The following is part of Pivotal Events that was published for
our subscribers February 28, 2013.
Signs of the Times
"Gold Goes Into a Death Cross"
- Financial Times, February 20
"Civilized people don't buy gold."
- Charles Munger, Berkshire Hathaway, CNBC, May 4,
2012
If policymakers were civil in serving the public interest rather than ambitious,
we would not seek the protection of buying gold.
"After a series of failed business ventures, Kwon Eui Moon decided
to get rich in a more traditional way in South Korea by taking out a
mortgage in 2002 and waiting for house prices to soar."
- Bloomberg, February 20
It did not happen.
"There are widening divisions among Federal Reserve officials about
the value of its efforts to reduce unemployment."
- The New York Times, February 21
"Investors in asset-backed securities are seeking relief from record-low
yields by snapping up riskier securities tied to jewelry loans and cars
parked at dealership parking lots."
- Bloomberg, February 20
"Bernanke minimized concerns that easy monetary policies has spawned
economically-risky asset bubbles."
- Bloomberg, February 22
One problem is that Bernanke still thinks that throwing more credit at a post-bubble
credit contraction will make it go away. Another is that too many interventionist
economists still think that "inflation" is raising consumer prices. Stocks
and lowergrade bonds soaring to dangerous levels, accompanied by massive credit
expansion, does not register as inflation.
The classic definition is "an inordinate expansion of credit". It works for
inflation in both tangible and financial asset prices.
In the 1600s, Amsterdam was the world's financial and commercial capital.
The term "easy" credit dates to then, and the Dutch had a practical term for
its consequent disasters - "diseased credit".
Perspective
"What we have here is an attempt to communicate,"
Of course, this is a modification of the classic line by the "Captain" (Strother
Martin) in the movie Cool Hand Luke and it refers to Bernanke's testimony,
this week. And his public utterances seem to be instructional, behind which
have always been the intense desire that financial markets follow the textbook
touts - puhlease!
In the movie, Luke (Paul Newman) responds to the Captain's abuse with "I wish
you would stop being so good to me, Cap'n."
And this is what most critical minds would hope for - that central bankers
would stop abusing financial markets with shopworn theories. But then, according
to the academics is that their deliberate currency speculation does not force
prices up. It is the public's
"expectations of inflation" that forces prices up.
As reported by CNBC recently, the Great Man exclaimed, "My inflation record
is the best of any Federal Reserve chairman in the post-war period."
He has been part of the interventionist bandwagon for a long time - initially
as an academic and with the Fed since 2002. Our view continues that the Fed
has been accommodating since it opened its doors in January 1914. Needless
to say, but this has never curbed great speculative moves, nor prevented the
consequent phases of forced liquidation. De-leveraging as it is now called
has not been the result of Fed policy change, but due to Mother Nature and
Mister Margin overwhelming the benighted desires of the central bankers who
happen to be on shift when a speculation becomes excessive.
As we like to observe. The job description of central bankers has been corrupted
to the point where it includes trying to get the speculative accounts "out
of line". The job description of the margin clerk is quite the opposite and
that is to "get the accounts in line!".
In Tuesday's testimony Bernanke boasted "We know when to stop accommodation".
Sure, and bulls will always know when it is time to sell.
Commodites
Base metals (GYX) tried to break above resistance at the 406 level, made it
to 404 at the first of the month and dropped to support at the 380 level.
Since April a year ago, the trading range has been between 406 and 350. The
recent high was accompanied by considerable enthusiasms about "inflation".
And 406 was the best that could be achieved. Often March can see seasonal strength
and it will be interesting to see how prices behave.
The dollar is approaching an overbought condition at 81.9.
Last week we noted that if agricultural prices (GKX) slipped below 439 it
would indicate further weakness. The low on Tuesday was 433, which extends
the decline that began last summer at the high of 533.
The action is moderately oversold.
Crude oil has declined from 98.24 late in January to 91.92 on Tuesday. As
noted last week there is minor support at this level.
With this, the CRB has declined to support at 292. It is somewhat oversold
at the daily RSI of 30.
