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The Gold Update

Monday October 15, 2012 10:26

“And the winner is…”

The European Union (?)  

The laureating of the Peace Prize by the Nobel committee up there in Norway (“we ain’t touchin’ yer Euro”) upon the EU “for having over six decades contributed to the advancement of peace and reconciliation, democracy and human rights in Europe” seems more than just extraordinarily coincident with the meetings in Tokyo this past week of the International Monetary Fund and the World Bank. The simultaneous timing of these events really emotes that compassionate “awwwwww” feeling for our friends Across the Pond. For from various financial officials who attended the IMF and WB conferences, here are some “text bites” that we’ve strung together such that we all can revel in the love. (Attendees’ names have been withheld to protect their integrity, however as you read each phrase, consider the positive effects for Gold going forward):

“ … there is a long way to go in Europe … will be an event risk for some time … fiscal consolidation has had a negative impact on our economy … the Euro is not an experiment, it is the future of Europe and it is something to not be reversed … in Europe, the decision-making process is slow and cumbersome ... given the lack of growth, given the market pressure, given the efforts that have been undertaken, a bit more time is necessary … it is time to move from dreaming of a world free of poverty to achieving it, it is time to bend the arc of history … some major central banks are again resorting to quantitative easing … recent experience suggests there are reasons to doubt the effectiveness of lax monetary policies in current circumstances …the recently announced quantitative easing by the U.S. Federal Reserve and the European Central Bank's Outright Monetary Transactions may have positive short-term impact, however, they are not sufficient to prevent the global economy from heading into a recession ..."

‘Tis pretty wonky stuff, all that. Moreover, the Nobel award is generally is bestowed upon a person or two, although a broader organizational entity has been chosen some 20% of the time. To be sure, more recent household names of well-deserving awardees roll right off the tongue such as Xiaobo, Sirleaf, Gbowee and Karman. But this time, the prize goes to an entity that spans 27 countries encompassing 23 languages and over one-half billion folks. Which begs the question: who within the massive entity that is the EU should actually take receipt of the coveted Gold medallion sporting the very image of Alfred Nobel himself? (Certainly ‘tis not going to be hung 'round the neck of some statue outside of the EU’s headquarters in Brussels). So after considerable thought, my 2¢ is that it ought be presented to the members of Germany’s Federal Constitutional Court in recognition of its brilliant ruling just one month ago which prevented a thwarting of establishing the €500 billion European Stability Mechanism (ESM), without which today ‘twould all be much worse. Their decision alone may have financially saved Europe:

Now that’s making a noble gesture, right there. (Well maybe not…)

Indeed, “the real winner is…” Gold. For over the broader spectrum, it has and shall continue to remain as noble as ever

…especially with all the monetary accommodation waiting in the wings. You can certainly sense amongst all those aforementioned quips from the finance officials a cerebral interlacing in our minds of the word “Gold”. We’ve already seen a most direct cause-and-effect of there not being enough dough to go around, resulting in material civil unrest in Athens, Madrid and France, (albeit it may not be fair to, at least as yet, include the latter as they’re forever at unrest over this or that). But even worse, would the Nobel folks rescind their prize in recognition of peace to the EU if it all goes wrong? I doubt the powers-that-be shall let it come to that.

Specific to the above chart of Gold’s weekly bars, we are seeing within the context of the healthy parabolic Long trend our anticipated pullback in price. Finishing the week at 1755, Gold has retraced down to the lower levels of The Northern Front (1750-1800), and again from here, a peek into the high 1600s wouldn’t at all be untoward. Recall a week ago our noting that Gold had recently reached a typically excessive distance, (better than 100 points), above its “smooth pearly valuation line” such that some near-term correction ought be expected. Here is the latest read thereto in the following three-month view:

Exceeding the 100 level per the oscillator (Gold minus Valuation) at the foot of the chart was the cautionary alert. (For newer readers, the smooth line is a relative value for Gold derived from how its price changes compared to such changes in the BEGOS markets complex comprised of the Bond/Euro/Gold/Oil/S&P). Such retrenchment in price by no means declares that the Gold Troops have lost the battle against the Forces of Resistance across The Northern Front. Rather, Gold is merely policing the battlefield. And whether it be from here at 1755, or from the upper 1600s, Gold’s next foray up to The Final Frontier (1800-1900) “methinx” ought be met with little resistance.

With reference to next looking at the daily price of Gold since 2002 along with its stalwart ally of support, the 300-day moving average (1680), a valued reader of ours chimed in this week as to how similar Gold’s correction and basing pattern of 2011-2012 appears to that of 2007-2008. ‘Tis so:

And as noted in the past, I liken that progressively upward 300-day moving average line to that which would correspondingly chart the growth in the global money supply as measured by M2, (aka “The Gold Story”).

‘Twas as Foretold by the Baby Blues

Three weeks have passed since the notion of a trade to short Silver was herein introduced, upon its baby blue dots -- a measure of 21-day linear regression trend consistency -- having slipped below the 80% level as noted in the leftmost panel as follows:

Then two weeks ago, we added in the same scenario for both Gold, (which as you know we don’t condone actually shorting), and the S&P, (which in the rightmost panel above we’d noted as already “having cracked”, a failed attempt at a recovery rally in the interim notwithstanding). As for the latter, I still think we shan’t see any material downside until post-Stateside election (06 November), after which it could well get a bit ugly out there.

In fact, some of you may have seen a piece over at MarketWatch this past week that made “The Case for a 40% Drop in the Markets”. I know that sounds preposterously unfathomable to many, but consider this: the S&P 500’s recent high for 2012 is 1474, (it currently sits at 1429). And those of you who have been paying attention out there have heard me quip on occasion that “I’m sittin’ on the bid at 880.” A correction of 40% from that 1474 high would bring the S&P down to 884. Moreover, given the “live” price-earnings ratio right now of 24.0x, proportionally at 884, that would become 14.8x.

Not so far-fetched after all, what? Here are the daily closes of the S&P 500 for the past 32 years-to-date:

“I ain’t sayin’, I’m just sayin’…”

“But mmb, wouldn’t that kill the price of Gold as well?”

To be sure, Squire, we saw all the BEGOS values decline during 2008’s Black Swan event, Gold thereafter recovering at the mightiest pace within that bunch. Truly, none of us can precisely foretell that which is to occur: when we’re right, we crow, but when wrong, eat crow. Really all that any analyst/trader/investor can go on are the probabilities of markets’ ebb and flow, ever with an eye as to how the world’s fundamental forces, given so many secular economic events and trends, will play into perceived asset valuations. Fancy wording perhaps, but the bottom line is: Gold will again break up and away from a declining S&P if for no other reason than from a pent up demand for liquidity, borne of selling equities to save one’s dough, or the printing of such for those in woe. (And as penned a week ago, ‘tis between the Election and end of Q1 that we may see this go.)

As for the ensuing week, per the excessive distance of Gold’s price above value, we may see more unwinding of that. Further, as the Baby Blues (for those markets shown earlier) cross below their respective horizontal axes, such linear regression trends become defined as negative. Specific to Gold itself, there are structural supports for which to watch at 1745, 1701 and 1679, (none of which would, as yet, upset the balance of the prevailing parabolic Long trend).

As for the "mo-mo" buyer in you, should Gold break above trading resistance at 1781, I’d anticipate a straight shot to at least the base of The Final Frontier (1800-1900), or if rather from any given lower structural level, in time, inevitably so. Attentive to one’s own risk profile, buying into Gold weakness through here makes sound sense.

For again, “the real winner is…” Gold (!)


Mark Mead Baillie

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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