Category Archives: Past Posts of Interest

Previous articles and posts of interest.

A ‘Carry Trade’ Returns?

As I was charting long-term Treasury yields in NFTRH 241, I ran a chart of the ratio between the banks and the S&P 500 and what do you know? The ratio had broken out to the upside right along with long-term interest rates. ‘Hmmm…’ said I, ‘maybe this is relevant to the analysis.’

Excerpted from NFTRH 241:

BKX-SPX ratio w/ 10 year yield, weekly

“The Bank Index ratio to the S&P 500 (BKX-SPX) is breaking out to the upside in defiance of a bear case in stocks. The BKX has modestly led the SPX since 2011. We have noted that this is a necessary bullish factor for the financialized economy, which is quite different from a real or organic economy.

Remember the ‘carry trade’ of the Greenspan era? That would be the same carry trade that helped bloat the banking sector, putting its big, fat too big to fail hands in just about every cookie jar in America.

The banks love rising long-term yields because they basically receive free money from the Federal Reserve as the first users of newly created funds on the short end, which is being held down by ZIRP. They then roll these funds into loan products, mark them up per long-term yields and voila, instant profits courtesy of a ‘borrow short, lend long’ gimmick.

Let’s see how this develops, but we should note that Bernanke has not created anything new under the sun. The great carry trade of last decade was just another unnatural systemic stress that led to the 2008 resolution.

Do you suppose that Fed officials are ready to let the banks do the heavy lifting, now with the incentive (carry) to get the funds ‘out there’ to the public? This condition came hand in hand with an inflation problem last decade and now that everybody seems to know there is no inflation, would not a new phase of rising inflation expectations go well right about now?”

Bottom Line

Talk of QE tapering may not only not mean the end of any prospects for inflation, but may actually be part of the kickoff to a new phase of increasing inflation expectations as the banks may now have incentive to get the newly printed money ‘out there’. The banks have been liquified through ZIRP and the prospect of a profitable ‘carry trade’ dynamic becoming engaged going forward should be factored into investors’ outlooks across a broad spectrum of assets and markets.

With precious metals and commodities so far down in the dumps and a certain NYU rock star economics professor out front talking down gold and talking up a dis-inflationary backdrop, might we not at least consider the contrarian possibilities of an inflationary phase to come?

If you’d like an affordable weekly guide (with interim updates as needed) that is always on the job for its clients’ best interests, I’d be more than happy to welcome you to the ‘Notes From the Rabbit Hole‘ Premium subscriber base.

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Whack-a-Mole (Japanese Nikkei is the Latest Bubble)

Excerpted from Notes From the Rabbit Hole #240, dated May 26, 2013.

Alan Greenspan gave them the playbook (Credit & Debt Manipulation 101) and now Ben Bernanke and global inflators everywhere have taken the ball and run with it in new, innovative and levered up ways. Actually it’s a game of Whack-a-Mole and they play it well, these inflating moles. The minute you think you’re going to drop the hammer on one of their heads, he’s gone and another one pops up elsewhere.

So how can we follow all the data points that hands-on, manipulative policy has introduced and forecast conclusions with accuracy? The answer is that it is difficult in the short-term, but in the long-term we are all dead anyway, so we might as well use some inflationary bubbles of the past as a road map to what may be ahead.

There are currently several bubbles (and one anti-bubble*) in play over varying time frames. These bubbles are the direct result of policy actions. Last weekend we reviewed the bubble in Japan’s Nikkei in relation to its policy-induced crashing of the Yen and then last week wouldn’t you know that the Yen caught a bid and the Nikkei suffered an incredibly bearish day?

That was the first impulsive hit. The Nikkei could well go back up to test the highs, but something seemed to kick off over there in the Land of the Rising Sun. Don’t fall for calming talk across global markets. It appears the first big moneyed interests got the hell out of the Yen bear trade and the Nikkei bubble trade last week.

