Yesterday we asked rhetorically if Ben Bernanke has become the gold bug’s best friend courtesy of his FOMC announcement which led to a surge in gold, and a kneejerk whimper in stocks, which has now been completely wiped out courtesy of a subpar GDP number. Today we note that it is not only the Fed, but the US Treasury, and specifically the ravenous Mr. Geithner, who just got a green light to issue another $1.2 trillion in debt, and bring total debt to $16.4 trillion, which would still be 107% of today’s GDP (which we don’t see growing much if at all over the next year), that can be added to the list of best Goldbug friends. As the chart below demonstrates quite vividly, in addition to global and local monetary expansion, the price of gold tends to correlate quite well with the US debt ceiling. Which means that per yesterday’s Senate 52-44 vote authorizing Timmy to go hog wild (which in turn means that Bernanke will have to step in and monetize much of this new debt issuance), the price of gold just got a green light for at least $250 in upside – the implied price just got raised to $1960. Of course, anyone who thinks the US will stop issuing debt there needs a brain MRI stat. Thank you Senate. And thank you Timmy. And, of course, thank you Ben.
Gold has rallied getting back into the low 1700s, but not closing above the key resistance areas. Let gold rally just a bit, and outcome the I told-you-so crowd. They shut-up with every decline, but let gold rally for a brief second, and well they then view the whole future based upon a single day’s action. It is always best to let the market speak. No individual will ever be able to forecast the future from a personal perspective. This is why I have stated countless times, the object of analysis is to eliminate the human subjective views.
If we step back and just let the market speak, we will survive our own trading decisions. Pictured here is a monthly chart of gold. People are all excited and gold has not ever exceeded the previous month’s high intraday. The Uptrend Channel continues to hold demonstrating it is not yet time to fall apart. The year-end number of $1434 held for the close of 2011 further warning that gold would not simply break-down. At the very least, gold now MUST close ABOVE 1637 at the end of January.
This interesting info-graphic on where Gold comes from and where it goes came courtesy of Trustable Gold, a company that provides information on purchasing gold by comparing the different investment opportunities.
David Morgan predicts the U.S. has another 2 or 3 years before the currency collapses. He also stakes out his predictions on where gold and silver are headed in the next year.
Here’s another gold chart that is sure to get under the skin of investment advisers who have refused to add a little of the yellow metal to their clients’ portfolios during its 11-year run that, based on the month of January, looks to be headed for number 12.
From the World Gold Council’s latest commentary on gold as an investment comes the chart below showing that U.S. stocks were much more volatile than gold in recent years.
This Commodity Online story about central bank bullion buying is worth a look as well. I remember hearing about Mexico buying a lot of the stuff last year but didn’t know they managed to garner the top spot with nearly a 100 tonne increase.
Of course, we’ll probably find out in a few years that China bought much more than that in 2011, central bank officials there wary about telling the rest of the world about their purchases lest the price rise too fast before they’re done buying.
After hitting a six-week high on Monday gold prices have eased slightly due to the lack of physical demand as markets closed in China, Singapore, Malaysia and Indonesia for the Chinese Lunar New Year. Gold prices climbed to their highest level since mid-December 2011 as investors eyed uncertainties surrounding Greece’s debt crisis and increased tensions in the Middle East. The euro hit a two-week high versus the dollar, mainly due to strong Spanish and French debt auctions.
It seems that although representatives of Greece’s private creditors left Athens on Saturday without a deal on a debt swap plan that is necessary in order to avert a disorderly default, some progress has been made on the details of the plan during talks between the Institute of International Finance (IIF) and Athens. Charles Dallara, the managing director of an association of more than 350 global financial institutions says the biggest loss the bondholders are prepared to accept is in the region of 65%-70%. But, why do these financial institutions demand anything. Don’t they understand that Greece is bankrupt and that Greek bonds have become worthless? When these financial institutions bought Greek debt, they thought they were very clever purchasing such high yielding bonds. Now that they have lost, they want some of their money back. It is the same as asking a croupier for your money back after you have lost on a bet at the casino. It is insane! They cannot now blame somebody else for their poor judgment a year or two ago. The loss therefore belongs to them.
