A day trader betting on the latest job numbers, for example, might take a wicked skull-shucking if he’s wrong, while a longer term investor who puts his money down on the same security at the selfsame hour could well be rewarded handsomely for his efforts.
We at Bourbon & Bayonets endeavour to enable our readers to ride the intermediate trend with the majority of our weekly market insights - and that means we have to be on the ball with respect to the longer term currents that move markets, too.
Last week, we reported to you on two of those currents, themes that we’ve addressed in our weekly letter for some time now: 1) the decline in the Treasury market and 2) the (ongoing) decline in the gold market.
As regards the former, we’ve been sufficiently emphatic. We’ve told all and sundry at every opportunity to ‘get out of Dodge’, and that going forward bonds were no place for anyone interested in preserving capital, let alone ringing up profits.
With respect to gold - and silver - our initial protestations were offered last summer (2011), when the whole complex topped out and we began the unpopular job of publicly defying the powerful goldphile lobby. Since then, we’ve been consistently bearish, calling out several profitable interim tops for those interested in shorting the PMs along the way.
Shock and AweSo imagine our distress when an inordinate number of readers are still trumpeting the official gold party line, claiming that ‘money printing’ and ‘excessive debt’ and ‘unfunded mandates’ and ‘fiscal cliffs’ and ‘Chinese bond repatriations’ and ‘new global reserve currencies’ are about to light the fuse under the gold rocket and send poor halfwits like McAbby to the poor house.
To put it plain, we’re in shock. Not, dear readers, because they’re wrong. They’re right, to be sure. Gold will skyrocket. But not now. And not likely until it’s widely perceived by those same trumpeteers that gold is the worst possible asset to possess that ever was. And that, too, to our great chagrin, is also not now.
What Went Wrong?Where these goldphiles err is in their belief that THERE IS NO VALUE TOO HIGH FOR GOLD TO RISE. And because they believe this, they also believe that every correction is a manipulation, and every downdraft but a minor delay in their inevitable rise to becoming KINGS OF THE WHOLE DAMNED UNIVERSE. While in truth, they’re just guilty of sloppy thinking.
For gold does not exist in a vacuum. Gold will rise and fall in singular accord with the flows of cash that buffet every other investment instrument on the planet. There are no exceptions. And one of the factors that contributes to those flows is the relative strength of other asset classes. That is, in the fast food world in which we live, where immediate gratification is the only iron clad rule, then yesterday’s gold investors will today race to buy equities the instant they see signs of potential outperformance from that asset class.
And only those adherents of the gold ‘religion’ - those who are married to the shiny metal and not to the profit principle - will be left holding the bag, squeezing tight their dead money while opportunities to increase their wealth drift diamond-like past their bleary eyes.
The following chart from Credit Suisse outlines the price trajectory of gold for the last eight years, along with a 3 standard deviation channel alongside.
According to Credit Suisse’s calculations this is the first time in the gold bull that we’ve breached the lower band of the channel. They say it’s bearish. And while it’s clear from the chart that something ‘new’ has happened, a bull might look at the picture and say, “Wait a minute, this means we’re due for a bounce!” But we believe he’d be mistaken.
Take a look below at the weekly chart for gold, as represented by her proxy, the SPDR Gold Trust ETF (NYSE:GLD), which we believe will have the final say on gold’s future.
The weekly chart reveals that we’ve been locked in a trading range since the fall of 2011, and that we’re now situated at precisely the mid-point between the two bands (red square at top). The direction of the next breakout will determine which way gold trends for as much as a year from now.
Or, to be more precise, if we break above the trading range, we’ll likely see gold levitate toward its former highs at 185; if lower, we should expect a drop toward moving average support in the vicinity of 125. And if RSI and MACD indicators have anything to say about it, the next move will be down. RSI moved sub-waterline the first week of December, and if current trends continue, MACD could confirm with her own dive by week’s end.
If and when that happens, GLD will accelerate toward the lower end of the trading band at 148.50. Beyond that, of course, it’s a guessing game. Until then, a longer dated straddle or strangle (the latter if you’re short on cash) would be wise. And for those with a little more experience, a short condor or butterfly could pocket you some nice premium.
We expect to see some genuine movement in GLD forthwith.
Many happy returns,
Matt McAbby, Senior Analyst, Oakshire Financial ...