The Nikkei is copper 2006, crude oil 2008, silver 2011, etc. These markets were hockey sticks with the blade pointing up. They reflected hot money that has been given permission to speculate and drive up prices. But this hot money, newly created and pumped into the financial system does little for the real economy. It transforms debt into vehicles for speculation within the financial sphere, with the first users being the most privileged with respect to coming policy.

In other words, the financial entities that put the money to work first and most profitably have been given the playbook ahead of time. Let’s be realistic about this. That right there disqualifies Bernanke and Co. from any respect in my book. The system is stacked and speaking as an American, is bad for most of America. You may have similar or contrary feelings about the policy of your country or union, depending on where you live.

Never before have the few rich been so targeted for further enrichment and the many of modest or little means targeted for further degradation. Meanwhile the hype is that we have a Socialist in the White House. Well, why do you think he is there and why do you think his agenda is so popular? I guess this is how a screwed up society redistributes some of what its corrupted components have horded.

The entire post-2000 play has been to financialize the economy to keep it going. To financialize something, you need money. To print money you need to put up more credit and so on and so forth. We know that under Greenspan the US had a convenient partner in China, as the US printed up a bubble in commercial credit and sent the consumer out there, credit card in hand to buy up all sorts of cheaply made goods. This helped build China’s infrastructure and pump commodities. That was the play; as inflation ‘got out there’ it took advantage of the ‘China build out’ hype and pumped strategic commodities.

This time around, a different mole has popped up and it is not one that the commodity gurus and gold bugs favor as it leverages the deflationary pressures in many parts of the world, and contains commodity prices. But the money has to go somewhere and a stock market with a Goldilocks story of ‘just right’ economic and policy conditions carries the day.

So in our twisted macro scenario, good is bad. Mediocre is good and bad will still be bad after the current phase passes (see Wrap Up for unsettling perspective on timing). Last week the economic numbers were biased positive and the Fed was on full Jawbone with Huey, Dooey and Louie speaking and the last FOMC minutes were released to boot. An over bought market running with the cult of easy money had a little case of the jitters.

That is because the financialized markets do not give a damn about what is good for their host countries or the average person. They are fixated on big mouth bankers in high places who feel they have the right to use monetary magic tricks to direct how the rest of us proceed with our financial affairs. They have withdrawn our free market in favor of something they manage as if it were just another government agency overseeing a given area for the public good. It is FrankenMarket and it does not want what is good for America; it wants what is good for it.

Courtesy of Marketwatch.com

At the end of last week some inconveniently strong economic data came in on the heels of the jawboning Fed. This paints a picture that puts the Fed in a position to have to answer the question “why are you taking yield from fixed income investors to reward risk takers with the Dow above 15,000 and the economy strengthening?”

The answer is that something of mocked up origins must be defended to the hilt because it was not born of natural means and its Achilles Heel lurks somewhere within the layers of leverage that have brought us to this point in a confusing macro backdrop. Here is a twisted picture of what the stock market wants to see continue.

Courtesy of Marketwatch.com

US manufacturing activity is just right. It is going nowhere but is not declining impulsively. A question we might want to ask right here and now is how long will it keep up its lame growth if the dollar keeps appreciating?

A hard rise in the USD would croak the manufacturing sector. What happens then, a return to the China labor outsource arbitrage gimmick? That is waning as China’s underpaid workers are slowly being converted to consumers with financial means.

Here are our bubbles du jour, with quick commentary as it is time to get on with this week’s analysis.

Nikkei weekly

Japan’s Nikkei is a hockey stick.

Yen weekly

Japan’s Yen is a hockey stick flipped over.

Copper weekly

Copper was once a hockey stick and has gone nowhere – subject to massive ups and downs, compliments of the financialized economy – since.

