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Gold: Loved And Feared And Way Too Low

Market Analyst & Author
March 15, 2015

Some years back in 1513 when Niccolò Machiavelli penned and first circulated his philosophy with respect to principalities, in controversially favouring truths over ideals (heaven forbid!), he queried as to "...whether it is better to be loved rather than feared, or feared rather than loved. It might perhaps be answered that we should wish to be both; but since love and fear can hardly exist together, if we must choose between them, it is far safer to be feared than loved.”

Likely far from Mach's fertile mind at the time, he was presciently pointing out to us the rare exception to the above bit that we've underlined: an apt description of the present day conundrum that Gold is both loved and feared. We say "present day", for not over just the hundreds of years since what back then would posthumously be published and known as "The Prince", but indeed for millennia, Gold has been loved as a store of wealth and value; hardly has it been feared; it has been an inspiration of love as a gift, and perennially has been the modifier for whatever or whomever is highest in any ranking, for everybody loves a winner. Emphasis on "has been", for today Gold has become a "has been". Oh, how we're cautioned to be afraid, be very afraid to own it, let alone buy it, for 'tis said 'twill only go down in value, 'tis not money, 'tis not storable, 'tis not convertible, 'tis not correlated to anything, 'tis going to zero, and that's it. 'Tis diabolical.

Gold's price being way too low is, of course, the very essence of today's lack of demand for it. Gold remains exceptionally "under-owned" for something of which there exists very little. Clearly, all that does exist is "owned" in one form or another, but there is a dearth amongst the vast majority in desiring to acquire Gold despite its uncannily cheap price. In responding this past week to a valued reader, I wrote as follows: "...‘Tis not so much that folks don’t want to own Gold, (I ‘spect they’d love to so do), but rather that: 1) they’re afraid of it, and 2) ‘tis a 'fad' not to own it..."

That said, allow us this use of the following double-negative as it drives home the point: nobody doesn't like Gold. Give a girl a Gold bracelet and she shan't throw it out the car window. Give little Johnny a Gold coin and he shan't place it with his quarters upon the cable car track to revel in the flattening effect by the steel wheels. The Apple Watch Edition at $10k+ is the new bling thing, but c'mon man, 'tis all about flashin' yer Gold. Everybody loves Gold. And yet "nobody" owns it, for "everyone's" become afraid of it.

Machiavelli famously went on to write “ is much safer to be feared than loved ... fear preserves you by a dread of punishment which never fails.” To wit, how about a currency failure? Anybody looked at the €uro lately?? Got Gold???

As noted, most folks don't have any Gold, and moreover they're not buying it as we below see per the weekly bars chart, the parabolic Short trend of the rightmost descending red dots having notched their fourth week. To be sure, the purple lines that bound the 1240-1280 resistance zone have proven to be a tough row to hoe:

And yet, the ironic positive here is that Gold truly is way too low. By our broadest measure of valuation in the scoreboard at the top of this piece, your eye may have caught that Gold on an empirical basis per the increase in StateSide money supply (M2) alone, even as offset by mined tonnage having almost doubled over the past 35 years, has reached a "natural" value of $2,500/oz. One ought have a party, yet given the dismal enthusiasm to own Gold these days, one might instead memorialize its having arrived at this $2,500/oz valuation level with a moment of silence.

"But mmb, there's no QE, so how can that valuation keep rising?"

Uh, Squire, have you ever heard of something called "interest expense"? To put it circularly, in order for the U.S Treasury to make interest payments on the debt that the Federal Reverse Bank has purchased, Jack Lew simply jumps into his Yugo, zooms from Pennsylvania Avenue over to Constitution Avenue and knocks on the Fed's door. Janet Yellen opens it and Jack says he needs umpty-ump billions of Dollars to make the period's interest payment. Janet prints the dough and hands it to Jack, who in turn hands it back to Janet, and with the payment made, 'tis off to the Capital Grille for lunch. Or something like that. But at the end of the day, we've more M2 than yesterday.

Now as for Gold's also being way too low on a relational basis, we next bring up our one-year chart of the yellow metal versus its smooth, pearly valuation line borne of price's movement relative to those of the primary BEGOS Markets (Bond / Euro / Gold / Oil / S&P). The key here is the distance of Gold's price below the valuation line as calculated via the oscillator (price less valuation) in the bottom panel of the graphic, wherein you can see we've just come off being 100 points low: historically, that's way too low! Yes, the smooth line itself is in a bit of down-curl, yet nonetheless 'tis presently 82 points above price, and curiously being at 1240 is also the base of the aforementioned 1240-1280 resistance zone:

'Course, as we highlighted in last week's missive, 'tis all about Dollar Exceptionalism as the Big Bowser rocks the world of the other bow-wow currencies. Further, for the first time since April 2003, the Dollar Index itself now is atop 100, making it worth 61% of what 'twas back in February '85 (at 164). Again, we really ought to have a party.

