Low Fed Rates till 2014 Sparks Gold

In today's FOMC announcement, the Fed signaled that they will be keeping rates ultra low thru most of 2014. That even raised my eyebrow...

This news put some giddy-up into gold, which vaulted about $50 this afternoon on the FOMC news.

I used this leap to sell my GLD position. It's up about 10% from its lows, price is now filling the gap, and stochastics are getting twisty in the overbought zone.

Am also concerned about the re-hypothecation issues surrounding these metal ETFs on the back of the MF Global situation last fall.

Selling this position puts me just about 0% net long (long metal and ag commodities against short equity index). Feels about right given the current field position of various asset classes.

position in commodities, SPX

Why Wealthy People Own Gold

Straightforward explanation of why wealthy people own gold. The key point here is that the primary reason to own gold (in its physical form) is not to speculate in near term price moves.

Instead, wealthy people own gold to preserve their wealth against problems like inflation, bank collapses, and aggression.

Viewed thru this lens, owning gold is less of a 'buy-and-hold' investment strategy and more of a buy-and-will-to-the-next-generation family wealth preservation strategy.

More Gold Weakness

Action in precious metals continues ugly. New lows for the move today. Peering thru a longer time horizon lens, however, finds the yellow metal just now touching its multi-year uptrend line--a defined risk set-up for bullish traders.

One apparent takeaway from a macro perspective is that gold is not buying the thesis that the financial system is reliquifying--particularly w.r.t. the EU. Instead it is behaving like a wave of deleveraging, deflation in in the cards.

position in GLD

Lightly Buying

Buying some gold and silver this am into the continued smeltage. Support is coming up fast. Stochastics getting there as well. Stated differently, risk/reward is getting more attractive.

Nothing crazy, just some incremental adds. Truth be told, would welcome lower prices for more substantial buying.

position in GLD, SLV, CEF

Gold Moving Lower

Never got off a comment last week on the head-and-shoulders (bearish) pattern setting up in gold. This morning gold is down nearly $50, which essentially validates the 'dandruff.'

Why the thrust downward in the yellow metal? Not sure, cookie, as there is no 'obvious' gold-related news on the tape. Over the weekend, however, there were some rumblings that last week's EU summit outcomes 'did not go far enough' in resolving the debt crisis. Swap spreads are generally widening today, with Greek spreads crossing the 10,000 bps mark--implying a 100% chance of default.

Am starting to sense that gold may be a leading indicator of another round of 'risk off' in the markets. Added to my short equity position this am, and may do more in the upcoming sessions depending on how things unfold.

position in GLD, SPX

The Infuence of Today's Events on Inflation

As noted in this morning's post, central banks got out the bazookas today in an attempt to blow away systemic deflationary forces that are driving Euro and US banks toward insolvency.

On the surface, the concerted central bank actions are clearly inflationary.

This post on zerohedge w/ Peter Schiff comments captures it well. The snippet at the end of the post REALLY captures it well:

"...this is merely the beginning as more and more inflationary actions have to be undertaken by central banks to save banks from being crushed by untenable debt loads. Whether they succeed in overturning the deflationary tsunami is unknown. What is certain is that they will bring fiat currencies to the [brink] of viability (and beyond) in trying."

As the snippet notes, the big question is whether this collective action will work. In late 2008, the Fed got out the fire hose of liquidity to stem the Lehman blowup. After a sharp relief rally on the news, however, markets resumed their downward path as the deflationary forces were not to be denied.

Hard not to wonder whether the same set up might not be in play here. Yes, the collective bazooka exceeds the power of the Fed's firehose. But the deflationary forces are more global in nature this time around.

Peter Schiff suggests that this is the time to load up on gold. That may turn out to be the case. Heck, gold popped 40 handles today.

But the other side of the trade is that the market forces pressing against the intervention are deflationary in nature.

And it's generally not nice to fool Mother Nature.

position in SPX, gold

Central Banks Announce Coordinated Measures

This morning central banks around the world announced coordinated measures to enhance global financial system liquidity. Coordinated measures like this imply that central bankers see something severely wrong with the global financial system.

Their perceptions of systemic probs are correct, although as usual they are behind the curve.

Unfortunately, the planned approach--i.e., 'more liquidity'--does little to remedy the underlying problem, which is one of insolvency.

Nonetheless, the news jacked markets around the world. Domestic stock markets have opened about 2% higher. Gold jumped $30 on the money printing spectre.

My inclination is to 'fade' (read: sell) this news and will be looking for an opportunity to add to short side exposure.

position in SPX, gold

Durable Rally, or Short Term Relief?

If we were to assign news-related causes to today' 2-3% stock market rally, it would probably be a blend of better than expected Black Friday sales plus the spectre of (another) Euro bailout. Of course, we learned today that a) the IMF had no Italian bailout program in motion, and b) last week's retail sales numbers may be greatly exaggerated.

So perhaps today's move is just one more rally to blow off some near term selling pressure.

Technically, an upside move 'works' to SPX 1220.