WTI Crude weekly

Crude oil was a hockey stick that got members of congress squabbling and hand wringing about how to control the evil speculators that drove the price up to such debilitating highs, remember? The bubble was actually compliments of Alan Greenspan’s out of control credit policies, which I’ll bet not one of those bozos sought to blame back then.

Silver weekly

And finally, we have the silver hockey stick, which formed a huge blade right into the conclusion of the last inflationary phase and commodity blowout.

Bottom Line on the Games of Whack-a-Mole and Hockey

With the modern way of doing things, money is created and set free to go where it will go within the structure of the global economy. Sometimes its inflationary effects will pop up here and sometimes there. Early last decade it was freed up to create a commodity bubble that attached itself to the ‘China Story’, which was itself a manifestation of the US-China cooperative experiment in credit creation and consumer spending.

There is Paul Krugman; he of the respectable platforms at the New York Times and Princeton and there has been Larry Summers; he of the respectable platforms at the US Treasury and Harvard. There have been a thousand others throwing their hats into the ring, speaking intelligently as if they are anything but promoters of an unproductive system that issues credit and creates new money out of nowhere toward its ends.

It is not a natural economic path. There will be resolution to the hockey stick forming in the Nikkei. The US and other global markets that have launched rallies through inflationary monetary policy along with the Yen’s fall should be affected as well. As we have shown each week, there has been a great wall of sentiment-fueled rationalization erected as to why the new bull atmosphere is real and sustainable. Did the first brick pop out of that wall last week with the Nikkei’s 7%-plus decline in a day?

* The “anti-bubble” is the hockey stick pointing downward toward hell that is the current view of most market participants toward an anchor to honest monetary systems; namely gold. Think about this for a moment; creators of paper and digital money (i.e. credit) have got the global investment community eating out of their hands in service to asset speculation (in this case, equities) and in utter revulsion toward the anti-market to all of this chicanery, gold.

At biiwii.com and NFTRH, we believe in anticipating the market’s turns from a contrary view; not reacting after the fact. Use these links for more information:

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The Stock Market – Which Side Are You On?

I read a piece this morning by Josh Brown, the Reformed Broker, in which he destroys the 1999 comparison for the stock market. He makes some excellent points about why the stock market is not only not over valued compared to 1999, but is actually a bargain. You should read it because we should all be considerate of rational views.

I also read The Fed is NOT Printing Money by Jesse’s Cafe’, which offers a view into a money creation process that is more geared toward the gaming of the financial markets through intermediary banks than it is the normal inflation of old. I mean seriously, I do not call Ben Bernanke an evil genius for nothing; it seems that he and his associates have taken monetary policy to the Nth degree and figured out how to paint inflation as non-inflationary. Our hero.

The point is that I think Josh Brown is 100% right. There is no mania in stocks. In fact, stocks’ worst offense right now is that they are strenuously over bought and sponsored by ‘dumb money’ aggregates that are equal and opposite to one year ago, when the same dumb money was exactly as bearish as it is bullish today. As he notes, the mainstream public may no longer be interested in the markets, but whoever that dumb money is, they proved a good indicator on an imminent bull phase last May. Again, we present the proof compliments of Sentimentrader.com:

Smart-Dumb money sentiment 1 year ago

Smart-Dumb money sentiment today

I have absolutely no problem being bullish on the stock market because it is made up of companies both bad and good; very good. After Memorial Day, my wife will re-start her career at a currently non-public technology company about which we are very excited. Its technology began as the founder’s MIT thesis and is now rolling out into major markets and outlets. One brilliant kid, an idea, a market and voila.

I totally believe in human progress and what great companies like Microsoft, Intel and later Google and Apple have brought us. I believe in the software systems that are making the burdensome healthcare system more manageable and great companies the world over that fill a need, improve lives and win out in the markets of public opinion and financial transaction.