Commodities could become stable to firm for some weeks. However, considering
the desperate attempt at currency depreciation, the real issue is that they
have not been soaring
"to the moon".
Commodities and other hard assets as well as financial assets all played their
key roles in building a great bubble. This completed in 2007 when the dynamics
of a classic financial mania climaxed. The feature of five previous post-bubble
contractions has been a financial crash (?) and economic collapse (?) followed
by a weak business cycle (?) and rebounding financial markets (?) .
Inflation bulls may be perplexed and disappointed that the "juice" from reckless
policymakers has not been driving commodities, or even gold and silver. Central
bankers may propose but the markets dispose and over the past year the market
decided that the big play will be in lower-grade bonds - around the world.
This has been bubbled to a dangerous condition, with the problem likely to
be "discovered" around mid-year. Gold and silver rallied into September's news
that the Fed and the ECB were going to aggressively buy lower-grade bonds.
These continued up and the "juice" did not go into precious metals.
The first global business expansion is maturing and as it rolls over commodities
will weaken. The completion of the great bubble included the CRB soaring from
182 in 2001 to 474 in June 2008. The Crash took it down to 200 in March 2009.
We still think that the high of 370 in April 2011 was a cyclical peak. The
subsequent low was 266 in mid 2012 and the rebound spiked up to 321 in September.
Essentially, since November the CRB has been trading between 291 and the high
of 305 at the first of February. Yesterday's 292 is testing the low and with
the RSI at 30 the action is moderately oversold.
Precious Metals
A few weeks ago we noted some research studies with titles "Five Compelling
Reasons to Sell Gold". One service's convictions topped this with "Twelve Reasons".
The mood is grim and it is appropriate to move from anecdote to measured sentiment.
The following chart updates the one in our "Precious Metals Report" of February
15th. Quite simply, sentiment is now more, repeat more, bearish than at the
depths of the 2008 Crash. The February 15th "Special" noted that it could take
a couple of weeks to clear the problems in the gold sector.
Are we there yet?
Let's review how far we have come since the halcyon days of last September
and with the fateful April-May of 2011.
In the spring of 2011 the Daily RSI on the silver/gold ratio soared to 92
when we noted that that level of speculation had last occurred at the sensational
blow-off in January 1980. We noted that the action was dangerous.
Going into the dismal low of May 2012 the monthly RSI registered the worst
oversold in twenty years.
With the rush up to September, the Daily RSI reached 84 when we again noted
dangerous conditions.
It seems that these speculative thrusts were mainly discounting the evils
of central banking. Particularly so for the surge into September, which was
inspired by the ECB and the FED proclamations about reckless buying of lower-grade
bonds.
The old story about "inflation" and gold has not been working. Gold and silver
bugs may have had their last hurrah and could be looking for a new mantra.
Mother Nature seems to be providing it with the distinctive turn to the gold
sector trending opposite to the orthodox sector. This is one of the features
of a post-bubble contraction and it could run for many years. There will be
cyclical swings with golds underperforming during business expansions and doing
well on the recessions.
A transition to the gold sector "doing well" seems to be developing.
On the nearer-term, stability in the CRB could help as could stability in
the dollar. Beyond dismal sentiment numbers, relative valuations are at lows.
The HUI/Gold has dropped from 62 in 2006 to 22. This compares to the low of
23 a year ago in May. The Daily RSI is as at 24, which was also reached then.
Since the crash into 2001 gold stocks have soared relative to the general
stock market. HUI/SPX climbed from 0.026 to 0.56 (no typo) last September.
The low last May was 0.28 at a weekly RSI of 30. Now the low today has been
0.23, with an RSI of only 22. Clearly, the excesses of the speculative surges
to May 2011 and to September 2012 are being fully offset. This is also a massive
correction of the fabulous outperformance of golds relative to the big stock
market.
The ChartWorks is watching for the trading opportunity and investors could
continue accumulation.
Larger
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Link to January 12, 2013 'Bob and Phil Show' on TalkDigitalNetwork.com:
http://talkdigitalnetwork.com/2013/03/markets...t-as-vix-spikes
