Fade Gold’s Heavy Glow… At Your Own Peril
“I think we are actually at a point of encouraging risk-taking and that should give us pause.Investors really do understand now that we will be there to prevent serious losses.” -Jerome Powell, Oct. 2012
“I’ve offered the thought that the U.S. could unilaterally re-set the price of gold to a much higher number and overnight re-liquefy the system and minimize the pressure of our enormous debt. The price of gold has bee re-set twice before by the U.S. so why not now? Yet nobody in D.C. has even broached this idea. Why?
Then the full horror of the situation struck me. The reason raising the price of gold isn’t discussed is that we probably haven’t got the gold.” -Richard Russell
“In the history of mankind, only gold has been considered pure wealth. It is wealth standing on its own, minus the weakness and stupidity of mankind. Gold affords protection against the ignorance of mankind.” -Richard Russell
“Standing in line
To see the show tonight
And there’s a light on
Heavy glow
By the way I tried to say…” – By the Way, Red Hot Chili Peppers
The strength in U.S. equities versus much of the globe over the last few years has been conspicuously accompanied by significantly higher yields in US Treasuries versus the rest of the industrialized world.
Whether a firm dollar has backstopped foreign inflows into U.S. stocks or the other way around, the correlation is unmistakable.
It is irrelevant which is the horse and which is the cart.
The ‘preference’ of foreign investors turning to U.S. Government debt and U.S. stocks turned into a panic—first in the bond market in December and then stocks in January.
TLT (long bond ETF) broke out with authority on December 4th, the SPX reversed up sharply on December 26th.
Even during the big May 7 ½ % downturn in the SPX, TLT continued to advance.
The takeaway is that the driver of the T-Bond advance is relatively higher yield available in the U.S.
It is/was exacerbated by the sell-off in May as capital moved into ‘safer assets’.
The thesis is desperation, not underlying strength in the U.S., that has underpinned foreign flows into the U.S. bond market.
For U.S. investors, the flight to sovereign ‘safety’ has meant There Is No Alternative to stocks. Empress TINA reigns supreme.
However something funny happy happened on the way to the forum of the Fed last week as Powell let doves fly.
The dollar fell sharply closing below its 200 day moving average on the important Friday weekly closing basis.
In so doing, the dollar broke a rising trendline for 2019 triggering a Rule of 4 Sell signal…a break of a 3 point trendline.
December’s Powell Pivot is turning into Powell’s Snow Plow.
The downturn in the dollar will be a negative for foreign investors who have reached for U.S. government debt.
Their bonds will be worth less when they go to sell and convert back into their own currency.
The question is what the effect dollar weakness will have on U.S. stocks.
It is likely to impact foreign buying of U.S. stocks but moar easy money may initially have a bullish knee-jerk echo effect driven by domestic money managers.
Even Paul Tudor Jones was saying a week ago that a new rate cut cycle means you should be buying stocks.
I’m not so sure.
How much easy money is too much?
A daily SPX from the September 21st all-time high that was a false breakout above the record January 2018 peak. The September high preceded a wicked 20% three month sell-off.
Again in early May, the SPX made a nominal new high and failed to gain traction once again.
This time it turned back up from a successful test of a prior swing low, the early March low.
The double bottom, along with the Fed’s dovish posture on Wednesday perpetuated a new-all time high late last week.
Since January 2018, each new high has been unable to get traction.
The question is whether, courtesy ‘easy money’, will this time be different?
Will the 3rd attempt to new highs over the January 2018 peak see a sustainable push above the 3000 SPX level of lore?
Will the 3rd time be a charm for the bulls or will another failure from a new high turn the devout into non-believers?
The problem for bullish investors is that the light at the end of the easy money tunnel is the glow from the oncoming gold freight train.
However, if indeed a rate cut cycle is starting here, it is starting from the 2nd floor, not from the 6th floor.
In other words a rate cut cycle would be starting at already historically low levels.
Likewise a rate cut cycle from here would be starting with the SPX at record highs.
Gold is taking notice.
Below is a daily gold from last Wednesday’s report. Gold is over 1400 on Sunday night
This time is different.
Gold has been stirring subsurface for months and has just exploded to new 6 year highs.
Our report from June 14th, Our Gold Prediction Is Playing Out, underscores that what happened last week is not out of the blue. The gold show has been glowing for a while.
There are many cumulative factors that fed into what a friend and fellow trader aptly calls gold’s jailbreak.
Like all jailbreaks, it takes time for escape velocity to occur.
The stars aligned in late May and we had subscribers purchase the July 123 GLD calls at $1.07.
We sold some for a 6.79 gain after taking our initial investment off the table. They traded above $9 on Friday.
The positions we accumulated in GDXJ, KL, and AG have killed it.
The point is that while many were fading gold in the 1300-1350 region again, our stuff was telling us this time was different.
Many players are saying that the move in gold has attracted too many believers too quickly.
However, as W.D. Gann stated, “When a stock or a commodity advances into new territory or to prices which it has not reached for months or years, it shows that the force or driving power is working in that direction. It is the same principle as any other force which has been restrained and breaks out. Water may be held back by a dam, but if it breaks through the dam, you would know that it would continue downward until it reached another dam, or some obstruction or resistance which would stop it. Therefore, it is very important to watch old levels of stocks and commodities. The longer the time that elapses between the breaking into new territory, the greater the move you can expect, because the accumulative energy over a long period naturally will produce a larger movement than if it only accumulated during a short period of time.”
Everyone may shrug off the water level rising, but when the water is knee high in your living room, it means a one-hundred year flood.
The four most dangerous words in the market are “this time it’s different.’
The other four most dangerous words are, “one hundred year flood.”
Gold may be embarking on such a move.
Pos GLD calls, GDXJ, SBGL, WPM, AG
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