Oct 31

King Dollar in a Bull Market

Gold Price Comments Off on King Dollar in a Bull Market
But change your goggles and hey! Commodities in AUD not too bad…!

BORING as it sounds, I want to talk a bit about the end of US QE today, writes Greg Canavan in The Daily Reckoning Australia.
Because it’s very important to how markets are going to behave over the next few months.
As you probably know, yesterday the US Federal Reserve voted to end its policy of quantitative easing. But it will still be reinvesting the interest payments from its $4 trillion plus portfolio and rolling over any maturing treasury securities, so it’s balance sheet will continue to grow, albeit much more slowly.
On the surface, US markets didn’t seem too fussed about the end of an era. Shares sold off around the time of the Fed’s statement and then rallied towards the close. Probably a case of “algo’s going wild” as automated high frequency traders tried to make sense of the Fed’s statement.
And the Fed did its usual job of promising to hold rates as low as they possibly could, which markets seemed happy enough with.
But the real action took place under the surface. That is, the US Dollar spiked higher again. This is an important point because when the US Dollar rallies, it usually signifies tightening global liquidity.
Think of it as liquidity returning to the source (US capital markets) and drying up…or disappearing. That’s certainly what has been happening these past few months. Since bottoming in May, the US Dollar index (which measures the greenback’s performance against a basket of currencies) has increased by nearly 9%.
That might not sound like a huge spike, but in the world of currency movements, it is. Imagine if you’re an exporter and your product just became 9% more expensive…chances are it will lead to a drop in sales as customers look for a cheaper substitute.
This is the problem with the end of QE. It leads to liquidity evaporation as ‘punt money’ returns home…which leads to a strengthening US Dollar…which hurts sales of US multinationals.
It’s not going to happen right away though. Most companies have hedging strategies in place that protect them from sharp moves in the FX markets. But if Dollar strength persists…and the chart above says that it will, then you’ll see the strong Dollar hitting companies’ revenue line in the coming quarterly reports.
Not only that, but the evaporation of liquidity in general could lead to another bout of selling across global markets. QE is all about providing confidence. Liquidity is synonymous with confidence. Take it away and you’ll see the mood of the market change.
Getting back to the Dollar strength…it’s a headache for Australia too. It’s smashing the iron ore price, and the Aussie Dollar isn’t falling fast enough to keep up. In terms of the other commodities though, things aren’t quite so bad.
All you seem to hear lately is negative news about commodities. That’s because the world prices commodities in US Dollars, and as you’ve seen, the US Dollar is a picture of strength. But if you look at commodity prices in terms of Aussie Dollars, things look a little better.
The chart below shows the CRB commodity index, denominated in Australian Dollars. It’s a weekly chart over the past five years. And y’know what…it doesn’t look that bad! Since bottoming in 2012, it’s made considerable progress in heading back to the 2011 highs.
But you’ll want to see it start to bottom around these levels. If it doesn’t, prices could head much lower.
The thing to note about this chart is that it doesn’t include the bulk commodities – iron ore and coal. These commodities tend to dominate the headlines in Australia. Things like nickel, tin, copper and oil don’t get much of a look in.
Which reminds me, in case you missed it, Diggers and Drillers analyst Jason Stevenson recently released a report on some small Aussie oil ‘wildcatters’. With the oil price low, now could be a good time to sniff around the sector.
You could say that about commodities across the board. In the space of a few years, they’ve gone from hero to zero…or the penthouse to the…
That usually means there could be some good value around. One thing you need to look for in the current environment is a decent demand/supply dynamic. Iron ore in particular is heading towards massive oversupply next year. I reckon that makes it a poor investment choice for the next few years.
You’re better off to wait until the China slowdown and supply surge knocks out the juniors and all the marginal producers….leaving the market to BHP and Rio. You’ll then probably be able to pick these mining giants up at much lower levels.
Once you find a commodity with good supply/demand fundamentals, you need to make sure the producer is low cost. That protects it against further price falls…or a rise in the Australian Dollar.
It also protects it against foreign competition. One of the issues with the Aussie resources sector in recent years is costs. Other countries have much cheaper capital and labour costs and can therefore get stuff out of the ground cheaper than us.
That brings me to a final issue: Australia doesn’t really invest in its own resource sector. Via superannuation, we have a huge pool of capital. But this mostly goes into the banks or the major miners. Superannuation capital is not high risk capital.
That means a lot of the capital that flows into the resource sector is foreign. And when global financial conditions change…like the end of QE and the strengthening of the US Dollar…that capital departs.
This will create problems and opportunities for the sector. But given the bearishness towards commodities in general, it’s probably time to start getting interested again.
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Oct 29

Don’t Get Bullish on Gold Below $1350

Gold Price Comments Off on Don’t Get Bullish on Gold Below $1350
This month’s “triple bottom” is not, repeat NOT, confirmed says this technical analyst…

