We went to Cape Cod this weekend to visit my parents. We had a nice time boating and catching up with relatives. As an added bonus, I came away with an artifact from the past; my mother gave me a gold watch made by the old Waltham Watch Company that I vividly remember residing in the vest pocket of my Grandfather. As an eight or ten year old I used to love that watch. Now it is with me and I will hold it dear until one day I give it to one of my own kids (I know some of you just flashed an image of a certain scene in the movie Pulp Fiction - now stop that!). It truly is a time capsule, one that carries a weight and beauty that only gold can provide. I set it against a flag I keep here in my office for a touch of irony and symbolism as well as a sense of history.
Gold Sector Watch
Now I will move on to a gold watch of a different kind; the ongoing, sometimes obsessive monitoring of gold's "price" action by frenetic hedge funds, a suddenly gold-attentive financial media and even a good portion of the goldbug community. Gold had gotten caught up in the casino atmosphere of an underachieving albeit buoyant stock market, China-bubble and inflation-pumped commodities and of course that old classic, the geopolitical angst/safe haven play. The result is a lot of commentators and traders micro-managing the metal's price instead of simply letting it be what it is and always has been; a store of value in times of unstable fiat currency. Like now for instance. So here is Biiwii's gold watch, followed by a broad market watch and bond market watch.
The "miners" need to be followed carefully in their lead/lag relationship to the metal and in their inherent volatility as leveraged plays on the "barbarous relic" with their ability sniff out inflation (AKA increasing money supply or liquidity, not rising prices). Many people say deflation is bad for gold stocks, and in my opinion it would be. Real deflation would be bad for the "prices" of nearly everything except for cash, although I would expect it would not harm the value proposition of gold much. The point is however, the Fed and global central banks are nudging the inflation-fueled global economy toward deflation in baby steps. Nudging it ever so gently until maybe something breaks. It is when something breaks that we will see if we have an inflationary future, and given a near-century of inflationary policy, what would any rational person expect?
Many people are bemoaning the fact that the miners have underperformed the bullion of late, and that is usually a troublesome sign. But thus far, in the face of extreme stock market weakness, the miners may have begun the process of becoming the contrary vehicles they usually are. Huey recovered the May '05 uptrend line it lost when it got thrown out with the stock market and commodity complex bath water in May and June. Folks, no matter how bearish you may feel, the fact remains that that is a bullish flag consolidation above the 50DMA until it isn't. If it does fail, and if the broad market continues to be a basket case, keep your eye on the long term trend line (from late 2000) around the 250 area, where there is a ton of support. Also note that the figure above is a "potential" Head & Shoulders top in the making as noted by several technicians recently. You don't want to know where that projects to (well okay, think May '05 low) if it comes to fruition. I don't believe it will, but...
On the Biiwii Blog http://biiwii.blogspot.com/, I often refer to the broad market as "the Pig" in order to show the proper disrespect to an entity that runs on inflationary liquidity and carries the hopes, dreams and assumptions of millions. I enjoy writing in this manner and as I am not charging anyone anything for my opinions, I will have fun. If I were to go "subscription" at some point (always a nagging thought in the back of my head), you would see a serious and more professional side ;-).
There is a lot of noise out there. The public is bearish, and some savvy and usually contrary analysts that I follow have become bullish on the market, although at the moment they appear on the cusp of a re-think. I have thus far been reassured in my resolve to hold the Prudent Bear Fund (bought a nice inverted H&S back in March), the Rydex 200% inverse Dow fund and a large chunk of cash (yielding in excess of 4.5%) to protect a portfolio of gold and silver stocks (with a sprinkling of uranium, energy and global bonds), with the reassurance coming in the form of a monthly chart of the S&P 500 that I have kept on the front page of the website http://www.biiwii.com (check it out) for the last several weeks that has told me, no matter the noise in the short term with bulls and bears blowing their horns and micro-managing the market, that it should ultimately settle in to the targeted area. It has worked like a charm so far, and if this does indeed come to fruition the way I see it, the plan is to buy from formerly greedy and now frightened bulls. I don't believe we are there yet, although the ups and downs could be something to behold over the next several months.
I have also relied heavily on the VIX and Vixen along with the 20DMA on the Put/Call ratio. Here is a chart of the Vixen, which first alerted me that there may be trouble for Bully as it began its attempts at breaking out of a simply massive (as in entire cyclical bull market) falling wedge. The Vixen is a volatility and fear indicator associated with a leading market index, the Nasdaq. When I saw this in early '06, the chart geek in me could barely contain himself.
You may say "well Gary that's fine, but where were you with this when we needed it as it began breaking out?" to which I would say if you were watching the Biiwii site, and in particular the old "Technical Analysis" page, you were right there in real time. I have also been presenting ongoing daily and longer term views of the VIX, etc. right through the entire market topping process. Check it out, it is there in the blog archives. I clearly remember when many perma-bears bemoaned "the VIX has stopped working". Well, it is working once again.
It is interesting to watch the herd buy into the "the economy is slowing so let's buy the 'safety and value' of treasury bonds" scenario play out. I would call it a "let's be debt buyers of last resort" scenario. Another chart followed regularly on the blog is that of the 10 year yield (TNX). I see this entire current phase as in essence a Kabuki dance between the Fed and the need to calm inflation "expectations". The TNX, in my opinion in a new long term uptrend, has not yet broken through massive resistance from the 1994 downtrend. Mr. Bernanke needed that short-term downturn in rates and appears to have gotten it. See blog chart posted on Friday, July 14th.
Meanwhile, the chart that everybody who wants to be ahead of the curve (pun intended) is watching is the yield spread. Here we come full circle back to the gold sector because when this ratio does bottom, it will spell the phase of out-performance by the barbarous and reviled relic of the past.
It looks like we may get a double bottom here. At least the inflation economy had better hope so. As it is, we note how well gold has done during the period of curve flattening since 2004 and wonder about the implications of a rising curve. Watch the leading indicators at all times; gold miners, volatility indexes and the bond market.