The rally out of the February intermediate and yearly cycle low has now traveled far enough and long enough that it is due to take a short breather. That breather would be in the form of a short term pullback into the midcycle low.
The initial move out of the July intermediate cycle low lasted 22 days before forming a short term top.
The current rally is now on 21 days old and as you can see in the chart very short term overbought. Traders should now start looking for a brief pause in this market. A move back down to the 1120 support zone is probably in the cards some time soon.
I’m also starting to see divergences in breadth and signs that institutional traders are stepping aside for the moment. More on that for subscribers in Tuesday’s market update.
If we are on the brink of an asset explosion, and I think we are, then traders should be prepared to position long in virtually any asset class as we make our way down into this temporary correction.
I expect the stock market will also exert some influence on the precious metals market when it sinks into the low. As a matter of fact at 21 days it now appears gold has already begun the trip down into its next daily cycle low.
As this short term gold cycle is right translated (topped later than 12 or more days) the expectation is for this move to hold above the last cycle low at $1044. It would be a big plus if gold can hold above the last short term dip at $1087 and keep the pattern of higher short term highs and higher short term lows intact.
If it can, then I would be looking for gold to move above the critical $1161 level during the next short term cycle.
If gold can take out $1161 then the pattern of lower intermediate lows and lower intermediate highs will be broken. That will also force a re-phasing of the last intermediate cycle low from December to February. Again more on that in the subscriber newsletter. Suffice it to say that it is critical this re-phasing take place if gold is going to continue higher and not go through another multi month consolidation phase like it did from March 08 to Sept. 09.
So short term expect some weakness in the stock market which will probably continue to rub off on the gold market, but be prepared to buy the dip as this is not over yet.
When the tech bubble burst in 2000, Greenspan tried to “fix” the problem by cutting rates and printing money. Fix the problem he did … well sort of! What Greenspan did was create two new bubbles in the credit and real estate markets to replace the tech bubble that had burst. Millions of jobs were created in these two industries. Much needed jobs to replace the ones lost as the tech boom came to an end.
I think we will all admit it was one heck of a party, but like all good parties there’s a price to pay. The Hangover!
The truth is the economic boom of the mid 2000’s was built on a lie. Instead of a foundation of productivity the last bull market was founded on an ocean of liquidity. That ocean of liquidity fostered risky investments and massive speculation. It was only a matter of time before the house of cards came crashing down. And crash it did. The world suffered through the second worst bear market in history almost taking down the global financial system in the process.
Apparently the powers that be have learned nothing from this near death experience because they are back at it again, printing, printing, printing in another vain effort to create prosperity with the printing press. I dare say the average 6th grader can understand that the act of putting ink on paper does not create wealth. It’s too bad our elected officials can’t understand this.
So here we are, we’ve survived the credit crisis and all appears to be well in the world. I’m here to say that all is not well. We now have a cancer growing under the surface of the economy many times bigger than the one Greenspan created. This cancer isn’t going to show up in real estate or credit markets, that bubble has already burst, never to be inflated again. No, this time I expect the cancer is going to flare up as inflation in the commodity markets.
Witness the strange resilience of oil at $80 despite a very strong dollar the past 3 months. Gold has been holding over $1100. Sugar is at multi-year highs. Copper is less than 15% from all-time highs.
The commodity markets are now poised to unleash a massive inflationary storm. I think there’s a very good chance that storm will strike this spring.
The dollar is now deep into a counter trend rally and in jeopardy of putting in an intermediate term top at any time. When it does the flood gates could break and we will have to deal with the unintended consequences of Bernanke’s actions.
Unfortunately, there are no painless cures for spiking inflation, especially in an ongoing recession. The cure is to let the market clean out the excesses. The cure is to raise rates and drain liquidity, to induce a recession. That course leads to 20%+ unemployment and a deflationary depression. Does anyone really believe our elected officials will choose the that course of action?
On the other hand, doing nothing leads to higher and higher inflation and running the presses faster and faster to stay ahead of rising prices, eventually culminating in a hyperinflationary event if government debt is allowed to spiral beyond the point of no return.
