Analysts are misreading the Dow/<b>Gold chart</b> and what it means for <b>...</b> |
- Analysts are misreading the Dow/<b>Gold chart</b> and what it means for <b>...</b>
- Has The S&P 500 Topped At Exactly The Same <b>Price</b> As <b>Gold</b> <b>...</b>
- The <b>Gold Price</b> Added $3.60 Today for a Comex Close at $1284.20
| Analysts are misreading the Dow/<b>Gold chart</b> and what it means for <b>...</b> Posted: 23 Apr 2014 08:56 PM PDT Posted on 24 April 2014 with no comments from readers Take a look at the Chart of the Day below that shows the ratio between the Dow Jones Index and the price of gold. Analysts have drawn a rather distorted looking trend line channel showing a break-out to the upside. That would seem to indicate higher stock market prices and a lower gold price. However, if instead you continue the downward trend line to the top of the recent high then you still get the classic bell-shaped curve beloved by hedge funds and other chartists. This would clearly indicate a long-term reversal to the mean will continue in the Dow/Gold, perhaps with quite a dramatic correction to the downside. So the Dow Jones would fall and gold prices rise. Bell-curve or not? Does this graph look like a bell-shape or it is broken? We see a distortion caused by an unsustainable spike in share prices last year and the impact of Indian taxes on the gold market. If that is true then the clever thing to be doing would be to accumulate gold at current prices and sell stocks. That's the reverse of the consensus view now but when was the consensus ever a good guide? Posted on 24 April 2014 Categories: Gold & Silver  | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Has The S&P 500 Topped At Exactly The Same <b>Price</b> As <b>Gold</b> <b>...</b> Posted: 24 Apr 2014 01:56 PM PDT Chances are high that the S&P500 is in the process of making a huge top. We will discuss our rationale in this article, based on the gold to equities ratio, as well as current market conditions. The extremely interesting fact is that spot gold has topped at exactly the same level as the S&P500 top (to date, on a closing basis). Compare the following data:
The following chart shows both assets over the last three years. Chart courtesy: Stockcharts.  Gold to S&P 500 ratio from 2011 to 2014 Both assets have traded visibly inversely correlated since mid-2011:
The following chart shows looks at the gold to S&P 500 ratio in the last 100 years. Note that the red arrows and blue ovals are own additions. Chart courtesy: Macrotrends.  Gold to S&P 500 ratio from 1914 to 2014 The last three years are marked in the blue oval at the right. One of the following two statements must be true:
The second scenario would be a replay of the 70ies. Back then, the secular uptrend in gold corrected significantly and equities experienced a cyclical uptrend. As the chart points out, the cyclical trends lasted for three years. We cannot exclude the first scenario indicated above. However, we estimate the probability to be very low, in the range of 5% to 15%, based on the "set of circumstances" we see in equities and in the economy. Of course, the fact that the S&P 500 and gold have reached the same (price) level and is merely a chart observation. It does not tell anything as such. The more important point is the set of underlying market conditions. In that respect, we currently observe conditions which, in our belief, confirm the chart observation. The "set of circumstances" we discuss in the remainder of the article are related to the equities market, in particular the US, but also the broader economic context and even the monetary system. First, US equities are rising for 5 years now. Technically, the current bull market is +270 days old. This is the second longest bull run in the last 80 years, being beaten by the bull run which started in October 1990 with a duration of 406 days. Source: Standard & Poors. Second, based on the Crestmont P/E ratio, the S&P Composite is trading at very high levels, only beaten twice in the last +100 years, i.e. in 1929 and 2000. Third, margin debt in US equities is at all time highs. SeekingAlpha released an article which explains that "margin debt at the New York Stock Exchange rose to an all-time high of about $465.72 billion in February from its previous record high of about $451.30 billion in January. There is a strong positive correlation between NYSE margin debt and SPY." Although the equities bull run is currently still intact, at least from a technical perspective, the risk of speculation is getting higher as well. The more speculation, the sharper the inevitable correction. Fourth, IPO fever has popped up