It has been my theory that this year we would see one of the worst performances by the stock market since 2008. However that has always been dependent on Bernanke not being able to break the dollar’s rally out of its three year cycle low. As of this morning the dollar has printed a failed daily cycle. More often than not a failed daily cycle is an indication that an intermediate degree decline has begun.
I have begged and pleaded with people not too short the stock market over the last several weeks. For one it’s very hard to make money on the short side for the simple reason that markets move down differently than they move up. Now I’m going to give you another reason not to short the stock market.
If the dollar has begun an intermediate degree decline then we should see it continue generally lower for the next 7 to 10 weeks. If this turns out to be the case then we are not going to see any meaningful declines in the stock market during this period. As a matter of fact the risk is great that the stock market could enter a runaway type rally if the dollar has begun the move down into an intermediate degree bottom.
As you can see in the chart below the last runaway move in 2006 lasted almost 7 months.
Runaway moves are characterized by randomly spaced corrections, all of similar magnitude and duration. As you can see in the chart above the corrective magnitude in this particular runaway move was about 20-30 points.
Keep in mind we don’t have confirmation that a runaway move has begun yet. We would need to see how the first correction unfolds. If it is mild and brief, followed by the market moving back to new highs, then the odds would escalate that a runaway move has in fact begun.
Another big clue will come when the dollar bounces out of its daily cycle low, which is now due at any time, and if that bounce fails to make new highs before rolling over. If that happens it will reverse the pattern of higher highs and higher lows and confirm that an intermediate decline has indeed begun.
The scary part is that this may also signal the top of the three year cycle. If so then we are looking at an extremely left translated three year cycle that should generate huge inflationary pressures by the time the next three year cycle low is due in the fall of 2014.
It has been my expectation that we would see another deflationary period in 2012 before the cancer infected the global currency markets. As of this morning I’m not so sure that process hasn’t already begun and the deflationary period has been aborted. Bernanke may have broken the dollar rally yesterday.
If this scenario unfolds it has the possibility of generating the bubble phase of the gold bull market. I elaborated on this in last night’s premium report.
Gold is a very controversial object. Many investors view the precious metal as a storage of wealth and a hedge against uncertainty. However, critics claim gold is a bubble and has no intrinsic value, especially since you can not eat it. The tech giant Apple Inc. also receives a fair amount of controversy, and unlike its name would suggest, you can not eat it either.
Last year, Apple made headlines when its cash and marketable securities position of $73.8 billion surpassed the operating cash balance at the U.S. Treasury. The news magnified calls for Apple to deploy some of its idling cash hoard. At the time, analyst Katy Huberty from Morgan Stanley explained that Apple’s current and future cash flows “greatly exceed” its cash needs. After Apple’s most recent earnings report, the calls for deploying cash are increasing in volume.
Late Tuesday, Apple reported its financial results for its fiscal 2012 first quarter, which ended December 31, 2011. In addition to a blow-out earnings number, Apple’s cash position has grown to new earth-shattering records. Apple generated a cash flow of $17.5 billion in the quarter, and finished 2011 with a whopping $97.6 billion in cash and equivalents. According to Zero Hedge, “Looked at otherwise, if Apple were a country, and its cash was equivalent to GDP, it would rank as the world’s 58th largest economy, above such countries as Slovakia, Iraq, Luxembourg and Syria.” In terms of market capitalization, Apple has now surpassed Exxon Mobil as the world’s most valuable company. In fact, Apple’s current cash position of nearly $100 billion is greater than the market cap of 474 of the S&P 500 companies.
The question then becomes, what should Apple do with its massive cash hoard? Conventional recommendations range from paying a dividend or buying back stock, to acquiring suppliers. While these are certainly worthy recommendations, it is hardly the unconventional thinking that has propelled Apple to the top of the podium. In addition to these recommendations, Apple should also consider purchasing gold. A relatively small gold position in Apple’s portfolio could help the company further offset currency and monetary policy risks to its $97.6 billion stockpile. In November, Apple started accepting Chinese yuan for App Store downloads, but could benefit even more by diversifying into gold. A report by Oxford Economics last year recommends holding at least 5 percent of assets in gold. The report concludes that gold is a good hedge against inflation, as well as deflation.