But the point I think the Reformed Broker is missing is what underpins the market of stocks in these corporations. Looking at the stock market as a stand-alone, I tend to agree with his viewpoint. But when policy makers are woven into the fabric of the market to this degree, they must be factored. Questions must be asked like “why on earth, with this excellent and healthy stock market and sufficiently functioning economy are they continuing to repress interest rates by buying $85 billion in bonds per month?”

Aren’t those bonds debt? Where did that debt come from? Does bloated debt not imply that the economy in which the stock market’s components ply their trade is a leveraged thing, as opposed to an organically thriving thing? Why can’t we just let the debt float on the open market and let it get resolved by the market if things are so good beneath the surface?

I think you know the answers to those questions. That is the main point of bears questioning the stock market’s fundamentals. Not the old PE Ratio canard. We are now in the post-PE world. What matters is policy because it is policy that has created the seemingly healthy stock market. So which side are you on; the side that sees the stock market and the stock market only, or the side that sees the stock market within the context of the universe in which it exists?

Biiwii.com, Notes From the Rabbit Hole, Twitter, Free eLetter

Young FrankenMarket Lives

Excerpted from Notes From the Rabbit Hole #237:

Young FrankenMarket Lives

In failing to take a “healthy” correction to the equivalent of SPX 1350 to 1450 from the upside target zone of 1550 to 1590, the market is now running on policy and momentum. Hence we now dub thee Young FrankenMarket; Ben Bernanke’s creation, sustained by government and legacy MBS debt, following Alan Greenspan’s monster that was stitched together with artificially low interest rates that ultimately manifested in a huge commercial credit bubble.

Payrolls came in at 165,000 and an over bought, over loved* market popped its cork and exploded into blue sky. It had to be more than an okay ‘jobs’ report that did the trick. It was likely the combination of a still inflating Fed (and ECB, Europe popped hard as well) with some data that was good enough, but not so good as to call into question the Fed’s systematic inflation regime. This is Bernanke’s FrankenMarket, created by policy.

After making bearish patterns and/or negatively diverging from the Dow and S&P 500, the Russell 2000, Nasdaq 100 and Semiconductors all broke to new all-time (RUT) or recovery (NDX, SOX) highs on Friday. This left one notable holdout, the often-watched Transports. Since I normally do not give much weight to Dow Theory, I’ll not do so now. But it should be noted that the Trannies are not at new highs… yet [edit: They are now].

So it appears that recent writing I have done about a topping process may have been incorrect or at least, early. The current period reminds me a lot of Greenspan’s monster that emerged from the credit bubble early last decade, FrankenMarket as I called it in the first public article I ever wrote.

I remember wanting to be bearish [in 2004] because bearish seemed like the honest way to be. You cannot after all create (print) a bull market and a sound economy to go with it, can you? Well, yes and no.

Through interest rate manipulation, Greenspan created a bull market that really wasn’t (as measured in gold, which stripped out inflation’s effects and gave a ‘real’ and bearish view by the Dow-Gold ratio).

As noted previously, the But It Is What It Is website name came in large part due to my realization that the bull (in nominal stock prices) should not be fought as I looked around and saw (non-gold bug) perma-bears being blown up left and right. Any gold bull who was also bearish the stock market likely did just fine. But the play was long gold, and avoid or long the stock market.

Today we are challenged with a different monster. This one is more dangerous to the honest money contingent because it appears the golden shield has melted down and stopped protecting people from the obvious inflation being promoted in service to liquefying the banks, propping the economy and promoting a stock market bubble.

But here we have to take a step back and realize that it was 10+ years of bull bull bull for gold. Who are we to say what type of corrections should be suffered along the way? Stripping out the emotion, what we have is a really smart (I’d say diabolical in a way that is not entirely negative) policy maker who has somehow either engineered a ‘best of all worlds’ Goldilocks environment or taken the horseshoe out of his ass and hung it up on the wall of his well-appointed office.