Unfortunately, I think it’s probably too late to stop the storm. Let’s face it, you don’t start turning the Titanic when it’s 100 yards from the iceberg. By then it’s too late and the ship is doomed.
The same principle applies with our economy. If the Fed waits until inflation starts to pop up it is too late. The damage is already done and there’s no going back. If the inflation Genie gets out of the bottle there’s no easy way to get him back in. I would argue that the commodity markets are already trying to tell us there’s trouble coming.
History has been crystal clear - every time oil spikes 100% or more within a year’s time, it has pushed the our economy into a recession. We already have a spike from $32 to over $80 and this is against a backdrop of high unemployment. The last thing we need in an economic environment that’s already under stress is surging energy prices again.
The question investors have to ask themselves is whether it’s more likely the powers that be will do the right thing, raise rates, drain liquidity and force the world into a deeper recession before inflation gets out of control or will they continue to kick the can down the road making the problem bigger and bigger?
Knowing human nature, my bet is that our elected officials will do whatever they have to do to avoid short term pain - even if it means compromising our future.
The storm is brewing. It’s time to batten down the hatches.
That means gold and silver!
It wasn’t much, but yesterday’s addition of 4.6 tonnes of gold to the “tonnes in the trust” at the world’s most popular gold ETF - SPDR Gold Shares (NYSE:GLD) - was the largest one-day addition since the middle of December. As compared to last year at this time, there’s not much happening with the GLD inventory these days. Recall that during the first few months of 2009 they were adding gold bars like never before - a whopping 350 tonnes during just the first three months of the year.
The inventory is still about 20 tonnes below the all-time high reached last June, however, given what’s happened with the gold price in recent days, that could soon change.
From the 2001 beginning of the great secular bull market in gold, price has followed a predictable ABCD wave pattern.
This pattern has since played out five times. And on each occasion the C-wave has provided a spectacular performance. Gold’s C-waves of 2002, 2005 and 2007 yielded brisk gains of 18, 61 and 41%, respectively.
Fast forward to our current C-wave (April 2009 - present) and we find ourselves in either a C-wave that has surprisingly underperformed expectations (topping in early December with a modest 19% gain), or one that has yet to show its awesome might.
The question now is whether gold is still consolidating within a C-wave advance or whether a D-wave has managed to take hold.
On one hand the C-wave never really generated the kind of excessive speculation we normally see at C-wave tops. The silver gold ratio never spiked, miners never even got to normal valuations much less expensive, which is what would be expected as gold fever hits hard at C-wave tops.
The massive year and a half consolidation only spawned a meager 190 point new high? That doesn’t sound like a C-wave top to me. We had the most powerful A-wave, along with the weakest B-wave of the entire bull market so far and all it could gain was 190 points above the old highs? Hard to believe.
Trillions and trillions of dollar printed and thrown at the market and all we got was 190 points? Again hard to believe.
We even have a broken trend line.
Despite a very strong dollar gold is still holding well above the lows.
Everything seems to be saying this is still a C-wave…except the miners.
The HUI should have broken through the 420 resistance like a hot knife through butter. It should be breaking the down trend.
It hasn’t done either. Instead it immediately turned tail as soon as it got short term overbought and has now closed back below the 200 DMA.
We have two lines in the sand. If gold can break the pattern of lower lows and lower highs by moving above $1161 then the odds are the C-wave is still intact. If however it moves back below the Feb. low we are almost positively caught in a D-wave.
Which ever way gold breaks out of the box should tell us were we stand. I will say that if this is a D-wave we should be getting close to the bottom. I would expect a test of the 65 week moving average and the $1000 mark will probably be about it before the next A-wave gets underway.
Remember the A-wave should test but probably not exceed the highs.
So at the moment we just have to wait and see which line gets broken first.
Gary Savage is currently retired and lives in Las Vegas. He is the author of the Smart Money Tracker, a financial blog with special emphasis on the gold secular bull market.
Gold’s action hasn’t been particularly jawdropping of late unless you consider what it’s been up against.
Last week there were two events that were bad for gold: Bernanke tightening and the IMF dumping, and yet it held strong, and in recent action it’s staye solidly above the $1110 line, which had been the scene of so much trench warfare.
