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The Gold Update by Mark Mead Baillie --- 147th Edition --- 08 September 2012 (published each Saturday) --- www.deMeadville.com
OMG we’ve got OMT
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Let’s begin with the Quote of the Week. Specific to “Outright Monetary Transactions”, so saith Super Mario: “OMTs will enable us to address severe distortions in government bond markets which originate from, in particular,unfounded fears on the part of investors of the reversibility of the euro.” Talk about relief. How silly of me to have felt so fearful about the reversibility of the Euro, fabulously foundational fiat that ‘tis!
To be sure, the ECB’s President Draghi does bring to the roulette table his Italian flair. His own country is clearly in the current spotlight primarily as tomorrow’s (Sunday’s) Formula One race is at Monza, (aka “The Cathedral of Speed”), and secondarily, as goes Spain, so is expected to go Italy. At least that’s how the tifosi, (Ferrari’s home circuit fanatics), would prioritize these two events. Nonetheless for Europe’s financial leader, ‘tis a chance to save both the Euro and his own bellissima Italia at the same time. Nothing like bringing home the bond bacon, (er uh, pancetta).
But for you and I, isn’t this OMT ploy essentially Gold-neutral? Whilst committing to make “unlimited” purchases of one-to-three year sovereign debt, no money shall have to be printed, (i.e. no magical ECB accounting entries made), because the requisite monies to buy the bonds are simply going to be withdrawn from other areas of the EuroZone’s financial system. (Are you paying attention out there, Angela?) So, the global monetary supply shan’t increase and thus Gold does not deserve to benefit in what appears as only another rearrangement of the Titanic’s deck chairs.
“But mmb, for this scheme to work, don’t the governments have to distribute the bond proceeds so that their economies actually grow and the debt eventually be repaid? And if the ECB is taking from A and giving to B, it’s not really putting pre-spent money into the system at all, is it?” Oh, such rhetorical questions there Squire, but don’t be a party-pooper. Allow our EuroFriends some time to bask in the afterglow of the spin…
  
…for as we read from Across the Pond per the FinTimes that “Loan Rates Point to EuroZone Fractures” as even in the private sector funding costs surge, along with MarketWatch noting that the “EuroZone’s Downturn Deepens”and the OECD stating that ”Recession is taking hold in the EuroZone”, neither have we no escape Stateside as The Guardian so pointedly reminded us on Labor Day that: “We Can’t Grow Ourselves Out of Debt No Matter What the Federal Reserve Does”. Keep stacking up those Gold Bars.
As for such bars of the weekly variety, Gold has now managed -- for the first time since January -- three successive weeks of advance and is now at 1738:
You regular readers of THE GOLD UPDATE know the fervent anticipation we’d been harbouring about a breaking of price up through those parabolic Short trend red dots in the above chart as leading the Gold Troops back to The Northern Front (1750-1800), but not presumably in a straight line. When one thinks back to the days of those mighty troop trains, envisioned is a long, rhythmic clackety-clack up the railroad track. But not with this bunch: having already traveled as far as ~1745~, they clearly instead opted to board Le Train à Grande Vitesse. Indeed Gold has risen a full 10% since 1587 just back on 02 August. But now as the Gold Troops close in on The Northern Front, they need be wary of the Forces of Resistance therein, perhaps disguised as nothing more innocent than a game of boules and a glass or three of pastis:
The point is: I shan’t think Gold to simply go traipsing right along unimpeded through The Northern Front toward an arrival at the base of The Final Frontier (1800-1900). This run up through 1750-1800 shall be stymied and repelled by areas of historically dense price consolidation, (notably from the previous November-December and February periods). Having now just celebrated the one-year anniversary of Gold’s All-Time High of 1923 from 06 September 2011, remember that price by then had gotten “a bit ahead of itself”. Now ‘tis making a more purposeful return to these current levels of being reasonable priced whilst awaiting another inevitable whirl of the printing presses. And StateSide, we’ve got Big Ben & Co. next up on the dais in the coming week.