I think it might be the latter, which in less crude terms means that it was just time for a technical adjustment. I hate to qualify the pain real people are suffering as an “adjustment”, but think about it. The negative energy at the bottom of markets and the economy in 2008/2009 was incredible. This very letter reproduced the Time Magazine Depression 2.0 ‘breadlines’ cover in support of its then bullish orientation.

Markets may need to work their way through an equal and opposite upside blow off before all is said and done. Who knows when that will come? It could be next week or it could be next year. But it is a near certainty that sentiment will play a big role.

For now, the trends are the trends, there are few signs that anyone is getting concerned about inflation and hence, the inflation continues. It is the Alice in Wonderland market:

“Nothing would be what it is because everything would be what it isn’t. And contrary-wise; what it is it wouldn’t be, and what it wouldn’t be, it would. You see?” –Alice

* AAII (Individual Inventors) had been an inexplicably skittish exception, as its members have fled to a bearish stance at the first sign of every recent minor correction. This had been a caveat to the bear case and the market will now try to suck them and any other holdouts in before a top is realized.

Notes From the Rabbit Hole has been following events with great interest since the Fed’s QE regime kicked in to its new phase (III), and technical analysis has kept us on the right side. When I named the newsletter I did so with Alice’s quote above in mind. Never has the idea of accepting what is contrary and counterintuitive been so important for everyone from speculators to savers to honest money advocates.

We remain intact first, and ready for opportunity – that “contrary-wise” could be big opportunity – second.

Biiwii.com, NFTRH, Twitter, Free eLetter

Is Gold as an Investment Finished?

Excerpted from this week’s edition of Notes From the Rabbit Hole, NFTRH 235:

Is Gold as an Investment Finished?

Before delving deeper into that question, perhaps we should see what the mainstream media thinks. In fairness to the MSM, we note there are plenty of articles on both sides of the debate. Yet there has been some media piling-on since the recent hard breakdown in gold. The aptly named Howard Gold explains:

The Case for Owning Gold Has Collapsed; Yellow metal could be headed much, much lower http://is.gd/h5KW6v.

Gold could be headed not much lower, but much much lower. This was written on April 18, when the value assigned to the monetary relic (AKA its nominal price) resided at $1391 per ounce. So be warned, Mr. Gold advises that gold could go much much lower. Gold bugs take heed; Mr. Gold himself has put the double ‘much’ whammy on you!

After critical support at 1524 was lost our first downside target of 1440 or so was sawn through like Balsa Wood. Okay fine. For those who micro manage every tick in the price of gold (I am not one), then here is the situation; the current little rebound must extend back up to and through the broken support level at 1440 or the next target in the low 1200’s is up next.

See the weekly chart on page 3, which was produced 5 weeks ago in NFTRH 230. While not a favored outcome, recent events with gold’s price are not surprising.

Gold weekly chart (from NFTRH 230)

To review, the two potential points to watch for in the event of a breakdown from 1524 were the weekly EMA 200, which supported the 2008 decline and then the conservative measurement from the pattern breakdown, which is in the low 1200’s, which also includes a visual support shelf from 2010. The less conservative measurement (the top at 1900 to 1524) would target around 1150.

So that is the price picture, now on to the fundamentals courtesy of Mr. Gold. From the article linked above:

“But gold’s price could be headed much, much lower, said Campbell Harvey, a professor at the Fuqua School of Business at Duke University. Harvey has looked at gold prices over the centuries, and concludes that it’s still trading at lofty multiples of inflation.”

In the article linked above there is another link where you can download the research of Mr. Harvey and colleague Claude Erb – currently making the rounds like a good gold bug horror movie – that talks about gold’s “real” price as measured by CPI and GDP. Boiling it all down, gold is historically over valued as compared to measures of the effects of inflation on consumer prices and relative to GDP.

We will steer clear of the debate about government number fudging, because it is a battle that is not necessary. The Federal Reserve and many of its counterparts around the globe are inflating, or trying their damnedest to inflate. They are using debt instruments to create money out of nowhere and pumping it into big banks, which are supposedly expected to release the money out to the public.