Gold has been under selling pressure since early December. That powerful drop and the chart pattern it has formed will generally resolves itself after an ABC retrace pattern. I have drawn this on the chart which is what I think will happen in the near term. This daily chart of GLD ETF has a small 4 day bear flag and bearish reversal candle which is pointing to lower prices in the near term.
We continue to wait for new low risk setups as different investment scenarios unfold.
Gold is in a strong bull market but the short term charts have provided over 13 short trades in the past 2 weeks for futures traders playing the bounces to resistance levels. The triangle on the 60 minute chart with declining volume is a continuation pattern of the short term trend which is down.
Because gold is trading near a support level on the daily chart, I am waiting patiently for a perfect setup to go short, or long depending on what happens in the coming hours. I predict lower prices with $102 area for the next support level.
Let’s continue to focus on these short term charts to take advantage of any low risk setups which come our way.
We recently reentered the gold trade with an average price of $110.44 on the GLDs after having exited our year long position on 12/3. If GLD can get an hourly close above $111, I will add yet another tier–approximately $1,140 in the commodity itself. Take a look at the chart below for a visual depiction of the trade.
And forthwith, the oracle speaks. The much awaited 2010 Commodity Outlook is out. Here is the 2010 summary breakdown:
Some commentary:
As we start a new decade with the global economy emerging from the worst recession of the post-war era, we expect the commodity supply-side constraints of the past decade to once again reemerge, reinforcing the sustainability of higher long-term commodity prices – a theme we first began discussing at the turn of the current decade. However, the inability to grow supply after a decade of sharply higher prices turns the question of the sustainability of higher long-term commodity prices into one of the sustainability of higher long-term growth. Anemic supply growth of energy and basic materials runs head-on into the ongoing revolution in emerging markets generated by more than a billion people rising into the ranks of the middle class over the next decade.
We maintain that this undesirable outcome is not the inevitable result of dismal Malthusian logic, but rather the result of deliberate choices as expressed through policy. At the beginning of the current decade, we argued that decades of inadequate investment in commodity productive infrastructure were leading to a “Revenge of the Old Economy”, where a constrained supply base would sustain higher commodity prices. Toward the end of the current decade we argued that the “Revenge of the Old Economy” had turned into the “Revenge of the Old ‘Political’ Economy” where significant policy constraints on the free flow of capital, labor and technology were substantially constraining supply growth for many commodities, regardless of price or expected return. Furthermore, these protectionist policies caused capital not to flow to the most efficient commodity investment but rather to the most freely accessible one that was usually inefficient, extremely high cost/tax with poor rates of return, which put more upward pressure on prices, or in some cases the capital did not flow at all, creating outright physical shortages.
But not all commodity markets finished the decade supply constrained. Impressive supply growth in several key commodities in recent years proves that many of these supply-side problems can be alleviated through well aimed policy that motivates investment in resource constrained sectors. For example, the ability to freely invest in US domestic natural gas production has led to the technological breakthrough of unconventional shale gas plays, which has created a global glut of natural gas. In addition, investment in petroleum refineries and ferronickel pig iron technologies has led to sharp declines in petroleum product cracks and substantially lower nickel prices.
Moreover, in many of these cases, policy served to encourage rather than to discourage investment. For instance, while the United States and Europe opposed petroleum refinery investments owing to environmental concerns, India incentivized this investment through tax breaks, but maintained strict environmental standards, creating a “nearly zero-emission refinery” that uses state of the art technologies with a cost basis that has even driven some less sophisticated western refineries into closure.
Overall, these developments suggest three emerging themes that are likely to continue to dominate in 2010 and beyond:
Differentiation between commodities driven by the extent of supply constraints that will likely drive greater price dispersion across the commodity complex;
Resource realignment as emerging markets are forced to bid away scarce commodities from the developed economies, especially when supply constraints are more restrictive, which shifts the focus away from the sustainability of higher prices and towards the sustainability of higher growth;
Increasing macroeconomic correlations as resource realignment will likely increase the relevance of commodity prices and supply to the broader macroeconomic environment.