WAYNE KAUFMAN is chief market analyst at Phoenix Financial in New York.
Regularly quoted in the media and interviewed on Fox, CNBC and the BBC, Kaufman produces a daily report for Phoenix, is a member of the Market Technicians Association, and has taught level 3 of the MTA’s three-level online course for Chartered Market Technician candidates.
Here Kaufman speaks to Mike Norman on behalf of Hard Assets Investor about how he sees the big picture right now…
Hard Assets Investor: We’ve seen some crazy gyrations in gold, in the Dollar, in oil, even in stocks. Summarize how it looks to you.
Wayne Kaufman: In terms of US equities, we’ve been watching a deterioration of underlying market breadth, that hasn’t shown up, or had not shown up in the major indexes until the last couple of weeks. But for the last three or four months, we’ve been watching small-caps get decimated. And then the midcaps followed. And then the large-caps, S&P 500, had a peak recently. But the breadth was terrible.
And now the stocks have rolled over. It’s to the point where you’ve only got about 18% of S&P 1500 stocks over their own 50-day moving average, less than one in five. About one in three are still over their 200-day moving average. So that underlying deterioration came through and pulled down the majors.
HAI: Now with small stocks weak like that, wouldn’t that suggest general economic weakness, or at least a tipoff to that effect, that we’re seeing basically small, medium-sized businesses not doing very well?
Kaufman: Definitely. You’re right. You’re talking about changes taking place. The question in the mind of investors right now is, we’re seeing the weakness in China, in Europe, in Germany suddenly rolling over. You’ve got the price of oil. It’s all of these things that are turning dramatically. Is this a long-term trend change? Or is this just going to be short term? Is it just typical October stuff, in the case of equities? That’s what we’re going to find out over the next few weeks.
HAI: But is there really a downside, when people know the central banks are going to be there, push comes to shove?
Kaufman: There, at a point, is only going to be so much that the central banks can do. I was recently asked by a news outlet to give my projections for the S&P, and my reasoning. My No. 1 reason for being bullish is central banks around the world will do everything possible to prevent a global recession. Are they really able to do much more? We know they’ll try. Are they going to wait too long before they do? How effective can they be?
HAI: Last time you were here, you were negative on gold. And that play worked out pretty well. How do you see things panning out from this point?
Kaufman: I see short-term, over-sold and over-bearish sentiment. So a bounce is definitely in the cards, especially if there’s some short covering by people who are short the futures. But when I was here last time, I said I couldn’t get bullish unless gold broke $1400 or so. Now that number is a little lower.
HAI: Where is it?
Kaufman: $1300. I need to see $1350 at least, because you do have a potential triple bottom. A lot of people say, “Oh, triple bottom.” It’s a potential triple bottom that doesn’t get confirmed until you break unimportant resistance. Unless we can get above $1350, I’m not going to start thinking about getting bullish, except for oversold, over-bearish bounces.
HAI: We had a guest recently talking about the death of gold. Reminds me of the death of equities back on the infamous 1979 Business Weekcover. What do you make of that?
Kaufman: I agree. That’s why I’m saying I could see a bounce here, because it’s oversold, and it’s over-pessimistic. Levels of pessimism are extreme. And when you see that, that’s a good time to take the other side of that trade. The question is, how much staying power? You’re talking about commodities going down. The Dollar has been strong, which is a little too much bullishness in the Dollar. That certainly can be capped here.
But oil is just amazing. For years, you always said that the Saudis controlled the price of oil. You were 100% right. Because they’re the only country that really has significant excess capacity. Right now, are the Saudis purposely trying to drive the price of oil down, so that they can try and put a cap on fracking and energy exploration and production here in the States?
HAI: The shale guys, the shale producers.
Kaufman: Potentially an amazing tactical war going on between the Saudis and the US, in terms of oil production.
HAI: I saw an example of that back in the ’80s, when I was an oil trader on the floor of this very exchange, when they crashed the price down. That was a message sent to the non-Opec producers, the North Sea guys in particular. So I think you’re absolutely right. 
You mentioned the Dollar. That was a surprise to most people, because we had this narrative, for a long time, about money printing, and central banks, and quantitative easing, and hyperinflation and the Fed doing all this. Yet, look at the Dollar.
Kaufman: I don’t want to seem like I’m complimenting you because you’re the host, but you said this a long time ago.
HAI: Don’t hold back…
Kaufman: You said a long time ago, all the inflation guys, that they were wrong, they were going to be wrong. You were 100% right. So it was a big surprise. Now, as a technician, I called the Dollar going up at a point when I saw it giving me buy signals. I don’t do it the intuitive or the economist way. It’s extremely overbought. And it’s extremely over-bullish. It has been taking a pause. I think it’ll continue to pause here. It’s just too many people on that side of the trade at this point.
HAI: We heard comments recently from New York Fed President William Dudley, to the effect that a Dollar that’s too strong might hinder our ability to achieve our goals. Hint, hint, a little bit of code words there…
Kaufman: You’re right. But the problem they have is that the strong Dollar is going to hurt exports, obviously. But you’ve got S&P 500 companies due in the neighborhood of 40% of revenues, 50% of profits overseas. So, whether it’s from the strong Dollar or just because the economies overseas are very weak right now, no matter how you go on that, it’s going to be a problem. And the world economy needs to clear up. We’re not an island unto ourselves; it will affect us. And I think that’s what equities are starting to show.
HAI: Good points. Wayne, always great to have you here. Thanks very much.
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Oct 29

Now, About That October 2014 S&P Crash

Gold Price Comments Off on Now, About That October 2014 S&P Crash
Not quite the shake-out needed, but just the “correction” the Fed wanted…

