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Gold Price Going From Nowhere To Somewhere

Market Analyst & Author
May 10, 2015

If you've been sensing, amidst increasing annoyance, within what we recently dubbed "Gold's Flight at 1200", (all of its turbulence and gyrating about notwithstanding), that price is neither breaking out to the upside nor downside, your perception by now must be extra-sensorially honed. The sum of the combined high-low ranges for the last eight weeks is 279 points, (traders' -- or perhaps better put -- algorithms' delight), and yet five of those eight weeks' net changes have been less than ten points. Moreover, through all such churning, Gold closed out this past week yesterday (Friday) at 1187, just five points above the 1182 settle of eight weeks ago inclusive. 'Tis reminiscent of that which was written back during the earliest months of The Gold Update, when in March 2010, we equated Gold’s stance to a Chris Isaak song that he likened to a girl standing in the Greyhound Bus station with her dirty-blonde hair, wearing a taupe-colored mini-skirt, white boots, and holding on to a small, overnight case, the song thus aptly named: "Goin’ Nowhere.”  To similarly wit, here below are Gold's weekly bars:

That's one year of weekly price bars. Now let's turn to daily price closes, but in a very different way. When off-the-cuff remarks are made about the price of Gold, 'tis oft quoted as being in the "something-hundreds", i.e. today we're in the 1100s. (Arguably in rounding, one might say Gold is in the 1200's, but that's cheating). In any event, We decided to construct the following chart. It displays the daily closing prices of Gold from the year 1975 through yesterday, encompassing all 10,143 trading days, (which for you WestPalmBeachers down there is just over 40 years). But rather than depict the actual closing prices, the Gold line is comprised of the hundreds "handle" of each closing price, ("handle" being traders' lingo for the broad category of price, again Gold today being in the 1100 "handle"). Note the phenomena of bunching/consolidating within the two red boxes, the one on the right essentially being the last two years-to-date. Getting a bit long in tooth's duration, what? Time to stop "Goin' Nowhere" and start "Goin' Somewhere":

"And I'll bet the pale green line is M2, eh mmb?"

Exactly right, Squire. Courtesy of the Federal Reserve Bank of St. Louis, we've got that data all the way back to late 1980. Gold at that time had already spiked well ahead of M2, then lagged its debasement for quite a number of years, only to finally catch up and peak at 1900 in 2011, but now to again terribly trail. Were one to add to the Dollar Dog other foundationless bow-wow debases such as the €uro and ¥en, Gold's price ought today be quite literally "off the chart". Still, with an eye to those two red boxes, again one would expect these days of "Goin' Nowhere" to start "Goin' Somewhere", (and to rationalize "lower" would be quite the tall tale to tell, given Gold's proven ability to be able to rise even during times of higher interest rates and so-called "Dollar-strength", much to the chagrin of analysts who don't do the work to ferret it all out).

What about Gold versus the stock market's strength? Here's our Gold vs. the S&P 500 graphic; but this time, rather than display just the past 21 trading days (one month) of percentage tracks, now we've blown the chart out to a full year-over-year view in order to emphasize the broader-based negative correlation of these two markets. And at a rough glance, Gold is -10% whilst the S&P is +10%.

Query: whither Gold should the S&P correct 10% or 35% or 50%? Not that our valued readers need be reminded that the S&P has corrected by better than 50% twice in the last 13 years. Yet per a highly-visible FinMedia survey this past week, in response to the question "Will the S&P fall 40%?", 39% chose "No way". To paraphrase the late, great Howard Cosell: "If ignorance is bliss, they must be ecstatic." The minority, 20%, responded with "Yes". (And curious how ultimately 'tis the minority that ever really makes any money in the markets, non?)

That brings us to the Fed, about which 'tis oft said that its Federal Open Market Committee members are "behind the curve". Contextually, such metaphor is articulated with respect to the FOMC's voting to adjust the Fed Funds and Prime interest rates well after markets at large have already pointed the way. But in this case we're seeing the light bulb having at long last come on, at least above the head of the Fed's Head Teller (aka "Old Yeller") as concerns equities valuations. Given our "honest" calculation of the S&P 500's price/earnings ratio as having gone from the sublime high teens of some five years ago to the ridiculous thirties as have been the recent readings over many-a-month, one might say that Fed Chair Yellen's seeing, (as quoted), "dangers" in "quite high" stock valuations is not just being behind the curve, but as well over the hill and far away. Or as on occasion we like to quip, "They're just figuring this out now?"