Differentiation between commodities driven by the extent of supply constraints will likely drive greater price dispersionOver the past decade a substantial amount of investment and technological innovation has taken place across the commodities complex with widely varying degrees of success. As we emphasized at the beginning of this decade, it was precisely this uncertainty in the success of different technologies that generated a premium in commodity prices above the observed marginal cost of production.
During the first part of this decade, almost all technological advances in commodity production failed. In energy, oil sands failed to deliver owing to energy and water constraints, gas- and coal-to-liquids proved too costly, biofuels used too much land and drove up agriculture prices, solar parks proved too expensive and wind used up too much real estate. All of these problems made scaling up these technologies too difficult. In metals, environmental impacts restricted the widespread use of otherwise productive technologies, while in agriculture GMO was simply additive to Borland and hybrid technologies.
By the end of this decade, however, some of these failures started to turn into successes, such as the technological breakthroughs that occurred in natural gas and nickel, which started to create differentiation in commodity pricing, especially when the ability (or inability) to grow supply was matched against emerging market demand growth.
Overall, the more binding the constraints on investment and supply growth and the more leverage to emerging market demand, the stronger the commodity price recovery has been this past year and the stronger the outlook is into 2010 and beyond. In particular, natural gas, refined petroleum products, nickel, wheat and aluminum have all seen significant growth in production capacity and with the exception of aluminum all have limited exposure to emerging market demand growth. Accordingly, these commodities have experienced far more modest price recoveries and have a much weaker forward price outlook. In sharp contrast, crude oil, copper, zinc, platinum, corn and soybeans all have binding supply constraints with far greater leverage to emerging market demand.
In the past, these types of shortages were largely dealt with by intra-commodity substitution. This behavior generated fundamental tightness across the commodities and drove the commodity price convergence that has been a key feature of the markets over the last five years, making the consumer indifferent to the specific commodity. For example, corn could be used for transportation like oil, for power generation like gas and for material like aluminum, so if the prices of these commodities were the same on a Btu basis, we were indifferent to the commodity.
However, the nature of the current shortages limits the ability to substitute, suggesting the likelihood of increased price divergence in coming years. For example, we expect that the substantial disconnect between oil and natural gas prices will likely be sustained over the medium term. When natural gas was in tight supply, oil could be used as a substitute to natural gas in the generation of electricity. However, substitution in the other direction does not work given current installed technologies and infrastructure. In other words, oil can substitute for natural gas in power generation where it is predominantly used by combined cycle units that can burn both fuels, but natural gas cannot substitute for oil in transportation where oil is predominantly used without massive investment in infrastructure. The avenues to convert natural gas into an oil substitute are wide ranging but all very expensive – gas-to-liquids to turn natural gas into diesel, compressed natural gas (CNG) as a direct automotive fuel and electric cars. Until these investments are made or the gas glut is resolved, which is unlikely in the next three to five years, natural gas is likely to trade at a steep discount to oil.
And while you can read the oil propaganda on your own (maybe just pull the summer 2008 report: same shit, different day), here is what Goldman had to say on Gold.
With the US Federal Reserve expected to keep its short-term nominal interest rate target near zero through 2011, we expect the low US real interest rate environment will continue to provide strong support for gold price in 2010 and 2011. However, as we also expect US inflation to remain subdued, we expect that gold prices will come under significant downward pressure once the US economic recovery strengthens and the US Federal Reserve begins to raise interest rates. Consequently, an earlier than expected tightening of US monetary policy is the primary downside risk to gold prices in 2010 and 2011, in our view. In the interim, however, we expect the low US real interest rate environment, continued gold-ETF buying and reduced Central Bank gold sales will allow gold prices to continue to move higher. Consequently, we raise our gold price forecasts to $1200/toz, $1260/toz and $1350/toz on a 3-, 6- and 12-month horizon, respectively, with a 2010 average price forecast of $1265/toz and a 2011 average price forecast of $1425/toz. While an earlier than expected tightening of US monetary policy presents a substantial downside risk to gold prices in 2010 and 2011, we believe the near-term risk to our gold price forecast is skewed to the upside.