JESSE Livermore is considered to be one of the greatest traders who ever lived, writes Gary Dorsch, editor of Global Money Trends newsletter.
Also known as the “Boy Plunger” and the “Great Bear of Wall Street”, Livermore was famous for making and losing several multi-million Dollar fortunes and short-selling during the stock market crashes in 1907 and 1929.
Most notably, he reportedly pocketed $3 million during the Crash of 1907 and made a $100 million profit during the Crash of 1929. He subsequently lost both fortunes.
Livermore learned that the big money was not made by day trading on short-term price fluctuations, but instead, greater success comes from determining the direction of the overall market.
“Adopt a buy-and-hold strategy in a bull market and sell when it loses momentum. And always have an exit strategy in place.”
Before his death, Livermore wrote a book titled, How to Trade in Stocks, in which he famously warned his readers that “the stock market is designed to fool most of the people, most of the time.” Yet…
“All through time, people have basically acted and re-acted the same way in the market as a result of: greed, fear, ignorance, and hope – that is why the chart patterns recur on a constant basis.”
And in regards to the latest “Bear Raid” operation on Wall Street – ie, the near 10% sell-off in the S&P500 index – we have all seen this movie before and it usually ends the same way.
In a typical Bear Raid, the US stock market begins to gradually lose its footing and then there is a sudden, sharp downturn that climaxes in a scene of panicked capitulation selling. Stop losses are hit below the 200-day moving average, and weak handed investors are flushed out at the bottom.
What follows next is a sudden quick rebound from the lows, followed by an eventual recovery of all the previous losses that were engineered by the Bear Raiders. Once investors begin to realize that they were hoodwinked, they begin to pile into stocks again at higher prices.
Long-term investors, that is to say, the Richest 10% of US households that own 82% of the listed shares, are happy the shakeout was brief and rather painless, and that the rally can continue, fueled by corporate buybacks.
Livermore had also seen this type of “Bearish Raid” during his days on Wall Street…
“The theory that most of the sudden declines or particular sharp breaks are the results of some plunger’s operations probably was invented as an easy way of supplying reasons to those speculators who, being nothing but blind gamblers, will believe anything that is told them rather than do a little thinking. The raid excuse for losses that unfortunate speculators so often receive from brokers and financial gossipers is really an inverted tip. The difference lies in this: A bear tip is distinct, positive advice to sell short. But the inverted tip – that is, the explanation that does not explain – serves merely to keep you from wisely selling short. The natural tendency when a stock breaks badly is to sell it. There is a reason – an unknown reason but a good reason; therefore get out. But it is not wise to get out when the break is the result of a raid by an operator, because the moment he stops the price must rebound. Inverted tips!” – Jesse Livermore, Reminiscences of a Stock Operator
The long awaited downturn in the S&P500 index finally began on Sept 19th and ended on October 15th. The S&P500 index topped out at an all-time high of 2,015 and briefly fell to as low as 1,820 for a decline of 9.7%, or just shy of the 10% requirement to be regarded as a bona-fide correction.
Such shakeouts are part of the normal cyclical movements in the stock market, and they are regarded as a healthy exercise that shakes out the speculative froth from the market, and thus prevents the emergence of unsustainable bubbles that can burst into bear markets later on.
What was unusual this time however, was the extraordinary length of time that the S&P500 Oligarch index has avoided a correction of 10% or more. The Dow Jones Industrial index has gone 725 trading days without a correction, the fourth-longest streak since 1929. (In the 1990s the Dow went more than twice this long without falling 10%). However, a correction in the S&P500 index typically occurs about once every 18 months.
But it’s been 38 months since the last bona-fide correction of more than 10%…
As Livermore famously warned: “The stock market is designed to fool most of the people, most of the time.”
Prior to Sept 19th, 15 top strategists on Wall Street had raised their year-end targets for the S&P500 index. Goldman Sachs chief US equity strategist predicted the S&P500 index would reach 2,050 by year-end. Deutsche Bank raised its year-end projection to 2,050 and Stifel Nicolaus’s went wild, forecasting a rally to 2,300. Wells Fargo raised its view to 2,100.
On Sept 3rd the chief US-market strategist at RBC Capital Markets told The Associated Press, “What usually stops bull markets? It’s almost always a recession,” adding he sees no indications of a downturn looming.
Following the S&P500’s relentless rise to above the psychological 2,000-level, the percentage of newsletter writers that were bearish on the US stock market had dropped to 13% as of Sept 3rd, the lowest percentage since October of 1987, according to a survey of more than 100 writers, and taken by Investors Intelligence report.
In sharp contrast, the percentage of bullish writers was 56%, or about 4.5 times as many as the bears. Contrarians said the extreme readings might be an ominous sign, but the optimists were unbowed.
“A great many investors and analysts are wasting their time trying to prove that stocks have formed a new bubble, which they claim must soon pop,” a newsletter writer told Investors Intelligence.
“I think they are right about the bubble, but wrong about which market is in danger of a crash. It is much easier to make the case that the Treasury bond market is the real bubble these days.”
However, just the opposite scenario would unfold in the weeks ahead.
Shockingly, the yield on the 10-year US T-note briefly plunged from as high as 2.65% on Sept 19th as low as 1.87% on October 15th. Traders were buying Treasury notes as a temporary safe haven while fleeing from the stocks markets.
Contrary to widespread expectations, the S&P500 index fell nearly 10% from its all-time high, before hitting a panic bottom low at the 1,820-level. What was the cause of the unexpected downturn in the S&P500 index from Sept 19th through October 15th?
There are many moving parts that can move the markets at any given point in time. But in the view of Global Money Trends, top Federal Reserve officials and other G-7 central bankers wanted to see a shakeout in the stock markets.
Inter-market technical analysts can point to several factors that were rattling the S&P500 index during this 4-week period, in what could be described as a perfect storm. There was;
  1. a partial unwinding of the Yen Carry trade, with the US Dollar sliding from as high as ¥110 to as low as ¥105.25;
  2. the sharp slide of the German DAX-30 index to far below key support at the 9,000-level;
  3. the sharp slide in the S&P’s Oil and Gas sector due to sharply lower oil prices; and
  4. continued weakness in the Russell-2,000 small cap index;
  5. the release of the Fed’s newest tool – the “Dots Matrix” published on Sept 17th and telegraphed a series of baby-step Fed rate hikes, beginning around the middle of next year, to 1.375% by the end of 2015. The Fed also nudged its expected path of interest rate hikes to 2.875% by the end of 2016.
Hiking short term interest rates would require draining excess liquidity, which in turn, could puncture liquidity addicted markets. However, the “Dots Matrix,’ is mostly a psychological weapon that is used by the Fed to influence expectations about the future, without actually doing anything to turn its rhetoric into a reality.
Thus, the Fed can talk about hiking interest rates, as a mechanism to influence currency exchange rates, for example, without actually draining liquidity that could undermine the value of the stock market. Eventually, however, empty rhetoric would lose its potency in the markets, if not backed up by complimentary actions. Failure to act would tarnish the Fed’s reputation even more.
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Oct 29

QE, War & Other Autopilot US Action

Gold Price Comments Off on QE, War & Other Autopilot US Action
Ready for a clean break with Fed money creation…?