This could one day manifest in an out of control inflation problem (as measured by the lagging effects that Harvey and Erb call inflation, or resolve into a more intense deflationary phase as the thing that is just a whiff now gains momentum and swallows the entire spectrum of inflated assets in one big gulp of illiquidity.

The economy has depended on inflationary policy since the age of Inflation onDemand began under Alan Greenspan’s oversight in and around 2000.

Ask yourself this; why are they inflating? Why are they printing money at a furious pace if the GDP is real and sustainable? The answer is likely because they know that the financial system is a leveraged thing that must not be allowed to start deflating because if it starts deleveraging, it is not going to stop until the books are cleared.

Gold vs. Commodities, What is the Message?

Gold-CCI Ratio, weekly chart (from NFTRH 230)

The authors noted above measure gold’s ‘real’ price in CPI and GDP. Here we have always measured it relative to the commodity complex, which is generally positively correlated to the global economy. Above is gold vs. the CCI commodity index.

I had originally thought that a decline to the lower moving average would come with a continued economic bump, stock bull market and inflation-fueled commodity bounce. But instead, gold has tanked vs. commodities even as a deflationary pull starts to take hold with signs of economic deceleration, commodities down and the stock market potentially in some kind of a topping process.

Yet the ‘real’ price is still in a secular uptrend because the ratio has held above another parameter point we noted as important. If the blue arrow is confirmed by turning green one day, the message will continue to be a secular era of economic contraction, which has thus far been fought tooth and nail by inflationary policy. That is and has been the case for gold since day one. Not the case most gold bugs root for, which is inflationary effects, the likes of which are used as data points by Harvey and Erb. See?

Of course Harvey and Erb scare the gold “community” because a majority of the “community” sees gold as a hedge against higher prices. If the above chart breaks down and makes a lower low to the spring of 2011 (the height of the last commodity/inflation blowout) then we may have to admit Bernanke wins, Draghi wins, BoJ, China Central Planning and all other inflators win. They will have managed to create sustainable economies literally out of thin air.

The alternative to that is hyperinflation, where an asset grab of epic proportions could engage with gold under performing things you can actually eat, keep warm with and use for fuel. This asset grab would come out of a debased monetary system.

More realistically however, we might look for the real price of gold to gain support in its secular uptrend. This would see economic contraction and by extension, further decline in commodities and stocks markets. We have noted all along that the nominal gold price can decline in this environment, so people should know why they own the thing. Also, getting out of the ‘death of the dollar’ cult might be wise as well.

The USD, as long as implied confidence in our leaders remains intact, may be pulled upward with the real price of gold as a contraction phase bites harder. This is the world’s reserve currency in which a majority of global transactions are settled. As long as this remains the case, there will be claims on Uncle Buck. USD, as of the moment, is liquidity within the system. Gold by the way, is liquidity outside the system.

The average gold bug’s worst enemy is… the inflation tout. It is not the government or the big banks. It is the individual’s expectations of a lump of shiny metal. If they have not gotten this simple concept yet, after the recent damage, I am afraid they will never get it. And they will puke up their gold, which failed to protect them from the dreaded inflation that wasn’t.

Bottom Line

The “dreaded inflation” is measured in the mainstream by prices (CPI, etc.), not policy-making actions. Gold is a barometer and the pressure it would indicate could be inflationary or deflationary.

If one day you see the gold price skyrocket, then be prepared for a coming (lagging) inflation problem that would indeed eventually show up in prices. This could propel commodities, resources, productive economies and even stock markets to new heights.

If on the other hand gold just hangs around or declines, yet the ‘real’ price as measured in commodities rises again, the backdrop would be one of continued economic contraction and declining asset prices.