Other technical evidence, however, is not in synch with a sustained upside move. After an early move lower, Treasuries recovered most of the day's losses. Bank stocks gave up a big chunk of their early gains. The dollar also closed near even after early selling. Oil closed near its lows.

Hard not to view these 'divergences' with some skepticism about the prospects for big upside from here. Time will tell, of course.

Personally, I did a whole lot of nuttin' today. Will likely put back on some of the incremental short exposure ditched last week should prices continue higher toward 1220. Other than that, I continue to be active in the physical metals market, buying both gold and silver.

position in SPX, gold, silver

Flag Pattern Resolved

Last week's question about which way the pennant pattern in major market indexes would break has been answered. The pattern has resolved to the downside.

The reason being assigned to the rhyme this morning is the budget supercommittee's (gotta like that term) failure to come to an agreement over $1.2 trillion in spending cuts. No deal inked by Wed means across-the-board cuts of like amount commencing in 2013.

This sets up the 2012 elections as a referendum on Big Govt.

Of course, other issues are weighing markets as well. Europe is still on fire, and fallout from the meltdown of MF global is wreaking havoc in commodity markets.

Personally, am leaning slightly net long--about 5-7% of liquid assets. In other words, the value of long positions (primarily commodities) outweights the value of short positions (SPX index short) by a small amount.

Should stock slippage continue another 30 SPX handles or so, I'll start looking to cover some of my short position (support resides in SPX 1120-1140 range). With precious metals getting slapped around today (gold and silver both off 3-4%), am itching to add to those positions as well.

positions in SPX, gold, silver

Precious Metals Slammed

Precious metals getting smelted today with gold down almost $90 and silver off by nearly 15% (!). Obviously my small venture into SLV yesterday wasn't the best of timing...

Support for GLD looks to correspond to the multi-year uptrend line which corresponds to 152ish.

SLV looks to have support right around here at 30, although it doesn't feel very strong. Stronger support may reside below at 25-26ish.

Have taken 'placeholder' positions in both metals and will be a better buyer lower.

positions in GLD, SLV

Venezuela Siezes Gold Mining Companies

Venzuela is nationalizing its gold industry. This is one of the big risks with owning natural resource companies in general and precious metals miners in particular.

Political risk looms large in this sector.

On the other hand, the physical commodity itself does not carry political risk--at least of the kind that amounts to expropriation of producer property.

position in gold 

How Weak Currency Initiatives Could Hammer Gold

Fil Zucchi shares an interesting thesis that actions by central banks to weaken currencies could put downward pressure on the price of gold. This is counterintuitive because interventions to weaken a currency are typically viewed as bullish for gold.

Because there is building political pressure against weakening a currency via money printing, Fil posits that central banks might sell some of their gold reserves, and use the proceeds to buy foreign currencies (forex). Price of forex would rise, and domestic currency would weaken as per the objective.

I hadn't given this scenario much thought but I do think Fil has an interesting angle. Domestically, the Tea Party movement and other social awakenings seem to be sensitizing the public about the dangers of money printing by the Fed and other central banks. By selling gold to weaken the currency, central banks can achieve their goal in a politically expedient manner--i.e., they cannot be accused of pure money printing to manipulate currency cross rates.

Should such actions occur, it would almost certainly drive the price of gold lower. How much lower and for how long would be anybody's guess. What we do know is that central banks could not engage in this operation indefinitely as they would run out of gold to sell at some point.

Fil notes that, while the selling of gold by central banks would be bearish for gold price in the near term, it would likely set up a very bullish scenario for gold at some point. Once central banks deplete their gold, then the only way to continue currency debasement (which is the heart and soul of central banking) would be to crank up the printing presses full force. At that point, 'big inflation' would be en force; gold would be situated for a moonshot increase.

It would also constitute a sort of poetic justice, since gold will have left government hands and landed in the hands of the people--where it naturally belongs.

Like Fil, I'm currently out of 'paper' gold and silver, having sold the last of my trading position in SLV last week before ensuing price weakness (better lucky than smart). I do maintain exposure via my physical metals position--a position that I do not plan to sell.

Meanwhile, I'm going to watch gold price from the sidelines for a while, and look for evidence that Fil's thesis may be playing out.

position in gold, silver, USD

Downdraft Coming?

My sense is that the chances of a major wipeout our growing. Domestic markets today down 4% with some European markets (e.g., DAX down 6%).

Europe may be coming apart right here. The size of the debt problem is immense and it seems doubtful that Germany will shoulder the entire burden. Many euro banks down 10% today. US markets are a stone's throw from contagion.

Gold closed at another record high of $1827/oz. Investors are connecting the dots as the two options among sovereigns are boiling down to a) default, b) print money. The price of gold suggest folks doing the math are choosing b).

I've been rebuilding my short SPX position over the past few days and want to do more, but the volatility suggests prudence in spreading things out. Will likely use price to my advantage on rallies. The SPX seems to have room lower toward 1025ish.

Have once more started a GLD position although very hard to get large right here given the moonshot in price.