AMONG the many things still to be discovered is the effect of QE and ZIRP on the markets and the economy, writes Bill Bonner in his Diary of a Rogue Economist.
We can’t wait to find out.
The Fed has bought nearly $4 trillion of bonds over the last five years. You’re bound to get some kind of reaction to that kind of money.
But what?
Higher stocks? More GDP growth? Higher incomes? More inflation?
Washington was hoping for a little more of everything. But all we see are higher stock and bond prices. And if QE helped prices to go up, they should go back down when QE ends this week.
Unless the Fed changes its mind…
If the Fed makes a clean break with QE, it risks getting blamed for a big crack-up in the stock market. On the other hand, if it announces more QE, it risks creating an even bigger bubble…and getting blamed for that.
Our guess is we’ll get a mealymouthed announcement that leaves investors reassured…but uncertain. The Fed won’t allow a bear market in stocks, but investors won’t know how and when it will intervene next.
Last week, we were thinking about the reaction to the murder in Ottawa of a Canadian soldier who was guarding a war memorial.
There were 598 murders in Canada in 2011 (the most recent year we could find). As far as we know, not one registered the slightest interest in the US. But come a killer with Islam on his mind, and hardly a newspaper or talk show host in the 50 states can avoid comment.
“War in the streets of the West,” was how the Wall Street Journal put it; the newspaper wants a more muscular approach to the Middle East.
After a quarter of a century…and trillions of Dollars spent…and hundreds of thousands of Dollars lost…America appears to have more enemies in the Muslim world than ever before. Why would anyone want to continue on this barren path? To find out, we follow the money.
Professor Michael Glennon of Tufts University asks the same question: Why such eagerness for war?
People think that our government policies are determined by elected officials who carry out the nation’s will, as expressed at the ballot box. That is not the way it works.
Instead, it doesn’t really matter much what voters want. They get some traction on the emotional and symbolic issues – gay marriage, minimum wage and so forth.
But these issues don’t really matter much to the elites. What policies do matter are those that they can use to shift wealth from the people who earned it to themselves.
Glennon, a former legal counsel to the Senate Foreign Relations Committee, has come to the same conclusion. He says he was curious as to why President Obama would end up with almost precisely the same foreign policies as President George W. Bush.
“It hasn’t been a conscious decision. […] Members of Congress are generalists and need to defer to experts within the national security realm, as elsewhere.
“They are particularly concerned about being caught out on a limb having made a wrong judgment about national security and tend, therefore, to defer to experts, who tend to exaggerate threats. The courts similarly tend to defer to the expertise of the network that defines national security policy.
“The presidency is not a top-down institution, as many people in the public believe, headed by a president who gives orders and causes the bureaucracy to click its heels and salute. National security policy actually bubbles up from within the bureaucracy.
“Many of the more controversial policies, from the mining of Nicaragua’s harbors to the NSA surveillance program, originated within the bureaucracy. John Kerry was not exaggerating when he said that some of those programs are ‘on autopilot’.
“These particular bureaucracies don’t set truck widths or determine railroad freight rates. They make nerve-center security decisions that in a democracy can be irreversible, that can close down the marketplace of ideas, and can result in some very dire consequences.
“I think the American people are deluded…They believe that when they vote for a president or member of Congress or succeed in bringing a case before the courts, that policy is going to change. Now, there are many counter-examples in which these branches do affect policy, as Bagehot predicted there would be. But the larger picture is still true – policy by and large in the national security realm is made by the concealed institutions.”
Calling the Ottawa killing “war” not only belittles the real thing; it misses the point. There is no war on the streets of North America. But there is plenty of fraud and cupidity.
Here is how it works: The US security industry – the Pentagon, its hangers-on, its financiers and its suppliers – stomps around the Middle East, causing death and havoc in the Muslim world.
“Terrorists” naturally want to strike back at what they believe is the source of their sufferings: the US. Sooner or later, one of them is bound to make a go of it.
The typical voter hasn’t got time to analyze and understand the complex motives and confusing storyline behind the event. He sees only the evil deed.
His blood runs hot for protection and retaliation. When the call goes up for more intervention and more security spending, he is behind it all the way.
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Oct 28

QE Theory vs. Practice

Gold Price Comments Off on QE Theory vs. Practice
Works in the wrong one, says Ben Bernanke, trying to win hearts & minds…

CHANGING people’s minds, apparently, has very little to do with winning the argument, writes Tim Price on his ThePriceOfEverything blog.
Since people tend to make decisions emotionally, ‘evidence’ is a secondary issue. We are attempting to argue that the policy of QE, quantitative easing, is not just pointless but expensively pointless.
Apparently, instead of using cold logic, we will have to reframe our argument as follows:
  • Agree with our argumentative opponents;
  • Reframe the problem;
  • Introduce a new solution;
  • Provide a way to “save face”.
In terms of argumentative opponents, they don’t come much bigger than the former Fed chairman himself, Ben Bernanke. And it was Bernanke himself who rather pompously declared, shortly before leaving the Fed this year, that
“The problem with QE is it works in practice, but it doesn’t work in theory.”
There is, of course, no counter-factual. We will never know what might have happened if, say, the world’s central banks had elected not to throw trillions of Dollars at the world’s largest banks and instead let the free market work its magic on an overleveraged financial system.
But to suggest credibly that QE has worked, we first have to agree on a definition of what “work” means, and on what problem QE was meant to solve. If the objective of QE was to drive down longer term interest rates, given that short term rates were already at zero, then we would have to concede that in this somewhat narrow context, QE has “worked”. But we doubt whether that objective was front and centre for those people – we could variously call them “savers”, “investors”, “the unemployed” or “honest workers” – who are doubtless wondering when the economy will emerge from its current state of depression.
As James Grant recently observed in the FT (“Low rates are jamming the economy’s vital signals“), it’s quite remarkable how, thus far, savers in particular have largely suffered in silence. So yes, QE has “succeeded” in driving down interest rates. But we should probably reframe the problem.
The problem isn’t that interest rates were or are too high. Quite the reverse: interest rates are clearly already too low – at least for savers, and for that matter investors in the Euro zone and elsewhere. All the way out to 3-year maturities, investors in German government bonds, for example, are now faced with negative interest rates, and still they’re buying.
This isn’t monetary policy success; this is madness.
We think the QE debate should be reframed: has QE done anything to reform an economic and monetary system urgently in need of restructuring? We think the answer, self-evidently, is “No”. The answer is also “No” to the question: “Can you solve a crisis of too much indebtedness by a) adding more debt to the pile and simultaneously b) suppressing interest rates?”
The toxic combination of more credit creation and global financial repression will merely make the ultimate Minsky moment that much more spectacular.
What accentuates the problem is market noise. @Robustcap fairly points out that there are (at least) four groups at play in the markets – and that at least three of them aren’t adding to the sum of human wisdom:
  • Group 1 comprises newsletter writers, and other dogmatic ‘End of the world newsletter salesmen’ using every outlet to say ‘I told you so…’ (even though some of them have been saying so for the last 1000 S&P handles)…
  • Group 2 comprises Perma-Bulls and other Wall Street product salesmen, offering ‘This is a buying opportunity’ and other standard from-the-hip statements whenever the Vix index reaches 30 and the market trades 10% off from its high, at any time…
  • Group 3 includes ‘any moron with a $1500 E-trade account, twitter, Facebook etc…’, summing to roughly 99% nonsense and noise…
  • Group 4, however, comprises ‘True investors and traders’ asking questions such as, ‘Is this a good price? Is this a good level? What is my risk stepping in here, on either side? Am I getting better value than I am paying for? What is the downside / upside?’ etc.
“With the ‘magnification’ of noise by social media and the internet in general, one must shut off the first three groups and try to engage, find, follow, communicate with the fourth group only, those looking at FACTS, none dogmatic, understand value, risk, technicals and fundamentals and most importantly those who have no agenda and nothing to sell.”
To Jim Rickards, simply printing money and gifting it to the banks through the somewhat magical money creation process of QE is like treating cancer with aspirin: the supposed “solution” does nothing to address the root cause of the problem.
The West is trapped in a secular depression and “normal” cyclical solutions, such as monetary policy measures, are not just inappropriate, but damnably expensive for the rest of us. Only widespread economic restructuring will do. And that involves hard decisions on the part of politicians. Thus far, politicians have shown themselves predictably not up to the task. Or in the words of Jean-Claude Juncker,
“We all know what to do; we just don’t know how to get re-elected after we’ve done it.”
And let’s not forget that other notable Junckerism,
“When it becomes serious, you have to lie.”
No cheers for democracy, then. So, back to the debate.
Yes, QE has driven down long term interest rates. But the problem wasn’t the cost of capital. The problem was, and remains, an oversupply of debt, insufficient economic growth, and the risk, now fast becoming realised, of widespread debt deflation. To put it another way, the world appears to be turning Japanese after all, despite the best efforts of central bankers and despite the non-efforts of politicians.
The solution is fundamental economic restructuring along with measures that can sustainedly boost economic growth rather than just enriching the already rich through artificial financial asset price boosterism. Government spending cuts will not be optional, although tax cuts might be. The expansion of credit must end – or it will end in an entirely involuntary market-driven process that will be extraordinarily messy.
How to “save face”?
This is where we start to view the world, once again, through the prism of investments – not least since we’re not policy makers. For those wondering why a) markets have become that much more volatile recently (and not just stocks – see the recent wild trading in the US 10 year government bond) and b) inflation (other than in financial asset prices) seems weirdly quiescent – the answer has been best expressed by both Jim Rickards and by the good folk at Incrementum.
The pertinent metaphor is that of the tug of war. The image below (source: Incrementum) states the case.
The blue team represents the markets. The markets want deflation, and they want the world’s unsustainable debt pile to be reduced. There are three ways to reduce the debt pile. One is to engineer sufficient economic growth (no longer feasible, in our view) to service the debt. The second is to default (which, in a debt-based monetary system, amounts to Armageddon). The third brings us over to the red team: explicit, state-sanctioned inflationism, and financial repression.
The reason why markets have become so volatile is that from day to day, the blue and red teams of deflationary and inflationary forces are duking it out, and neither side has yet been convincingly victorious. Who ultimately wins? We think we know the answer, but the outcome will likely be a function of politics as much as investment forces (“markets”). While we wait for the outcome, we believe the most prudent and pragmatic course of action is to seek shelter in the least overpriced corners of the market. For us, that means explicit, compelling value and deep value equity.
Nothing else, and certainly nothing by way of traditional government or corporate debt investments, or any form of equity or bond market index-tracking, makes any sense at all.
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Oct 24