The third alternative is the least likely; gold hangs around or declines and yet the ‘real’ price loses its secular uptrend. This would indicate a sustainable economic expansion, created by inflationary policy has engaged. Thus far, inflationary policy has served to build in distortions that subject the system to extreme liquidations. That right there is the continuing case for gold – and for the time being I might add – cash, lots of it.

Okay now, that’s the theory. I have got a technical report to write, so lets get to it. NFTRH 235 then goes on to review the technical pictures of the precious metals, precious metals stocks, commodities and stock markets in an unbiased manner. This has kept the analysis on the right side of the markets throughout recent dynamic events. If you would like a hard-working service that does whatever it takes to be prepared for what the market throws at us, consider a subscription to NFTRH.

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Gold and Silver as a Macro Sign Post

The last week has been a fright fest for the gold “community”. But these are the financial markets, not a community. There is a world outside of what ever is going on in gold and silver. A macro economic backdrop filled with entwined and correlated assets and markets all trying to form a message when taken as a whole.

Sure, gold – as a monetary metal – is a big one when it comes to macro indications, but what is really important is the great question that has been ping-ponged about for many years now between intellectuals on either side of the debate; inflation or deflation?

This post dials things out from the hysteria of the gold bear market (it is a savage cyclical bear, and we will certainly deal with it in a constructive way on the market’s terms) to the big picture and the eternal debate between ‘inflationists’ and ‘deflationists’. Really, as I have felt all along, we have inflation and we have deflation… all along the continuum, as illustrated by the monthly chart of the 30-year T bond yield.

30 year yield, monthly

The continuum of gently declining interest rates on long-term T bonds implies a deflationary backbone spanning decades. Against this firm disinflationary signal, policy makers have had license to print money at various times and with varying intensity. The MACD trigger on the chart above implies that a new inflation phase is trying to get started, but this is restrained by what looks like the second of two bear flags that have formed just below resistance at a 3.5% yield.

As long as rates remain below that resistance level, the deflation argument is alive and well. The last time the ‘continuum’ hit the red line (100 month exponential moving average), which has been the limiter of inflation expectations for decades, the second phase of the commodity bubble was exploding to new highs, Bill Gross made a highly publicized short against the long bond (in essence, meaning he was bullish on inflation) and the CCI commodity index topped in early 2011; 2 years ago.

CCI, weekly

While commodities have not experienced the drama that is the gold market, their persistent weakness has encompassed important ‘indicator’ commodities like copper/base metals and crude oil. Technical damage is being done in those areas. We have been following the progress of this degradation each week in NFTRH and asking ourselves the question ‘could it be deflation on the horizon?’

Folks, that is a breakdown on the weekly CCI chart above. Not only is the index losing a channel, but a moving average cross (red dots) has taken effect that has signaled strong bear phases in the past. Respect the deflationary argument.

But the post is titled ‘Gold and Silver as Macro Sign Post’ so let’s get down to it.

US dollar & Gold Silver Ratio (GSR), weekly

The gold silver ratio (GSR, bottom panel) would indicate market liquidity contraction and associated deflationary forces. That is because though gold obviously gets hurt badly with a coming deflationary phase silver, the cross-dresser precious metal/commodity gets hurt worse. So is the breakout of a trend that has been in force since 2008 a warning to deflation?

Just as we watch the T bond ‘continuum’ for indications on yields, we need to watch the GSR for its would-be signals about liquidity, which after all is what the current QE operation is all about. So far, the GSR ain’t buyin’ it (QE 3, ‘to infinity’, etc.) as it did in 2010′s inflationary kick off. No, the GSR is rejecting the policy and hammering gold (but silver worse). Gold is a monetary asset that recovered first in the 2008 crisis. This time gold and silver are declining first and hardest and their relation ship (GSR) should be watched as an indicator to coming events.

The deflationary case has not yet been confirmed, but it is strengthening. Likewise, all of this going on today could be a prelude to the mother of all inflation problems. But it is so vitally important that we subordinate ourselves to the market and its indicators because there are super smart people on either side of the ‘i’/'d’ debate and half of them are going to be very wrong.