Frankly, silver looks more interesting to me right here compared to gold. Silver has not gone ballistic over the past two weeks like gold. Moreover, the charts suggest a bullish cup-and-handle pattern nearing completion.

A decisive move above 41 would be bullish.

positions in SPX, GLD, SLV 

Gappy Gold

Need to record the gold move for reference purposes.

As noted previously, gold can essentially be viewed as a bet on social disorder (monetary, social, etc.).

Gold is above $1800/oz in the after market.

position in gold

Just another 500 or so pt range day in the Dow today--all of it to the downside. Premarket futes starting heading south on chatter that one or more French banks were in trouble. After the opening bell, markets lost 300-400 Dow points before an afternoon rally closed the gap to about -100.

But then that rally totally fell apart, such that markets knifed thru the intraday lows on their way down in the last hour. Closing bell: Dow -519.

The market's dynamic is readily felt when assuming a trading mindset. Stocks are generally going down easier than they are going up. The temptation is to short 'em, but not only are we deeply oversold but there is also intervention risk, such as a local or worldwide ban on naked CDS sales.

Bottom fishers keep buying stocks at what seems to be 'low prices' only to get their heads handed to them when the indexes break lower in monolithic fashion.

This keeps the shorts out and the longs trapped in declining positions--a wholly bearish situation.

Also, let's keep in mind the background macro picture which portrays a massive deleveraging event underway.

As such, my inclination is to look for short side entries. The first situation I'll consider is if we happen to open green tomorrow. The risk, of course, is that we scream higher and don't look back. That's acceptable to me here given that I'm still long some stock (e.g., CSCO, MSFT).

At any rate, my general game plan as it stands is to sell rallies.

I'm also interested in adding to my SLV position. There has been a big disconnect between gold (moonshot) and silver (sold but trades relatively firm) during the past week. Clearly, market participants are wondering whether any paper currency will be worth anything--and until they do that they're piling into gold (as they have for thousands of years). My sense is that silver may play some catch-up here.

position in gold, CSCO, MSFT, SPX, SLV

Gold and the National Debt

Interesting projection of gold alongside US public debt. Should the relationship hold, loading $2.5 trillion more onto the debt pile implies that gold 'works' to $1950.

Gold is marking another new high today. Seems the markets are doing the math...

position in gold, GLD

Gold Breaks Out

Pretty much lost in all of the theater this week is that gold marked another all time high this week. Very impressive, as it seemed that the late April high would not be surmounted, and weakness near the end of June suggested that a major break was imminent.

Because gold is essentially a bet on disorder (monetary, fiscal, social, etc.), there could be many interpretations as to 'why' the breakout right here. Most scenarios end with the argument that more money printing is likely.

Late last summer I initiated a position in SLV to exploit a breakout in silver wherein I added more shares as prices went higher. Such pyramid trades are usually not how I roll, but it can be an effective way to play a strong trending move while using higher prices to help manage risk.

In the next week I will be looking for entry points in both GLD and SLV using a pyramid design.

position in GLD

Follow-up Charts

Last week, durring a summer session of MGT 305, an impromptu extra credit assignment on the definition and causes of market bubbles morphed into an interesting class discussion of our current economic and fiscal situation.

The following charts serve as follow-up to a couple of discussion threads. Notes that all charts show about 20 years of monthly data.

 

position in oil, gold

Red to Gold

Another remark on Grant. In his 5/20 letter, Grant reprints a speech he gave at the CFA annual meeting in early May in Scotland. In it, he builds the case for the Chinese 'red capitalism' being an exaggerated version of the hampered market model practiced in the US.

He suggests the situation in China as a 'description, writ large, of the salient error of all the world's monetary arrangements--namely the elevation of the technique of command and control over the free interplay of supply and demand.'

Grant then makes the case for the gold standard as a means for putting markets back in control.

position in gold

Selling Strength

Am moving into 'sell strength' mode in my personal accounts. While I believe that there is some value in select large cap stocks, there are just too many negative factors that, in my view, serve as headwinds against higher prices here.

Beyond the myriad macro factors (debt, EU, Mid East, etc), overall metrics suggest conditions of extreme stock market valuation. Couple that with the pending end of QE2 and one has to wonder what will keep stock prices levitating at nosebleed levels.

I have therefore been trying to use price to my advantage to unwind some risk. Sold positions in Intel (INTC) and Merck (MRK) yesterday. On further strength, will likely do same for Johnson & Johnson (JNJ). All of these stocks have had nice 15-20% moves off their spring lows and are trading near the upper end of technical band tags.

Should the price action in Cisco (CSCO) and Microsoft (MSFT) strengthen, I may make some partial sales here as well although I still perceive some value in these names. Currently, however, neither of these stocks can get out of their own way--which may be telling in and of itself.

If commodity prices strengthen, then I will likely lighten up on a number of related ETFs although I plan to retain a core position in the SPDR Gold Trust (GLD).

Hard not to eye the action in the general indexes without wondering whether we're putting in a significant top. First near term confirmation of such in the SPX would be a decisve break of the multi-month uptrend line (1330ish).

positions in CSCO, MSFT, GLD, SPX