Silver Buyers "Not Investing, But Stacking"

Gold Price Comments Off on Silver Buyers "Not Investing, But Stacking"
Silver investing analyst “gets why people are buying”, forecasts record-high prices…

SILVER INVESTMENT demand has receded since 2011, according to a detailed new report, but it remains “the single most important driver of prices” and is set to return, perhaps with force, over the coming decade.
On “current trends”, says the new Silver Investment Demand report from US consultancy the CPM Group – commissioned by the Washington-based Silver Institute –  investors worldwide could grow their aggregate holdings by 50% between now and 2024.
This level of investing “would be expected to push annual average silver prices to a fresh record high further out,” says CPM Group’s managing director, Jeffrey Christian.
Relaying an overview of silver’s historical use as reliable money, notably in China for 400 hundred years to the mid-20th century – as well as across the United States before the 1913 foundation of the Federal Reserve – Christian recounts a modern silver investor’s comment to him regarding what many chatrooms call “stacking”.
“With due respect,” the investor said, “you need to know that we do not invest in silver. We stack it.”
What the comment means, says Christian, is that silver investors in the developed West – whose demand has surprised analysts and defied the metal’s 60% price-drop since 2011 – “[do] not see silver as an investment, but as a store of wealth, an alternative to holding one’s wealth in a nationally issued currency such as the US Dollar.”
Instead of viewing silver as a speculative or short-term investment, Christian goes on, these buyers see the metal “as a core part of their long-term assets, the base in some cases of the individual’s wealth…much more meaningful and visceral to the owners than shares in a stock or a series of bonds they may hold for a period of time.”
Weighing against the silver stackers, however, other more “short-term” investors have driven the metal’s sharp price falls since it hit near-all time highs in spring 2011, CPM Group’s Silver Investment Demand report explains.
So-called “trend followers”, as well as “opportunistic” traders switching into equities, have added to sales from disappointed investors who had “over-blown expectations” that the bull market of 2006-2011 would continue. And because net investing demand shows what CPM Group calls “a strong 59.1% correlation” with real silver prices (after accounting for inflation), this sell-off by shorter-term money drove the crash.
Ultimately, the report for The Silver Institute concludes, future net investment demand “can only be guessed [and] will depend on how investors view the world around them.” But investors “may begin to increase their net silver purchases in the years ahead.” Because with Western economies failing to redress their financial imbalances since the 2007-2012 crisis, the concerns over inflation and credit-default which “motivated” the surge in demand from 2006-2011 could soon return.
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Oct 23

An End to QE? A Good Man in Congress?