While gold prices denominated in US dollars continue to march steadily high, looking at the price denominated in other currencies is a healthy reminder that gold prices remain creatures of their financial environment. For example, Australian dollar denominated gold prices peaked on February 20 of this year at 1563 AUD/toz and are currently 17.5% off of their highs. Meanwhile euro-denominated gold prices have only recently returned to their February 20 high of 789 E
While Exhibit 32 highlights the view of gold as a currency, we continue to believe that the impact of the financial environment on gold prices can best be understood by viewing gold as a commodity. As discussed in detail in our March 25, 2009 Commodities:
Frameworks: Forecasting gold as a commodity, US dollar-denominated gold prices are driven by different market fundamentals over long, medium and short horizons.
Long-horizon: Over long horizons (often more than a decade), the price of gold keeps pace with inflation. In 2008 US dollars, the long-run price of gold is near $420/toz.
Medium-horizon: Over medium horizons, the real price of gold fluctuates around its long-run price: pricing higher in low US real interest rate environments and lower in high US real interest rate environments.
Short-horizon: Over short horizons, fluctuations in the monetary demand for gold, notably gold-ETF buying and government central bank selling drive the price of gold relative to its medium-term real interest rate equilibrium.
This implies that the outlook for US inflation and interest rates is the key determinant of gold prices in the medium to long term. Our US Economics team expects that a slow US economic recovery will keep inflation rates low in 2010 and 2011 and lead the US Federal Reserve to maintain it short-term nominal interest rate target near zero. In our view, this has two important implications for gold prices in 2010 and 2011.
A continuing low US real interest rate environment will likely allow gold prices to continue to rise higher in 2010 and 2011.
The widening gap between current gold prices and their long-run inflation-adjusted average price of $420/toz combined with a benign US inflation outlook suggests that when the US economy strengthens and the US Federal Reserve tightens its monetary policy, the convergence of inflation-adjusted gold prices to their long-run average in a rising real interest rate environment will likely come through falling nominal US dollar denominated gold prices, not inflation.
This suggests that for the gold investor, US dollar-denominated gold will likely continue to rise in the expected low real US interest rate environment of 2010 and 2011. However, the widening gap between current gold prices and their long-run inflation-adjusted average price of $420/toz combined with a benign US inflation outlook suggest that an earlier than expected tightening of US monetary policy is the primary downside risk to gold. In short, we expect that the gold price-real interest rate cycle will turn when the US Federal Reserve begins to raise interest rates, but do not expect that to happen this year or next. A continuing low US real interest rate environment will likely allow gold prices to continue to rise higher in 2010 and 2011
Gold prices have continued to drift higher since a surge in net speculative long positions first pushed prices through the $1000/toz mark in September (Exhibit 33). This surge in net speculative length preceded a decline in US real interest rates, with the yield on 10-year US Treasury Inflation-Protected Securities (TIPS) falling more than 50 basis points to 1.20%, highlighting the strong relationship between US real interest rates, speculative positions and gold prices (Exhibit 34).
The ongoing decline in the 10-year TIPS yield has been suggesting ongoing upside risk to our gold price forecasts, which were based on the view that yields would move back closer to 2.00% as the economy emerged from recession. However, with the US Federal Reserve expected to keep its short-term interest rate target near zero through 2011, with US inflation expected to remain low and with 10-year nominal US Treasury bond-yields expected to range from 3.00%-3.25% in 2010 and only reach 4.00% in 4Q2011, we now expect that US real interest rates will remain near current levels at least through the first half of 2010 (Exhibit 35). With current US 10-year TIPS yields near 1.10%, this would imply a medium-term gold price of $1350/toz, if Central Bank sales were strong enough to offset investment demand (Exhibit 36). However, we expect that the buying from the gold-ETFs will continue to outweigh Central Bank selling over the next two years, leading us to expect gold prices to move even higher.
An earlier than expected tightening of US monetary policy presents a substantial downside risk to gold prices in 2010 and 2011
While movements in US real interest rates have dominated US dollar-denominated gold price movements in recent months, the increasing gap between current gold prices and the long-run average inflation-adjusted price of gold requires one to think about how the price of gold will converge to its long-horizon equilibrium when the US real interest rate environment begins to normalize. More specifically, the long-run inflation-adjusted price of gold is roughly 420 USD/toz in today’s prices (Exhibit 37). To return to this equilibrium, either US inflation must rise dramatically – a three-fold increase in US consumer prices – or we must expect a sharp decline in nominal gold prices when US real interest rates rise back toward more normal levels. Given our US Economics teams view that US inflation will likely remain subdued, falling to a rate of only 0.3% in 2011, this convergence must come from falling nominal gold prices.
