Gold-Friendly Commercials and Oscillators
Graceland Updates 4am-7am
Dec 27, 2011
1. If there is a flow of capital that portrays the current mindset of the average global investor perfectly, it is likely the incredible demand for so-called "risk-free" investments.
2. "If the last two weeks are any indication of how next year will start, there's near-insatiable demand....We have a significantly shrinking supply of risk-free assets in the world and U.S. Treasuries are one of the few left." - Ira Jersey, interest-rate strategist at Credit Suisse Group AG, in an interview with Bloomberg News, Dec 21, 2011.
3. Ira is referring to the incredible demand for US Treasuries and T-Bills. Amongst hedge funds and the public, the European crisis has ignited a surge in dollar bullishness and euro bearishness.
4. Click this Bloomberg bid-to-cover ratio chart for United States 4 week T-bills. You are looking at a spike in the ratio to a mindboggling level of 9:1. A ratio of 2:1 is considered successful. A 9:1 ratio, especially given the fact that these bills pay absolutely no interest, shows you the incredible level of investor fear that exists around the world.
5. The longer term T-bonds showed a 3:1 bid-to-cover ratio in the latest auction, indicating powerful demand from terrified investors who want to avoid risk. These investors will clearly pay any yield penalty to get perceived safety for the bulk of their capital.
6. Please keep in mind that there are two sides to every trade; for every seller of a euro, somebody has to be a buyer, or there is no trade. Talk and analysis about where the euro is going should always play second fiddle to liquidity flows studies.
7. Click this euro liquidity flows chart from sentimentrader.com now. Hedge funds are generally not as heavily capitalized as the commercial traders (banks) are. They buy most of their leverage from the banks, who are on the other side of their trades quite often. That's not a good situation to be in, if you are a hedge fund.
8. When your bookie is on the other side of your trades consistently, you have to realize you might be classified by your bookie as a mark, rather than a customer.
9. The fund managers are aware of the bookie-gambler relationship, but hope that they can make a "big score" with their leveraged play, and get out before the deep-pocketed commercial traders reverse the trend with their gargantuan buying. Enormous leverage brings huge risk, but if a fund can call a really big move, the profits made can be many billions of dollars.
10. A lot of hedge funds definitely have a lot of paper profits now from shorting the euro, but greed is a very powerful emotion, and hedge funds have a tendency to overstay their time on many trades.
11. What a lot of amateur investors don't understand is that the banks and prime brokers often continuously loan more capital to the funds to enlarge their positions. As the funds "add to a winner", the fact is that it doesn't take that much of a reversal in price to cause a dramatic reduction in the net liquidation value of their positions.
12. If you look at the red and blue circles that I have drawn on that euro COT report chart, you can see that the public is at record levels of bearishness on the euro, for the life of this chart. The funds are also very bearish, while the deep-pocketed commercials are holding a record bullish stance.
13. You can also see that by looking at previous major peaks and lows, you can create a "liquidity flows report card", and it is the commercial traders that get an A grade, and I would vehemently argue that the funds and retail investors get failing grades.
14. Will this time be different? Will the funds get an A grade while the commercials bust out? I don't think so. It's exciting to call a big turn, but I'm not so sure that action builds any lasting wealth. I like to see you focused on flowing capital slowly and surely into assets as their price declines, as the enormous commercial traders do the same.
15. It's important to understand that all the euros sold by one group of traders are bought by another. It is commercial traders that are buying euros, and leveraged speculators with "less-than-stellar" historical report cards who are selling and shorting them. Will the gambler beat the bookie? Personally, I don't bet against the house.
16. The commercial traders are taking the silver, gold, and euro birds in the hand, while selling the funds and public great stories about future dollar birds in the bush. Follow commercial liquidity flows, slowly but surely, to build consistent wealth.
17. Click this GDX oscillator cycle chart. From time to time I urge you to view technical indicators in "solo mode", without the price chart. In this case, I've run the chart back about 3 years, so you can see the repetitive up and down cycles that repeat virtually endlessly.
18. There are many factors in play for gold stocks right now, and these oscillators add more weight to the bull side of the case. You can see that these cyclical oscillators are all near the bottom of the chart, and historically such positioning is almost always followed by move to the upper area.
19. Without even looking at price, you could buy gold stocks blindly here (with limited capital, obviously), just based on the historical pattern of these oscillators. These oscillators won't get you to GDX $100 a share, but they should get GDX out of the starting gate very quickly.
20. The primary theme of an epic crisis is surprise, yet most investors refuse to accept that fact, and many become shrill and maniacal in their belief that they can predict their way through the crisis, or find gurus who can, rather than simply flowing their liquidity slowly and professionally in response to price action on the grid.
21. Click this key GDX weekly price chart. Yelling and screaming that bullish analysts failed because GDX is just sitting in the current price "box" will not get you through this crisis. Take a hard look at that chart and think about what has transpired in the background.
22. The GDX price burst out of a big head and shoulders bottom, and "should" have gone on to much higher prices. It tried, not just once, but a number of times. Price did burst above the black h&s neckline I've drawn on the chart, but surprise situations like the implosion of Europe were generally unpredictable. GDX held up quite well in 2011 considering that Europe almost collapsed.
23. Surprise, not prediction, rules the GDX chart, in a debt crisis of this incredible size. You can only respond to negative surprise by buying and/or enduring. The bottom technical line is that the big h&s pattern is still intact, and the rectangular trading range that has appeared does have a 2/3 chance of breaking out to the upside.
24. Think hard about whether taking the other side of the commercial trade in the euro right now is really a good wealth building idea. Maybe you have the capital to beat the bookies with a leveraged long dollar play. I'm less sure that you do, and doubt that any gains will be retained. My suggestion is that you adopt and embrace surprise as a central theme of this debt crisis. Refusal to do so has already cost most investors their confidence and a great loss of capital. Maintain a big picture view that gold will be the last man standing, and buy what you can in GDX, GDXJ, and individual gold stocks on all price decline surprises. Take a good second look at my GDX oscillator chart. The surprise now would be price weakness, and I'm prepared to buy such a surprise to a degree that few understand, but the odds are that we blast higher in gold stocks, here and now!
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