What's not having a party is the StateSide economy as it does its EuroThing of deflating away. You may have seen yesterday's (Friday's) report from our Bureau of Labor Statistics that the Producer Price Index in February, rather than increasing 0.3% according to the consensus of master economists, instead decreased 0.5%, a fourth consecutive falling month. And yet in the midst of it all, St. Louis Fed head James Bullard said this past week, in pointing to the economy's "rapidly improving situation", that an interest rate rise by the Fed is overdue. Would someone kindly fax to him the Economic Barometer?

In a veritable swan dive is that Econ Baro. As well may beset the BEGOS Markets, which year-to-date now all are underwater, appearing somewhat reminiscent of the days that preceded the acceleration into 2008's Black Swan. Here are the BEGOS Markets from the year's get-go through yesterday, (Friday the 13th... oooh, scary!):

As for the "Baby Blues" which measure the consistency of 21-day linear regression trend, here below we've those from a month ago-to-date for Gold (left), Silver (center) and the S&P500 (right). Despite all of their trends being down, at least the Precious Metals' Baby Blues have risen up off the floor. But for the S&P500, to quote the inimitable sports broadcaster Keith Jackson, "Whoa Nellie!" And if you read our daily Prescient Commentary, you've perhaps noted the current Market Rhythm Target for the S&P (June futures, which are presently 2043) of 2008. (Coincident with Black Swanee?) Here's the graphic:

Specific to Gold and Silver, here next are their 10-day Market Profiles, the respective supporters and resistors as labeled. That overhead chasm on the left for Gold looks more challenging than it does on the right for Silver. But as you traders know, be they chasms, crevasses or just good ole gaps, they're meant to be filled:

And thus we segué to the ever-popular, (yet these days oft-depressing), Gold Stack, the top number coming directly from the scoreboard:

The Gold Stack
Gold's Value per Dollar Debasement: 2500 (!!!)
Gold’s All-Time High: 1923 (06 September 2011)
The Gateway to 2000: 1900+
The Final Frontier: 1800-1900
The Northern Front: 1750-1800
On Maneuvers: 1579-1750
The Floor: 1466-1579
Le Sous-sol: Sub-1466
Base Camp: 1377
Year-to-Date High: 1307
Neverland: The Whiny 1290s
The Weekly Parabolic Price to flip Short: 1283
The 300-day Moving Average: 1260
Structural Resistance: 1241
Resistance Band: 1240-1280
10-Session “volume-weighted” average price magnet: 1180
Trading Resistance: 1167 / 1203 / 1208
Gold Currently: 1158, (weighted-average trading range per day: 17 points)
Trading Support: 1153
10-Session directional range: down to 1146 from 1223 = -77 points or -6%
Year-to-Date Low: 1146
Structural Support: 1033

Finally this from the "Only for Dolts Dept.", and we'll save the well-known publication from any embarrassment by citing them directly. Nevertheless, "they" ran with this headline, (I'm not kidding): "This is historic: The dollar will soon be worth more than the euro" What in tarnation does that mean? 'Tis beyond senseless. Why even ole Machiavelli would be muttering over such non-intellect ... but I'd bet he'd be brilliant enough to buy some Gold before the Shorts get scared out of their, well, shorts, at far higher prices. For today, he too would know that Gold is way too low!


Mark Mead Baillie

Mark Mead Baillie has had an extensive business career beginning in banking and financial services for two years with Banque Nationale de Paris to corporate research for three years at Barclays Bank and then for six years as an analyst and corporate lender with Société Générale.
For the last 22 years he has expanded his financial expertise by creating his own financial services company, de Meadville International, which comprehensively follows his BEGOS complex of markets (Bond/Euro/Gold/Oil/S&P) and the trading of the futures therein. He is recognized within the financial community of demonstrating creative technical skills that surpass industry standards toward making highly informed market assessments and his work is featured in Merrill Lynch Wealth Management client presentations.  He has adapted such skills into becoming the popular author each week of the prolific “The Gold Update” and is known in the financial website community as “mmb” and “deMeadville”.
Mr. Baillie holds a BS in Business from the University of Southern California and an MBA in Finance from Golden Gate University.

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