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Gold and the Bond are Daring the Fed to Raise Rates

To quote the late, oft affable, Hubert Horatio Humphrey, Jr., "I'm pleased as punch to be here!". 48-hours ago, Typhoon Terrible blasted through San Francisco, furiously roaring off of the Pacific Ocean and shutting down much of this once fair city's electrical grid. And after sitting in the dark here for 17 hours in a storm reminiscent of a decade or so ago that had us sans énergie for three days, I was dubious about getting this 265th consecutive Saturday edition of The Gold Update written at all. But then just short of midnight yesterday (Friday), the power popped back on, and within a couple of hours we'd repaired and/or restored the some 82 Excel files that drive the show, thus here we go.

Gold, of course, has been weathering its own storm for three years, and of late has been maintaining its own energy throughout, having closed higher in seven of the past ten weeks, indeed having done so in five of the last six. How many FinMedia broadcasts have noted that? None, (or doubtless we shan't find any). However, we so do describe it all here per the following chart of weekly bars from a year ago-to-date, the rightmost pair underscored by the fresh blue dots denoting the new parabolic trend as Long, with price anticipatedly knocking on the door of the mid-1200s:

And a tip of the hat to Bloomy Radio, which during our pre-storm Thursday wee hours noted something we've been pointing out for years with graphics and tables: that Gold plays no currency favourites. To paraphrase what was emitted from the bedside radio speaker: "Gold is strengthening as monetary supplies increase in Europe and Asia." I could hardly believe my ears, but the truth was great to hear, for 'tis the very nucleus of the Gold Story: the more you have of something based on nothing, the more valuable is the something of which the supply growth is nothing. Obviously not that the supply of Gold is purely fixed: 'tis almost doubled over the last 35 years, as is incorporated into the calculations that drive our scoreboard; but StateSide M2 alone over the same period has sextupled.

And yet, The Bank for International Settlements is warning of "Dollar strength" as potentially hazardous to the stability of emerging economies; such threat may soon pass as the Dollar Index has just tested and recoiled back from its two prior peak levels of the mid-89 price area that we saw in both March 2009 and June 2010. Moreover, gasoline and like petroleum-based products are readily affordable today for one and all: 'tis economic ecstasy (as long as the producers can cover their expenses, right?) 'Course as one party-pooper piece put it this past week: "As Gas Prices Go Down, Likelihood of Higher Gas Taxes Goes Up" -- (heaven forbid government loses its grip and allows us a taste of freedom).

In any event, the incredible shrinking world is getting Gold a bid. Falling business spending in Japan forced a GDP revision from +1.9% to +1.6%. The EuroZone's Industrial Production for October was all but flat, as was the demand for the European Community Bank's ultra-cheap loans to area banks. Meanwhile on this side of the pond, the StateSide PPI for November just went backward, underscoring a stealth slack in the economy. And here's a stealth fact: longtime retail industry consultant Howard Davidowitz recently noted that "The top 10% now does 50% of the [consumer] spending", our balance of 90% adhering to budgetary restrictions, with 25% not even having any form of savings. And the Federal Reserve Bank's near to increasing our cost of credit? Gold is rising almost as if daring the Fed to raise rates ahead. More likely the Fed shall end up increasing the money supply along with Asia and Europe. And more faux dough = more Gold mo-mo. To which, reclamation of the 300-day moving average (presently 1270) would be a welcome achievement. Here 'tis along with price year-to-date:

Indeed if just 10% of the folks are driving 50% of the bus, one might say our Economic Barometer belies that which we see with our eyes. Take for example the Department of Labor's monthly report specifically entitled "Non-Farm Payrolls": 'tis not entitled "Non-Farm Jobs", yet universally 'tis referred to the number of "jobs created". But -- as we've herein upon expounded in the past -- is it not the lion's share of jobs that is static, and rather than each being performed (as used to be the case) by one 40-hour worker, 'tis being so done today by two 20-hour workers? Here's the Baro:

The Federal Open Market Committee certainly understands the underlying economic delicacy of a more factored jobs market as they meet this week in consideration of lifting the "considerable time" clause as to their interest rate hike date. With pending FOMC member rotation in the new year purportedly leaning more doveishly, we'll see how Head Teller Old Yeller handles it all in the post-announcement press conference on Wednesday.

Further, just as one ought not fool Mother Nature, neither foolish is the Bond, for as we're wont to say: "It knows." So often is the Bond the predicative Sybil of that which is to come. Indeed as its current yield of 2.756% returns toward 10-year lows, so inversely does its price rise, almost as if daring the Fed to raise rates ahead. Here we've the Bond's price for the last 10 years-to-date:

Then there's the stock market, the S&P 500 motoring along at double its earnings support, (our "live" price/earnings ratio at 28.4x and yield at 1.988%), albeit the Index presently at 2002.33 is down a frightening -3.7% from its all-time high (2079.47) of just over a week ago. 'Tis but noise from our purview, indeed given this is a market incapable of even a -10% correction. Yet upon its correcting -50% as it has so done twice in the last 12 years, we'll then have something to talk about. Still, any S&P downtrend appears daunting to those schooled in the "fact" that stocks only go up. To wit, in the center panel below of daily bars for the last 21 trading days, we've the S&P (Spoo futures) doing their imitation of "The Wave", with the attendant "Baby Blues" of linear regression trend consistency in full cascade. Gold is on the left, its trend in nice ascent, and Oil is on the right, the trend in such descending plight that its extrapolation, (for you bottom-fishers out there), puts the price at 0.00 ("zero") come 19 March, some 66 trading days from today:

Specific to the Precious Metals, here we've their Market Profiles for the last two weeks-to-date. For Gold on the left at 1222, there's trading resistance just overhead at 1230, with support levels at 1205 and 1195. Similarly for Silver on the right at 17.03, she's got resistance at 17.10, with support at 16.40. To reiterate what we saw in these profiles a week ago, it appears that the yellow and white metals have reached their points of being "sold-out", that their ebb tides have fully receded, and thus 'tis time to go with their renewed flows:

So into the Fed Show we go, after which comes a very interesting economic metric: Friday brings us the December Philly Fed Index reading, which may finally be the precursor for the S&P to embark on better than a -10% corrective course. Here's why: a month ago, for just the second time in our 17-year history of Econ Baro data, the Philly Fed Index exceeded the reading of 40, (and 'tis projected this time to be roughly half of that). The prior instance of topping 40 was in March 2011, some seven months later finding the S&P to have then corrected by better than -15%. Naturally our being on "crash-watch" makes such a percentage drop appear minuscule, but whether it be Gold's firmness, Oil's plunge, or the S&P getting jittery, this usually benign time of year is indeed turning into that "December to Remember" toward a 2015 lacking stock market green, but for Gold: a year ever so stormingly bold!


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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