again, in a similar fashion as during the highs of the dot com era. According to Sentimentrader, the share of money losing IPO's (i.e., IPO's with negative earnings) stands at a remarkable 83%. This is just a hair's breadth away from the all-time record from mid-March 2000, when 84% of the companies that insiders were selling to the public could not prove their business models. Fifth, according to ShortSideOfLong, in the last 140 years, there have only been 7 prior events where markets gave investors returns in excess of 100% over 5 years. The chart below shows that 6 out of the 7 instances have led to serious corrections or outright crashes, while the one in 1956 lead to only a mild pull back. The chart also shows that equity market trends with 1.5 standard deviations above the 140 year historical mostly mark an intermediate or long term top. "The market has only ever traded at these overextended levels 8.6% of the time or 143 months in the last 140 years (with the outright majority of that during the late 1990s tech bubble)." It is very likely that the run into 2014 is going to produce another major decline. Sixth, the following chart shows that the average small investor portfolio has a 70% allocation to stocks, a level. Although not visible on the chart, the remaining capital is evenly allocated to bonds and cash. Zero interest rate policy (ZIRP) inflates capital to risk assets, leading to asset inflation. Participation of small investors typically peaks at the end stages of a bull run.  investor allocation to stocks : 1987 to 2014 In the broader economic context, we observe some worrisome facts. Leverage in the financial system is at all time highs. As we noted earlier, "Global derivatives have a notional value of around $700 trillion (latest official BIS data from mid 2013), the highest point historically." We believe this has the potential to accelerate a downward move in whatever asset class. In that respect, we believe that the crash of precious metals in April 2013 was a shot across the bow in increasingly distorted markets, courtesy of the central bankers' policies of this world. Other asset classes will follow with the same vengeance. Meantime, the debt bubble is growing bigger, especially in the US, Japan and China. A credit crisis seems to lure around the corner. The Chinese credit bubble is showing signs of cracking. The housing market in the US is propped up mostly by speculators (think Blackrock) while the real owners of houses account for a minority in the "housing recovery" of the last years. A credit induced economic recession would be similar to the 2008 collapse. The most worrisome fact, however, lies in the monetary system. On the one hand, the central bank narrative is showing signs of cracks. As we all know, a narrative is extremely powerful … until it stops working. The insight that central bank stimulus does not contribute to productive effects in the real economy but only leads to specific asset price inflation, is spreading around. Increasingly, data out of Japan and the US underpin this insight. On the other hand, of higher importance in our view, is the cracking dollar reserve currency. It is widely accepted that the US has enjoyed an exceptional privilege having a world reserve currency. The US has been able to grow its debt mountain to a level never seen before in history of mankind because it had a universally accepted currency which was used in the most traded asset classes, in particular oil (the petrodollar). However, the end of the dollar reserve currency seems to be imminent. Based on historical standards, world reserve currencies have lived on average 27 years. Note that the current dollar hegemony is ongoing for 43 years. Prior threats to the petrodollar have been laughed away by the use of military force. The Ukrainian case, however, has the potential to become a pivot point. Clumsy sanctions against Russia by the West point to retaliation right to the core of the monetary system: the petrodollar. Russia is about to sign energy contracts with its major trading partners in non-dollar currencies. We believe this will act as a precedent, and several Asian and emerging countries will follow. It will result in a loss of trust in dollar denominated assets, undoubtedly affecting US equities. Needless to say, this should also be a major catalyst for precious metals. In the short run, we do not exclude that equities could go higher. However, several factors confirm the longer term view. We see a three double top forming, a huge trading range which is lasting 2 months (very unusual since the bull run of November 2012), and a huge distribution in the RSI and market breadth. Again, it is the combination of all circumstances described in this article, as well as the point of maturation of each, that confirm a major decline in US and European equities is very close. One could argue that the stock market will climb a wall of worry. However, that is what has been going on for five years now, and any historical standard shows that its duration is already stretched. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| The <b>Gold Price</b> Added $3.60 Today for a Comex Close at $1284.20 Posted: 23 Apr 2014 04:17 PM PDT