Companies investing in precious metals such as gold is not completely unthinkable. In 2009, life insurer Northwestern Mutual announced it purchased $400 million in gold. It was the first time in the company’s 152-year history. Chief Executive Officer Edward Zore explained, “Gold just seems to make sense; it’s a store of value. The downside risk is limited, but the upside is large.” Since his comments in June 2009, gold prices have increased from $950 per ounce to nearly $1,700.
Aside from gold’s monetary value to investors, gold also has a minor industrial value. According to the most recent data from the World Gold Council, technology gold demand in the third quarter of 2011 was 120.2 tonnes. The WGC explains, “According to the Semiconductor Industry Association, worldwide sales of semi-conductors (the major consumer of gold in tech) were $25.8 billion for the month of September, an increase of 2.7 percent from sales of $25 billion the prior month. Over the year to end-August, sales grew 2.2 percent year-on-year, partly as a result of rising demand in netbook and tablet segments. Industry analysts iSuppli estimates that worldwide tablet shipments will exceed 60 million units in 2011, with Apple accounting for 73.6 percent of those.” Keep in mind, this estimate was before Apple’s record breaking sale of 15.43 million iPads in the December quarter.
While some may think it would be out-of-the-question for Apple to purchase gold, the precious metal would provide a hedge for the company and its shareholders. At the very least, Apple could use the gold in its technology products. If Apple deploys just 5 percent of its $97.6 billion cash hoard to purchase gold, it would only have to part with $5 billion. This amount of cash flow was earned in just one month in the previous quarter. Although Apple has not announced new plans for its cash supply, it may be nearing a decision. The company’s Chief Financial Officer Peter Oppenheimer said, “We’re actively discussing uses of our cash balance, and have no specifics to share. In the meantime, we continue to be disciplined with cash, and are not letting it burn a hole in our pockets.”
It has been a tough last year for precious metals investors but not so much for common stocks. Sure, the Euro crisis benefited Gold initially but as the panic has abated, stocks are rallying back to their highs while Gold has sold off and the gold stocks are trying to hold their lows. What is going on? Are we in the twilight zone?Bull and bear markets are long lasting, providing ample time for trends and counter trends to continually reappear and redevelop. The long-term activity of precious metals and common stocks is not a mystery. Gold has continued to hit all-time highs while the gold stocks eclipsed and maintain 2008 highs as support. Yes, common stocks are rallying but are nowhere close to seriously testing 2008 highs. Recently, we noted a potential major bottom in both the metals and the mining stocks. With common stocks nearing major resistance, it is no surprise that we are nearing a point where the secular bull trend is ripe for reemergence.
The chart below shows Gold against the S&P 500. Note the similarity between 2003-2006 action and 2009-2012 action. After surging higher, the ratio retreats quickly but then forms a bottom and builds a base. The ratio has found strong support and won’t be going lower anytime soon. Stocks have had a nice relief rally against Gold but it looks to be all but over.
Turning to Gold Stocks against Stocks, we find this ratio at a confluence of support. Yes, the mining equities had a difficult 2011 but it was nowhere close to their severe under-performance in 2008. Technically, the ratio looks likely to bottom soon and reverse course.
Moving along, we see the S&P 500 closing in on an area of strong resistance. Common stocks remain in a secular bear market and as a result, the market is nearing another sell signal. Conversely, the gold stocks which are in a secular bull market, are digging out a bottom
Investors and traders have to monitor charts and also sentiment which tells us more about fund flows and risk versus reward. Below is a screenshot of a new indicator developed bysentimentrader.com. They are combining put-call ratios, short interest and analyst ratings to develop another indicator for the various sectors. As you can see, every sector is either at or very close to a sell signal while the gold stocks are the only sector on a buy signal.
It may take a few months but common stocks are nearing an important peak. They won’t crash but they will act typical of what we see in the last third of a secular bear market. Doom and gloomers and extreme deflationists ignore the obvious reasons why stocks will begin a mild cyclical bear market and nothing of the sort of the previous two bear markets. At the same time, the precious metals sector is set to emerge from a major bottom and spend 2012 working its way towards the next major breakout that will serve as a catalyst for the beginnings of a bubble.
