Til Debt Do Us Part

Editor's Note: the new trade ideas have been added to The Nightly Stock Report.

When a consistent correlation suddenly breaks pay attention.

After gold bottomed in 1999 in the 13 years to 2022, the price of gold moved inversely with real yields. More precisely--- gold moved slightly ahead of changes in real rates.

The chart below shows how gold and real yields moved together---until a year ago.

Then, suddenly, inflation-protected TIPS plunged---all the while gold only wobbled a little.

This is an extraordinary buoyancy.

The vested interests who cannot afford to let gold clear 2000 again have not been able to wrestle gold itself lower. Instead my thesis is  they have resorted  to bludgeoning the precious metals stocks to keep a lid on metal speculation.

At the same time gold’s underlying firmness has shrugged off a relatively strong bid in the U.S. dollar since July 2023.

That also shows an underlying stealth strength in the metal.

All the while, Yen based investors are seeing gold strike new record highs.

As well wealthy Chinese are seeing increasingly heavy-handed government intervention in all aspects of their financial and social economy. So it is understandable they would want to protect their wealth.

What happens when the lid comes off?

It reminds me of 1994 and bonds versus equities.

1994 was the worst year for bonds to that time.

Equities held up moving sideways.

When bonds stopped going down, equities exploded in January 1995 and ran up non-stop for 5 years.

History’s most abrupt mega-debt-mania will have fostered all sorts of imbalances and distortions that must eventually be resolved in one way or another.

Without the traditional pressure release valves of a floating currency or policy-predictable outcomes, that resolution process could include violent discontinuities and disintermediation in markets: investors will seek to insulate themselves.

To wit, government foreign exchange restrictions and constricted gold import quotas along with private demand recently  goosed the Shanghai domestic gold price to $120 per ounce premium over gold’s global cash price. This is just the type of anomaly that hints at underlying tensions erupting to the surface.

GOLD BECOMES THE ULTIMATE SYSTEMIC PRESSURE RELIEF VALVE

What might such a catalyst be?

36 years ago, the wizards of Wall Street came up with “portfolio insurance”---which involved selling stock index futures whenever the stock indices fell to “insure” against a draw-down.

They also “perfected” program trading by which the stock index futures and individual stocks in the index were tied together---not realizing that network structures sometimes interact in strange ways.

Soros called it Reflexivity.

One fine day in October 1987, these two distinct systems worked together and drove the U.S. stock market into the ground.

Only by pulling the plug was a broader disaster averted.

Of course nowadays, The Street believes it’s a lot smarter.

The Street doesn’t think cycles had anything to do with 1987.

Few believe the news breaks with the cycles, not the other way around.

Nowadays, we believe we are much smarter: “Vol Control” funds promise to dampen the risk of sudden stock market moves by selling stock index futures when realized volatility rises (as it invariably does during declines).

Combine that background with ever-larger trend-following CTA funds, the brittleness/illiquidity inherent in having over half of equity allocations in purely mechanical “passive funds” and the recent explosion in zero-day-to-expiration options and we might as well have created a new, more consequential doomsday machine.

The next time one of these networked complex systems flips its equilibrium lid, will the central banks still be able to avert a complete wipe-out---especially with the exponential growth of debt and derivatives?

The recent slump in government bond prices calls into question any ability to conjure up more money without adversely affecting the currency.

Gold is watching.

Speaking of cycles…

It is 58 years from 1929 to 1987 and my Square of 9 Wheel shows that 58 squares-out with October 29^th, 1929, Black Tuesday.

So if you thought the pattern in both years was similar (it was) and had a Wheel at that time (1987)

You could have surmised that an Autumn Panic was on the table for 1987.

Does Paul Tudor Jones own a Wheel?

This year it’s pertinent that 58 points to July 30^th which splits the difference between this year’s SPX high (July 27) and the DJIA high (August 1^st).

Let’s dive further into the Wheelhouse.

We are currently 94 years from 1929.

94 squares October 14^th which happens to be the day of a Solar Eclipse here  in 2023.

There was a Solar Eclipse on November 1^st, 1929.

We are 36 years from 1987.

On the square of 9 Wheel 36 aligns with 481 (4810), the all-time SPX high.

Notice also the vibration with October being 144 Fibonacci degrees from this confluence.

The synergy of the Square of 9 Wheel relates time and price in various ways.

It’s all about confluence. The more confluence, the more I pay attention.

What’s the wheel have to say about GLD here?

GLD’s March 2022  high was a time/price square-out: 193 is square the week of  March 7^th.

The subsequent low was the week of October 31^st , 2022 at 150/151

However the CLOSING weekly low was at the 153 region in mid-September 2022.

153 squares the 193 high

And mid-Sept is opposition the March 2022 peak.

The last important high in GLD was May 4^th 2023.

May 4^th is opposite 170.

GLD hit a low of 171.26 on Friday.

A square-out with the last swing high may be setting up.

I’ve got my eye on 170 ish GLD.

It’s an interesting setup as the 170 region ties to a Ghost Line from the March 2022 high.

That said a trend line from the May 2019 impulse intersects with the aforesaid Ghost Line around April 2024 which is 6 months or 180 degrees from October 2023.

This potentially underpins the idea of a low this week in gold.

GLD needs to clear 178 to signal a change in the near term trend to the topside.

The primary trend remains up in GLD as reflected by a monthly from December 2015.

Notably GLD has not turned its 3 Month Chart down since May 2019 when it reversed to the topside with authority.

Interestingly trade below September’s low this month will turn the 3 Month Chart down for the first time in 4 years.

With GLD closing near session lows/monthly lows on Friday and today beginning a new month, GLD is certain to turn its 3 Month Chart down in October. It wouldn’t be surprising if it happened today.

The ensuing behavior will be critical to gauge.

GLD’s 3 Week Chart is pointing down. It turned its 3 Week Chart up in mid-July which defined a high.

It will be important to track GLD’s 3 Week Chart when GLD starts to rally.

If GLD gets traction on such a turn up, it should be the Sign Of the Bull that a major breakout over 191 is on deck.

Disillusionment and fear amongst gold bulls is thick.

The dour sentiment coupled with a higher monthly low and a possible 3 Drives To A Low on the weeklies polishes out the setup.

I think it important to view gold from the perspective of this setup so we will be prepared for the paradigm shift implied by gold’s larger unfinished rally pattern.
The rubber band is being pulled back in gold while commodities are giving us a B Wave bounce within a larger Wave 2 correction.

It is likely that they will fail to keep up with gold prices over the coming year.

The DJIA closed for 4 consecutive days below its 200 day moving average last week.

As I write this Sunday night, S&P futes are up 26 points on the immediate threat to a government

Shutdown being lifted.

Nothing has been resolved.

It’s a pyrrhic victory.

It’s a pyrrhic rally whether it lasts a few hours or a few days my expectation is an Autumn Panic will continue to play out.