Gold Price Comments Off on An End to QE? A Good Man in Congress?
God knows what Ron Paul was ever doing in US politics…

OVER the weekend, we were down in Nashville at the Stansberry Conference Series event, along with Ron Paul, Porter Stansberry, Jim Rickards and others, writes Bill Bonner in his Diary of a Rogue Economist.
The question on the table: What’s ahead for the US?
Ron Paul took up the question from a geopolitical angle. He told the crowd that the military-security industry had Congress in its pocket.
As a result, we can expect more borrowing, more spending and more pointless and futile wars. They may be bad for the country and its citizens, says Paul, but they are good for the people who make fighter jets and combat fatigues.
“We’ve been at war in the Middle East for decades,” he said…
“We supported Osama bin Laden against the Soviets in Afghanistan…and the result of that was the creation of al-Qaeda.
“Then we supported Saddam Hussein against Iran. Saddam and bin Laden hated each other. But after 9/11 we attacked Saddam, using a bunch of lies to justify it. We sent over military equipment worth hundreds of billions of Dollars. This equipment is now in the hands of ISIS – another enemy we created…and a far more dangerous one.”
Ron Paul is such a pure-hearted soul. What was a man like him doing in Congress?
It must have been some sort of electoral accident. Good men rarely run for public office. And when they do, it is even rarer for them to win.
Poor Ron is retired from Congress now. And he spends his time trying to “get the word out.” He thinks that if people only realized what was happening they would vote for more responsible leaders and more sensible policies.
Alas, that’s not the way it works. The further the country goes in the wrong direction, the more people there are who have a financial interest in staying on the same road.
We visited Ron in his office on Capitol Hill. He held a breakfast meeting with a small group of congressmen, trying to convince them to vote his way; we don’t remember what was at issue.
It was an uphill battle. Only a few members of Congress attended. And those few worried that their districts would lose money…or that the labor unions wouldn’t like it if they voted no…or that they might not get a plum committee assignment if they bucked their own party leadership. Ron was alone.
Politics favors blowhards, hustlers and shallow opportunists, we concluded. Which makes us wonder how Ron Paul ever got elected to Congress in the first place.
But not only did he get elected…once in Washington, he never sold out. Neither to the right nor the left. He opposed zombies, malingerers and bullies wherever he found them.
Which brings us to the subject of our own presentation to the Nashville crowd. We were following the (QE) money. “St. Louis Fed president James Bullard let the cat out of the bag last week,” we explained.
As Bullard told Bloomberg TV last week:
“I also think that inflation expectations are dropping in the US. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target.
“And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.
“So…continue with QE at a very low level as we have it right now. And then assess our options going forward.”
We didn’t think it would happen so fast. We thought the central bank would wait. We expected a little more hypocrisy…a bit more posturing…a little more phony resistance…a few denials…
…the Fed should have played it cool…coy…elusive…hard to pin down, making investors really sweat before coming to the rescue.
We knew where the Fed would end up…but we didn’t know it would go there so quickly and easily!
Bullard is admitting to a staggering act of vanity and hypocrisy. In the land of free minds and free markets, apparently only the Fed knows what prices equities should fetch.
Henceforth, it will approve all price movements on Wall Street.
To bring you fully into the picture, dear reader, the US central bank has the economy, and the markets, hooked on cheap credit and printing-press money. It has been supplying both on a grand scale for the last five years.
But it had promised to stay away from the playground, beginning this month. Now that the economy is recovering, goes the storyline, the Fed will back away from its emergency measures and allow things to return to normal.
QE ends this month. Higher interest rates are expected next year.
No bubble has ever been created that didn’t have a pin looking for it. And nobody likes it when the two meet up. Last week, it looked as though the Fed’s bubble and Mr. Market’s pin were coming closer. Then quick action by Bullard helped push them apart on Friday.
QE began in November 2008. And zero interest rates began a month later. This has perverted prices for stocks, bonds, houses…and just about every other asset price on the planet. Stocks are worth more than twice what they were at the bottom of the crisis. The average house is worth $60,000 more.
Now QE is ending. And that means a lot less money gushing into financial markets.
Instead of increasing at a 40% rate as it did in 2012, what Richard Duncan calls “excess liquidity” – the difference between what the Fed pumps out via QE and what the government absorbs via borrowing – will go up only 6% this year.
Next year, there will be even less.
With less new money coming from the Fed…and still no real recovery…something’s gotta give. No matter what Fed officials say. And since stocks periodically go down anyway, this seems like as good a time as any.
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Oct 22

Some Scattered Semblance of Sanity

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And other irritating spates of MPA from the MKIAM…