Consequently, the key question for the gold investor becomes when will US real interest rates rise, pushing gold prices back towards their long-run average levels? In our view, US real interest rates will rise when US economic recovery strengthens and the US Federal Reserve begins to tighten US monetary policy, raising its short-term nominal interest rate target. The last gold price spike in the early 1980s ended as the dramatic tightening of US monetary policy under Chairman Paul Volcker drove US real interest rates dramatically higher and drove gold prices down substantially (Exhibit 38).
In the interim, the balance between investor buying and central bank sales suggests that the balance of gold price risk remains skewed to the upside
Buying by the gold-ETFs surged during the first four months of 2009 by 13 million toz, far outpacing the total 2008 total of 8 million toz (Exhibit 39). Since this initial surge, ETFs inventories have remained stable and we expect ETF buying to revert to its long-term pace of 6 million toz per year. However, we see upside risk to this assumption. Over the past decade total overall gold investment demand, including bar hoarding, coins and gold-ETFs, has averaged 11 million toz per year. Given the growing size and popularity of gold ETFs, they now represent a larger portion of this total investment demand suggesting a potential shift higher in investment flows. Should the buying from gold-ETFs continue at this faster pace of 11 million toz per year, we would expect gold prices to rise to $1,400 /toz by the end of 2010 and over $1,550/toz by the end of 2011.
Although central banks have historically been net sellers of gold, we have witnessed a significant slowdown in the pace of sales since 2008 with the latest data suggesting an outright halt in aggregate sales. Compared to the late 1990s when many central banks viewed gold as a low-yielding asset and their gold sales put downward pressure on gold prices, the more recent movement among central banks is to view gold reserves as an important source of diversification away from the US dollar in their reserve holdings.
Furthermore, emerging market central banks have explicitly stated their intentions to gradually diversify reserves into gold as well as currency reserve assets other than the US dollar. From a positioning point of view, Asian nations as a group hold only a small percentage of their reserves in gold vs. the major European nations holding more than half their assets in gold (56% as of October). China, for example, holds only about 1.49% of its reserve assets in gold and surprised earlier this year when it announced that it had increased its gold holdings by 76% since 2003 to 1,054 tons, mostly from buying from their domestic mine production. Similarly, only 4.7% of Russia’s reserves are in gold and it has stated its intention to increase its gold holdings and has done so by 19% this year alone. Furthermore, the recent announcement that India was to purchase 200 tons of the 403 tons of gold the IMF plans to sell has substantially reduced the outlook for central bank sales in 2010 and 2011. Net, we expect selling by central banks and other official sector institutions to remain near subdued, less than 100 tonnes per year on net (0.25 million toz per month, Exhibit 40). Should Central Banks continue to be net buyers of gold in the next two years, the upside risk to gold prices would be considerable.
With gold-ETF expected to buy 0.25 million toz per month more than the central banks sell on net and with US real interest rates expected to remain depressed near current levels at least through the first half of 2010, we raise our gold price forecasts to $1200/toz, $1260/toz, and $1350/toz on a 3-, 6-, and 12-month horizon, respectively, with a 2010 average price forecast of $1265/toz and a 2011 average price forecast of $1425/toz (Exhibit 41). While this represents a 12% move to the upside in the next 12 months and a 20% move to the upside in the next 24 months, the last time US real interest rates declined to these low levels on a sustained basis was in the late 1970s, gold prices spiked to $1870/toz in today’s US dollars in January of 1980. While we view an earlier than expected tightening of monetary policy by the US Federal Reserve as the primary downside risk to gold prices in 2010 and 2011, we see the balance of risks as remaining skewed to the upside.
As compared to last year at this time, there’s not much happening with the GLD inventory these days. Recall that during the first few months of 2009 they were adding gold bars like never before - a whopping 350 tonnes during just the first three months of the year.