Yes, Madame Chair, the mathematics do not lie: when price expands at double the pace of earnings, that queasy quirk of unsustainability begins to weave its way into even the finest minds at the highest levels of finance, whilst we down below pulling the oars were already raising like concerns at S&P 1600, 1700, 1800, 1900 and 2000. And today up in the 2100s, those oarsmen who've not yet dived from the portholes in seeking an island of safety may well be doomed to go down with the ship.

As an aside, is it not odd that when stock indices have a losing day of a percent or two, we read of the markets as having been "routed", or words thereto; yet when they gain by same, 'tis all complacently accepted as expected? Back in a prior plunge, I again recall a fellow patron coming into our local café where we'd talk markets on Saturday mornings, and she'd ask us "When's my Sun Micro gonna go up?" The under-the-breath reply: "Lady, it ain't..." Which entities will be the like candidates next time upon history repeating itself? We note at this writing that 26 of the S&P 500 constituents have negative earning-per-share. Just sayin'...

Now for Gold's present state of "Goin' Nowhere", we next turn to what's "Goin' Somewhere", making it all the more surprising that Gold isn't so doing. The following three-panel graphic depicts not market direction, but rather market range. From left-to-right we've the EDTRs ("Expected Daily Trading Ranges") year-over-year for Gold, the Bond and the €uro. The numbers in the respective boxes are the EDTRs for the ensuing trading session, (at this writing for Monday). Odd that Gold is the wallflower whilst the Bond and the €uro are "a-dancin' and a-prancin'" (from The Gentrys'"Keep on Dancing",1965):

Specific to the €uro, (presently $1.1212), an acquaintance who'll be Iberia-bound this autumn asked me yesterday if he should buy his €uros today, the dare-I-say "false" inference being that they're on the cheap. On a relative basis, the €uro has not been this "cheap" in 12 years; on a purchasing-power basis as compared to the cost of goods and services Stateside, the €uro remains very expensive, ("Dollar-strength" mon derrière), which is why we've appealed to be apprised when the EuroCurrency gets back down to 81¢. And it just might happen given Greece's losing its grippity, the European Commission having just slashed Greek growth, and forecasted deeper price falls and greater public debt as political strife burdens the Hellenic economic outlook, in turn underscoring the fragility of the country's financial system. Greece's debt debacle talks, which are to resume early in the new week, are said to be near a "drop dead" moment with default in the balance, barring creditors agreeing to a couple of rescue deals. And bear in mind broadly that currency disruption, if not outright failure, is considered Golden rocket fuel.

But for the present, reductions in mining investment down-under have seen fit for the Reserve Bank of Australia to lower interest rates for the second time in 2015, whilst to the north in China, manufacturing in April was the weakest in a year, suggesting that the People's Bank of China may also have to again step into the monetary creation fray. Meanwhile in our hemisphere, the Economic Barometer has yet to find its own way, all of this serving to increase Gold's cachet:

Toward this week's wrap, below on the left we've three months-to-date of Gold's daily bars with their attendant "Baby Blues" depicting each day's stance of the 21-day linear regression trend's consistency: the blue dots are rightly in a state of flux given Gold's "Goin' Nowhere". And on the right we've Gold's 10-day Market Profile, the labeled prices being those with the dominant contract volumes: should Friday's Golden Swath as shown remain supportive, it ought lead to Gold's "Goin' Somewhere", (i.e. UP!):

Ahead we've a fat week of incoming Econ Data to further work its way into the aforeshown Econ Baro. You can watch its progress at the website, as well as the final tallies coming into play for Q1 Earnings Season, which to this point show a whopping 53% having done better year-over-year, meaning that a trifling 47% have not so done. At least that's how the stock market seems to be giddyingly weighing 'em. (Oh, but wait, 'tis OK because beating estimates is more important than actually growing. Silly me). Talk about "Goin' Nowhere".

Best to get on the real road to "Goin' Somewhere". Get some Gold!


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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