At the BITTER END of a long, long argument about it, writes Richard Daughty via his alter-ego, the Mogambo Guru, I stubbornly maintain that being paranoid and hostile is not, in any real way, related to my being such a sub-par husband and father, which, now that we are talking about it, is actually the result of a lot of other people (not naming any names) having wildly unrealistic expectations that were WAY too high.
Like, by a mile, in most cases. 
On the contrary, being paranoid and hostile is a natural, organic reaction, namely, where sections of one’s DNA turn on or off as a self-preservation response to the huge exogenous shock to the nervous system of the evil Federal Reserve creating so impossibly much excess money and credit that asset prices (stocks, bonds, real estate) have been inflated to unbelievable, unsustainable heights, and half the country is now receiving a government check each month.
These are, unfortunately, big, big, BIG, economy-exploding things that are now long, long overdue for a huge, painful correction back to, in yet another irritating spate of Mogambo Pointless Alliteration (MPA), some scattered semblance of sanity.
Unfortunately, big deflations in asset prices would, at a leverage of 90% borrowed and 10% capital – or more! – cause instant, massive bankruptcy at the slightest downturn, since virtually all money is in the leveraged stock, bond and derivatives markets, whether you like it or not, which is kind of stupid of me to say since nobody would like it, which just proves how weird things are these days.
But who wouldn’t be an angry paranoiac after a lifetime of suffering treachery after treachery? Like, for example, how teachers, police, and court-appointed morons always immediately fixate on blaming me, as some mythical “bad parent”, for the misbehavior of my stupid children when they are accidentally left unsupervised for a few hours, or a couple of days, max.
Like all I have to do in life is watch a bunch of stupid kids, instead of out frantically scratching and scraping for more Dollars with which to buy gold and silver to save the butts of the aforementioned stupid kids, and the sweet butts of their wonderful, delightful parents, when this whole bizarre, Keynesian-inspired deficit-spending stupidity finally destroys the world.
Or how about how I am always losing my stupid job? Why? Because the other employees secretly plot against me just because (they claim) I am lazy and incompetent so that they end up doing my work, too, even though we all know they hate me because I know that they are idiots who are not buying gold and silver in perilous economic times like these, even though I tell them over and over and over to do so. I mean, who’s the victim here?
Or how about all my neighbors being rude to me because they are hateful little rodent-people, bristling with resentment about being informed that they are stupid, as in one recent episode where I was charmingly friendly and convivial, casually asking a neighbor out mowing his stupid lawn…
“Hey, moron! Are you buying gold and silver bullion because the evil Federal Reserve and all the other central banks of the world are creating so insanely much cash and credit, under the laughable delusion of Keynesian economic idiocies, that we are doomed to an inflationary collapse, or are you still a moron?”
And then they get all huffy because they refuse to understand. “Don’t be obtuse, you morons!” I haughtily say, knowing that they don’t know the definition of obtuse is to refuse to understand something, because then I would have something ELSE to throw in their stupid faces the next time they say to me…
“Well, Mister Know-It-All Mogambo (MKIAM), you have been wrong about silver and gold for more than a year, so that anybody who listened to your stupid advice lost money, and they also lost all credibility by actually believing anything you said, you horrible man, whose own children think you are horrible, too, as revealed in the first paragraph!”
Like most Earthlings, they are morons about gold and silver, even though I have told them countless times How Things Always Are (HTAA), which is that you have to own silver and gold at the end of long monetary booms, and if you don’t, then you are a moron, regardless of any temporary aberrations caused by deliberate manipulation of the gold markets by the Federal Reserve.
Nice and simple. So where’s the justice for ME?
But, mostly, my paranoia and hostility stems from contemplating the world’s One Big Problem (OBP). Namely, backbreaking debts created by central banks that are now so incomprehensibly huge, incalculably huge, so impossibly huge that it is an overwhelming sum, involving, as it does, virtually all the money, assets and debt in the Whole Freaking World (WFW), which is a pile so gigantically big that not even Superman, strange visitor from another planet with powers and abilities far beyond those of mortal men, could lift it.
And it’s all leveraged to the maximum, all-or-nothing hilt to magnify looming losses, with so much debt known and unknown, so many parts and players known and unknown, pandemic political corruptions and frauds known and unknown, with so many divided loyalties back-stabbing each other, with so many treacherous cross-currents, cross-ownerships, grudges and revenge blood-lust that it cannot possibly be understood except as the supreme, swirling, stinking cesspool of everything turning to valueless crap, stinking and swirling and spiraling down the old crapper, which, fortunately, is merely a problem of hydrologic engineering, which is VERY well-understood.
So, what’s new? Internal metrics of the stock, bond and housing markets deteriorating? Sub-zero bond yields? The Swiss voting on owning more gold? The evil International Monetary Fund (IMF) suggesting that we dump the fiat Dollar and fiat Euro in favor of a fiat Special Drawing Right (SDR) drawn on the selfsame IMF? Foreign countries forming trading blocs to the exclusion of the US Dollar? The Ebola virus being a Black Swan Event, or even a Butterfly Effect event? Asteroids plunging into the Earth? Volcanos erupting? Earthquakes? Drought? Invasions of ravenous vampire zombie space creatures from Mars?
It gets – yikes! – worse every day, in every way, and the only thing of which one can be absolutely sure, beyond a doubt, take it to the bank, is that the foul Federal Reserve, along with the other intellectually-corrupt central banks of the world, will create all the gigantic, exponential amounts cash and credit necessary to, if they have to, literally, buy up the entire stock market to keep prices high, just as they are doing for bonds.
How can you NOT have stock market and bond market booms around the world when the central banks are busily creating the money and debt with which to buy stocks and bonds?
So you mock my paranoia and hostility, and my manic hysteria about buying gold and silver bullion? You ain’t seen nothin’ yet.
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Oct 20

The Fed Spots Inequality, Misses the Point

Gold Price Comments Off on The Fed Spots Inequality, Misses the Point
Janet Yellen says US inequality is worse than any time since, umm, the Fed was created…

IT DIDN’T take long did it? asks Greg Canavan in The Daily Reckoning Australia.
Now the Bank of England, the Federal Reserve’s old partner in crime, is at it too. On Friday, the BoE’s chief economist, Andy Haldane, said he favoured delaying interest rate rises in the United Kingdom.
That, along with comments from the Fed’s James Bullard on Thursday, helped global markets to rally late last week. It’s having a nice effect on our market so far today too. It was just as well. The situation looked extremely dicey on Wednesday.
Given US markets haven’t even had a 10% correction, the coordinated comments have a whiff of panic about them. What…can’t markets even have a half-decent correction these days without central bankers wetting themselves in panic?
While the minions were trying to hold things together late last week, boss Janet Yellen was inadvertently making a pretty decent argument to end the Federal Reserve altogether. She just didn’t know it.
In a speech on ‘economic opportunity and inequality’ in Boston on Friday, Yellen came out with some clangers. Unfortunately, most observers missed the irony of some of her comments.
Yellen drew heavily on data collated from the Fed’s Survey of Consumer Finances, which began back in 1989. Take it away, Janet…
“By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then.”
Hmmm…the past 100 years you say? The Federal Reserve came into being in 1913. A coincidence, do you think?
Not convinced? Give us some more stats then, Janet…
“After adjusting for inflation, the average income of the top 5% of households grew by 38% from 1989 to 2013. By comparison, the average real income of the other 95% of households grew less than 10%.
“The lower half of households by wealth held just 3% of wealth in 1989 and only 1% in 2013.”
That’s interesting. Go on…
“The average net worth of the lower half of the distribution, representing 62 million households, was $11,000 in 2013. About one-fourth of these families reported zero wealth or negative net worth, and a significant fraction of those said they were ‘underwater’ on their home mortgages, owing more than the value of the home. This $11,000 average is 50% lower than the average wealth of the lower half of families in 1989, adjusted for inflation.”
Wow! The average net worth of 62 million US households is just $11,000…half of what it was back in 1989, despite 25 years of (mostly) economic growth?
Is it another coincidence that just two years before 1989 the Federal Reserve embarked on a policy of full-blown central banking activism? In 1987, Alan Greenspan had just taken the helm from the last great central banker, Paul Volcker, when ‘Black Monday’ hit, on the 19th of October (nearly 27 years ago to the day).
Greenspan panicked. He promised the market liquidity and support and whatever else he could. The Fed hasn’t looked back since. From that day on, it’s been the market’s socialist tormentor and benefactor…creating crises and then trying to solve them by throwing money at the problem.
And where does the money end up? In the hands of the already relatively well-off, which is why Janet Yellen’s statistics look so horrible.
The irony of a new Fed Chief pointing all this out is particularly…rich. Actually, it’s nauseating. If you didn’t know any better you’d think she was actually having a laugh. It’s either ingenuous or the work of the devil.
In truth, I think it’s genuinely ingenuous on Yellen’s behalf. You don’t set out to become the world’s biggest do-gooder by being a hard-nosed realist.
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Oct 19