If the GSR remains on this signal (in breakout mode), then watch for the US dollar to become strong – not because of any intrinsic value it may have – but because it is a claim on liquidity, which is intensified by its reserve status. Remember how they knee-jerked into gold during the euro crisis and how they knee jerked into USD and then gold during ‘Armageddon 08′? That is what happens in a rush for liquidity.

As for the USD’s technicals, it is actually losing one of its weekly moving averages, but a new bear signal would not come unless the moving averages cross down. The most recent cross down (first yellow shaded area) was a fake out, as could be the current cross to up, prior to silver beginning to out perform gold and commodities regaining lost support.

But the signals are the signals and if deflation is in the near future – as currently indicated by T bonds, precious metals and the commodity complex, then the USD is going to ramp up.

It is a complicated situation, and that is why I say you have got to be willing to do the work to stay on the right side of it. Or, if you are a normal person with a normal job and life, then associate yourself with people who are willing to do the work with an open mind subject to the many twists and turns that this wonderfully complex macro situation is going to present. People should know by now that nobody has all the answers. This is a work in progress on the macro. Dogmatic beliefs will be (and have been) punished.

It would be my pleasure if you’d join me – if you so desire – at the hardest working newsletter (and dynamic interim ‘in-day, in-week’ update) service I know of if you are so inclined. We are not trying to predict anything. We are simply using hard work, discipline and open minds to remain on the right side of a complex situation.

Otherwise, I’ll keep writing these public articles and I hope you’ll keep reading them. Tuning out the usual hysteria, what is happening on the macro is happening and we have all got to be willing to realize we do not have all the answers and there is always learning to do.

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Real Price of Gold – Things Are ‘This’ Far From Changing

Hold your thumb and forefinger tip so close that you can barely see any light between them. The space is about as thin as the support line on the first chart and the bottoming pattern neckline on the second.

GYX daily chart

The industrial metals (including ‘Economic Doctor’ copper) are on the verge of losing support and are a non-confirmation of any strong economic near-future. Yes of course, it is because of China’s growth problems and other global issues. Will the US and newly inflationary Japan pick up the slack?

We have been noting economic strength in the US (sparked by the Semiconductor sector) but this will bear watching closely now for signs of deceleration. The industrial metals should be in higher demand if all is sustainably well.

Au-GYX ratio daily chart

The Gold-GYX ratio made a hard bottom in February. The ratio will go much higher if the neckline at the 200 day simple moving average is exceeded.

Au rising vs. industrial metals (positively correlated to the economy) would go hand in hand with a renewed phase of economic contraction and the all-important ‘real’ price of gold would rise if this spreads out to other commodities.

Au-CCI ratio, weekly chart

Of Course, on the big picture the real price of gold has been marching higher most dynamically since the crash of 2008. The last 1.5 years of indignity for the gold “community” has merely been a waiting game; a noisy and cacophonous waiting game.

When this last chart breaks down below the green moving average, the age of economic contraction and gold’s real bull market is over. The thing is though, it has not even failed the blue moving average. This chart mocks global policy makers and their supposed economic remedies.

2013 could be a great year. Never has there been the potential for so many to be so off-sides in the financial markets. Right now gold bugs are being told they are off-sides as every week new negative reinforcement of their stance comes into play. But that is why we map out the things beneath the surface, like the HUI correlation to the US stock market and ratios like Au-CCI (or on the positive side, AMAT-SOX for example).

You either want to look right – in going with current trends – or you want to be right, in using tools (including your own bullshit detector) to see the new trends. I hold several ‘regular’ stocks (less Apple, a trade that failed yesterday) that I like as I play uncommitted trend follower. But the real play is setting up and it is tied to economic contraction, which of course is and has been the trend most markedly since 2008. Gold vs. industrial metals is very close to a signal.

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