The GOLD PRICE added $3.60 today for a Comex close at $1,284.20. Silver closed Comex up 7.9 cents to 1943c. Ranges today were tiny, the GOLD PRICE range was $8.70 and the SILVER PRICE range was 17 cents, but their gains bring little comfort. The overlapping trading simply doesn't depict a rally, but correction without much conviction or direction. I'm still guessing that the downside risk for the gold price probably isn't more than $14 from here. Silver on 15 April made a low at 1922c, and another on 21 April at 1923c. That might have fulfilled the downside thrust, but we might still witness a V-move to 1900c. In any event, all that is my anticipating, since neither market has yet flashed a signal it is turning up. Be patient here, but don't go to sleep. I bought a good bit today to balance my own position. I don't think there's too much downside risk here, and I certainly don't want to be short. Markets are drifting, without much conviction one way or the other. Like a torpid snake, though, that can change any time. On narrow ranges today stocks turned down, slightly. Dow abdicated 12.72 (0.08%) to a 16,501.65 close. S&P500 dropped 4.16 (0.22%) to close at 1,875.39. Since markets don't make triple tops (or bottoms) but usually break through that barrier to continue higher, we can probably expect a higher top in stocks. However, the charts don't speak unequivocally. As they rise in seniority from Nasdaq Comp to S&P500 to the Dow, they look better. First two are in downtrends, Dow has moved sideways, yet the overall uptrend says they will move yet higher, unless a breakdown is confirmed. That would require universal closes below the 200 day moving averages. Dow in gold inched down 0.19% to 12.85 oz (G$265.63 gold dollars). Dow in Silver hooked down 0.232% to 848.94 oz (S$1,098.91 silver dollars). That probably does not mark the top, although yesterdays 851.70 oz was awfully close to the 853.66 oz (S$1,103.72) December 2013 high. Yet the high lieth not far away. US DOLLAR INDEX fell 4 basis points, nothing really, but it has been repulsed trying to climb above the 20 and 50 day moving averages, to its shame revealing its weakness. One of these days the dollar will do something, but probably not tomorrow. Drifting sideways. Euro rose a little today, 0.8% to $1.3817, but not enough to break above its downtrend line. Not enough to sneeze at, in fact. Yen is tippy-toeing back and over its 50 DMA. Rose 0.1% to 97.57 cents per Y100, going nowhere. - Franklin Sanders, The Moneychanger © 2014, The Moneychanger. May not be republished in any form, including electronically, without our express permission. To avoid confusion, please remember that the comments above have a very short time horizon. Always invest with the primary trend. Gold's primary trend is up, targeting at least $3,130.00; silver's primary is up targeting 16:1 gold/silver ratio or $195.66; stocks' primary trend is down, targeting Dow under 2,900 and worth only one ounce of gold or 18 ounces of silver. or 18 ounces of silver. US $ and US$-denominated assets, primary trend down; real estate bubble has burst, primary trend down. WARNING AND DISCLAIMER. Be advised and warned: Do NOT use these commentaries to trade futures contracts. I don't intend them for that or write them with that short term trading outlook. I write them for long-term investors in physical metals. Take them as entertainment, but not as a timing service for futures. NOR do I recommend investing in gold or silver Exchange Trade Funds (ETFs). Those are NOT physical metal and I fear one day one or another may go up in smoke. Unless you can breathe smoke, stay away. Call me paranoid, but the surviving rabbit is wary of traps. NOR do I recommend trading futures options or other leveraged paper gold and silver products. These are not for the inexperienced. NOR do I recommend buying gold and silver on margin or with debt. What DO I recommend? Physical gold and silver coins and bars in your own hands. One final warning: NEVER insert a 747 Jumbo Jet up your nose. |
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