Expectant of Gold getting boffed about a bit through here, I’d take pullbacks as opportunities to further accumulate it for the long haul. A quick, corrective move sub-1700 wouldn’t be at all untoward, and indeed the chance, as says a friend, to “buy mohrrrr…” The current 1666 level of Gold’s 300-day moving average is just below recent trading support at both 1696 and 1672, (as you’ll see in the pricing profile near the foot of this week’s missive). For the present at 1738, Gold is 72 points above its stalwart “protective” average. Gold’s median distance sub-average on that negative excursion from May to August was -65 points, the farthest deviation being briefly -109 points:
Cautionary as always, we do not want to put too much trust in any single arbitrary technical measure; however as herein pointed out in the past, ‘tis amazing how the shape of 300-day moving average mimics the global growth path of fiat money supplies. If you sense the world, in order to keep going, shall require more baseless money, then you’re in the right asset with Gold. Rolling with its encountering adversarial punches of resistance is all part of the experience. And as we go to this three-month view of Gold, ‘tis getting a bit steep at the moment…
…as we see price having arguably moved far afield above its smooth, pearly valuation line, (borne of relative price-changing relationships within the BEGOS complex comprised of the Bond/Euro/Gold/Oil/S&P markets). Irrespective of Gold first moving higher still into The Northern Front (1750-1800), the route from here may go something like 1750-to-1670-to-1800 within the guise of the fresh and vibrant parabolic Long trend, (denoted by the new blue dots in the chart shown earlier of the Weekly Gold Bars).
Owning Up (and then Down?)
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When one is off base as an analyst, ‘tis important to so acknowledge. My declaring that the S&P had put in its high for all of 2012 back in April at 1422 was wrong; the Index closed yesterday at a new 2012 high of 1437.
Indeed, what’s ~UP~ with the S&P? It has yet to respond in full to the bone fide plunge in the Economic Barometer, (which you can track each day at the website). True, the Econ Baro then recovered about a third of that drop before having again displayed a lack of steam over the past three or so weeks. We also herein pointed out recently that the amount of moneyflow it has taken of late to move the S&P a distance of one point has been minimal, suggesting a dearth of trading participation, (which is not unusual through the July-August stint). That may be, in turn, exaggerating the apparent level of money now moving into the S&P, such flow as measured looking stronger than the recent rise in the Index itself, a phenomena which usually leads to even higher levels ahead, (also viewable daily at the website).
I remain very cautious about these high S&P levels and admittedly somewhat suspicious as to them being maintained by “political trading forces” ahead of the StateSide election. To wit early Thursday, well before Mario Draghi’s press conference on the reshuffling of EuroZone liquidity, the S&P futures were already flying. ‘Twas so coincident following the prior evening’s speech by President Clinton leading into the pending evening’s speech by President Obama, that not one but ~both~ of my eyebrows raised. “This is too perfect”, I thought. “Muster a financially-stocked group with an array of S&P futures trading platforms and you can keep triggering computerized buy programs all day long at the stock exchanges.”
‘Tis odd to me to see the S&P rising in the face of earnings growth declining. Isn’t the market supposed to discount the future? If so are we going the correct way? I looked back at the S&P 500’s price-earnings ratios during its robust finale year of 2007. The average p/e for the S&P that year, wherein the index fairly resided in the 1400s-1500s, was 19.1x. Now at 1437, that measure is 24.4x. Then yesterday, this item crossed the financial wires: “Intel cuts Q3 revenue outlook, citing a challenging macro economic environment.” Now you and I both know that in other years, such a story would cream the S&P futures, driving the Index down into a bad day. And, oh by the way, did you note that China’s key Shanghai 300 Index fell this week to its lowest level since early 2009?
(That chart courtesy of Bloomberg). At the end of the day, the market is never wrong. Moreover, as a great friend and purely technical trading colleague loves to remind me: “The signal is the signal is the signal!” But I’ll tell you this: my rabbit ear antennae are pulled out to the max. And if ~they~ (in DC) are intervening in the S&P futures trade on the buyside, how much longer shall ~they~ keep it all afloat? (For those of you scoring at home, there are 42 trading days left until Election Day, 06 November).
As for Gold’s current correlative stance vis-à-vis the S&P, here again are their comparative percentage trading tracks for the past 21 days, (one month):
The yellow metal clearly has outperformed the S&P month-over-month, however the next anticipated round of Gold’s “breaking away” has yet to make itself materially manifest.
Meanwhile, should the Gold Troops upon crossing into The Northern Front soon therein encounter the Forces of Resistance, as we’ve discussed, a correction sub-1700 would be perfectly normal prior to a subsequent upside surge. So if you’re considering some underlying entry points, here is Gold’s recent trading profile with those notable trading support levels at 1696 and 1672, (the red bar being the current 1738 level):
As we opened this week’s missive with The Quote of the Week, why not close it with this Headline of the Week, again from over at MarketWatch: (this one’s a killer): “Greeks Reportedly Told to Work Six Days”. Right.
On to Big Ben, next week’s heavy incoming data calendar, and Gold’s initial clash with the Forces of Resistance at The Northern Front!
Cheers!
…m…
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