I See Two Horsemen

Gold Price Comments Off on I See Two Horsemen
Patience needed, but the Dollar has been rising with the Gold/Silver Ratio…

The BLACK LINE is where we have been, writes Gary Tanashian in his Notes from the Rabbit Hole. The blue line is a projection of what a typical correction (whether a healthy interim one or a bear market kick off) might look like.
We used real charts of the Dow, S&P 500 and Nasdaq 100 to gauge the entry into the current correction and now the resistance points to the expected bounce off of the US market’s first healthy sentiment reset in quite some time. But our cartoon above gives you the favored plan on how the correction could play out.
Last week, the market bounced on what can only be viewed as a sad attempt by a Fed member (a perceived Hawk, no less) to jawbone a stop to the impulsive bearishness. The strength of the US Dollar and first decent correction since 2011 seems to have spooked the folks over at Policy Central and suddenly they are talking QE again. That does not inspire confidence, if you are a bull.
Be that as it may, we have been due for a bounce to clean out the over bearish and over sold conditions. We are making no claims to know whether or not this is a bear market kick-off because when the process is complete per the sketch above, a trade-worthy rally should materialize when a notable low is ground out.
An impulsive straight line drop, to support though it is in many cases (ref. the real charts of the Semiconductors and the Banks), and recovery on policy makers’ jawboning is not usually a path to sustained recovery.
NFTRH is managing a bounce (the first ‘up’ phase of the blue line above) until/unless it proves it is more than that. Traders should be nimble. If the projection proves out, a renewed decline into November could follow, which should come out of a good setup for bearishly inclined traders.
Moving on, volatility is back and while it seemed to come out of nowhere, it was easily readable in advance by steadily declining junk vs. quality bond yields spreads, declining index and sector participation rates and of course, the strong US Dollar (which is decidedly not on the favored agenda of asset-friendly policy makers), among several other indicators we tracked into and through the first part of the correction.
Per the scenario above, in the likely event a bottom has not yet been registered, one will eventually be ground out and it should be good for a trade at least. Personally, I have positioned for a bounce right here but that is not recommended for anyone who is not willing to trade on a dime, in-day and in-week. The answer to the question ‘cyclical bull ender or not?’ does not need to come yet, but there is going to be data galore going forward. We’ll work the data as it comes in. Meanwhile, an intermediate bear trend is in force.
We had gauged the outperformance of the Emerging Markets (EEM vs. SPY) for much of this year, but when the ratio broke down we noted it in real time. So we shorted the EM’s and prepared for coming bearishness in US markets. We have been charting Europe’s decline for months now, initially shorting Spain, which had previously been our guide to the upside speculative impulse that took hold in Europe.
Global markets are nearly but not yet broken with Europe and the World index at key big picture support, the Emerging Markets having made a false breakout and failure, China actually looking interesting here, Japan playing the ‘push me, pull you’ game with its currency and Canada doing some bearish things as the TSX not only loses its blue sky breakout, but starts snapping support levels. The TSX-V (CDNX) is leading the way down and is flat out destroyed right along with any speculative spirits in the world of scammy little Canadian ‘resource’ plays.
Early in 2014 we charted the CCI index of commodities, and its hold of critical support at 500 as well as its resistance to the breakout and rally that followed. More recently we managed the decline to and through that support level while maintaining a “not interested” stance the whole way. Commodities can bounce with any ‘inflation trade’ bounce (watch TIP-TLT and other inflation expectations indicators) that may manifest.
We were not interested in commodities because we were given no reason to have a favorable view of inflation expectations, which through the TIP-TLT ratio were gauged to be burrowing through the floor week after week. This was also another negative for the US stock market, which had been feasting like Goldilocks on the bears’ porridge.
Foremost among the indicators have been Yield Curves generally favoring US stocks and hurting gold, until the curve burst upward beginning last week. This has not surprisingly come with the US stock market correction. If the market bounces, the curve can decline and junk-quality bond spreads can bounce. Also, the VIX needs a rest.
The big daddy of indicators however, has been the Two Horsemen, i.e. the Gold-Silver ratio and the US Dollar rising together. This was an indicator of failing liquidity which NFTRH and indeed our public website, noted in real time.
It is the indicators even more so than straight up technical analysis that will help us decide whether or not the bull market has ended as we move forward through coming data points.
Deflationary and economic growth troubles across the globe are blamed for the recent strength in the US Dollar and to a degree that holds merit. The other support has been the very real economic recovery in the US (beginning with the Semiconductor sector) born of very unreal (i.e. unnatural and unsustainable) policy inputs.
Naturally, it stands to reason that if Dollar compromising policy is promoted to keep assets aloft, then a strong Dollar is unwelcome. Because not only would it begin to eat away at exporting sectors like manufacturing, but it would also make assets less expensive. But that should be a good thing, no? Declining prices in things like oil, food and services? Not on the one-way street that is our current system of Inflation onDemand.
The Yen is strong lately and the Euro can gain a bounce bid. This means that the USD can continue to weaken from its impulsively over bought and over loved levels. But on the big picture USD has been moving upward from a long-term basing pattern.
Gold is meantime favored over silver, given the move in the Gold/Silver Ratio and diminishing global liquidity. Beyond that, gold’s fundamentals have not been constructive for some time now, no matter how often idealists click the heels of their ruby slippers.
That was then, this is now. Gold is counter cyclical per the Gold-Commodities chart in this post. This one chart is the very reason that NFTRH never did take its focus off the biggest picture view of an ongoing global economic contraction in progress. This would be the gateway to a real bull market in gold mining stocks, but it is also the more difficult pathway because the inflationists get weeded out along the way as silver does not go to the moon and lazy analysis gets punished, not rewarded.
Gold stocks are counter cyclical and macro indicators, and they say we may be at the start of grinding out a counter cyclical phase. But note the word grind. That’s what it has been and what it could continue to be for a while yet. As gold slowly asserts itself vs. cyclical commodities, cost-input fundamentals gradually improve in the industry and as gold slowly asserts itself vs. stock markets an important component of investor psychology slowly comes into place.
Patience…the macro does not pivot over night.
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