Pondering the Summers of 2012 & 2014

Guest Post by Doug Noland

The gulf between inflating global securities prices and deteriorating fundamental prospects widens by the week.

Another captivating week capped off a dramatic summer. War erupts in Europe. In the Middle East, a terrorist organization with unprecedented military might blows through Iraqi defenses to take control of a large swath of Iraq to go along with its considerable territory in Syria (establishing an “Islamic caliphate”).

Meanwhile, global securities markets enjoyed rallies that were equally dramatic. Mustering a summer surge, U.S. equities disregarded geopolitics to post all-time highs (S&P 2000!). Curiously, Treasury yields were in no way excluded from the frenzy. In the face of rallying stocks and generally positive U.S. economic data, Treasury yields surprised with a determined move to the downside. This latest “conundrum” saw 10-year yields sink to 2.34%, a 15-month low. While notably volatile, corporate Credit spreads ended August about where they began June.

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Gold and Silver CoT

As expected, there was improvement this week in the gold and silver CoT data.  Silver did not do much but it had been improving much more steadily than gold, which mysteriously (ha ha ha) took a sizable hit a week ago Thursday.  This data includes that hit.  The goons did some covering on that day.  Click graphics for full view…

au.cot

Au Commitments of Traders

ag.cot

Ag Commitments of Traders

HUI Timing Boxes

In the previous post about ‘Gold Miners & Inflation’ it was mentioned that the 2013-2014 would-be bottoming grind in HUI has been almost exactly the duration of the 2010-2011 topping grind.  Here is a visual to put with that statement.

hui

The current yellow box is an exact duplicate of the 2010/11 box, which came with an over bought MACD crossed down.  The breakdown candle implies that September would be the month that a break UP candle comes into play if this relationship has any predictive power.

Taking it further, as also noted in the previous post, the Ukraine noise does not help the sector and indeed could hurt in the short-term, because it keeps the wrong gold bugs on the tout.  So NFTRH keeps open some minor downside targets.

Taking it further still, those downside targets would end up being buying opportunities if gold’s macro fundamentals start to improve, which despite the emails I get to the contrary, really has not happened yet beyond a few ongoing positives.  But it had not happened yet in 2000 either.

Gold Miners & Inflation

A constant struggle in writing about the precious metals is in trying to be clear about the differences between the gold stock sector and other sectors when it comes to inflation.  That is because there are two types of bullish environments for gold stocks…

  1. The ‘play’, where all the inflatables rise with inflation expectations; this would be the ‘gold is silver is copper is oil is hogs is corn’ trade.  This is the play where the inflation and commodity gurus tell you to buy resources to protect yourself from the US dollar crash that is going to happen any day now.  A problem is that in this environment many resources often out perform gold, thus hurting miners’ fundamentals.
  2. The other is a longer trade or dare I say it, investment.  This is where commodity prices are declining and the USD is firm.  Gold is stronger than silver and the inflation oriented gold bugs get bearish because they can’t understand how gold will not go down with oil and indeed, inflation expectations.

I have often called #1 a ‘SELL’ on any strong rally that results.  #2 is a more difficult animal because it can be a grind as it sets up.  That grind would be the misperceptions game kicking in where the majority gets fooled into thinking if copper goes down so will gold.  After all, China’s gonna decelerate again!

tip.tlt.gdx

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Doctor Copper Updated

Copper is a tough one.  If copper hangs in and hints at an ‘inflation trade’ (i.e. anti-USD) bounce to come, I’d like to buy COPX or FCX.  The charts are coming along nicely.  COPX was NFTRH+’d recently for just such an occasion.

The weekly chart of copper is trying to hold above a downtrend breakout line and hold a trend out of March.

copper

But the monthly chart is still disgusting, a year or so after it was created…

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Ukrained… Again

To the extent that stocks are down and precious metals and crude oil are up on Ukraine and Russia?  Well look, you have probably been to this site enough to know my views.  I won’t badger you about it.

headline

Headlines from MarketWatch

Nah, check that.  It is often not advisable to buy precious metals on up days and it is never advisable to buy them on up days with negative geopolitical headlines and upwardly revised GDP.

Just a public service announcement from the website that deplores casino mentality, lazy analysis and people who do not think beyond cartoons.

I actually bought USO for a crude oil bounce play yesterday and now am forced to at least consider taking a small profit sooner than expected.  These events do little more than rile up the markets in the short-term.

Silver, Gold, Inflation & Goldilocks

It is rather obvious that the Silver-Gold ratio (SGR) will need to rise for any sort of inflation trade to whip up.  I think we can get a bounce in commodities here because they are over sold, Uncle Buck is over bought and I might add, UUP hit the upside target of 22.10 measured off its bullish pattern.  Beyond a trade however, the USD still looks bullish and commodities, not so much.

I found this old chart that tells the story of a declining SGR (post-2011) and a commodity index right in line with its dis-inflationary message.  In this environment Goldilocks has lived quite comfortably and kept the stock market on track.

sgr

Three options here…

  1. A little inflation phase whips up and beaten down commodities and precious metals (led by silver) out perform stocks or…
  2. The whole mess continues to drop and dis-inflation turns to something more impulsive, taking stocks with it.
  3. The fairy tale goes on and on into perpetuity, with silver gently under performing gold, inflation expectations gently declining… and they all lived happily ever after.  Nite nite little dreamer.

And two of the above are viable.