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They're Trying to Shake You Out!

By: Poly | Monday, February 4, 2013

If we are to believe market commentators, then Gold is being held back because the FED's QE may be ending sooner than expected. The argument is that if the economy improves, the FED will back out of asset purchases (QE), and the gold bull market will end. But the FED has said it would continue to purchase assets to the tune of $85B per month, for as long as the unemployment rate remained above the 6.5% mark.

So the question becomes, when should would we realistically expect to see this level achieved. In order to bring unemployment down to that 6.5% level, the economy will need to add nearly 5 million jobs. That amount also includes providing jobs for the first time workers entering the force.

Change in Payroll Jobs per Month
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As you can see from the above chart, we've struggled to add more than 200k jobs in any given month. Also this business cycle is now in its 4th year and in danger of entering into a recession. The FED has held rates at zero for years and has implemented 5 years of QE, yet the best this economy can manage is employment growth that barely keeps up with a rising population.

In 2013 the economy also faces some headwinds. We've moved from an environment where the government was stimulating (spending), to one where they are cutting spending at rates not seen since the 90's. The coming budget fights will surely result in additional cuts; these will only serve to slow the economy further. The end of the payroll tax holiday has already hit the majority of US taxpayers as have tax increases on the high income earners. These newly implemented policies, along with what will surely be additional austerity measures in the coming budget showdown, add significant downside risk (shock) that is not adequately priced in by the markets.

The impact of these policies was evident within this week's release of negative Q4 GDP data. The main component bringing down GDP was a reduction in government spending. Although this data was ignorantly dismissed "as a one off" miss, it demonstrates that where the government had a heavy hand in this recovery, its absence or hastily withdrawal from it in 2013 and beyond will only serve to be a drag on employment growth.

Let's put the threat of a recession and a further slowdown in job creation aside for a minute. Let's choose to ignore it and just assume a more optimistic growth run rate at 200k per month. Even at this rate, we're talking about the FED pumping in $85B per month for the next 2.5 years! That's an additional $2.5T to add to their existing $3T balance sheet. So under "rosy forecasts", we're looking at a FED balance sheet in the order of $5T-$6T by 2015. If this economy experiences even a mild contraction or slowdown, then that time-frame would easily be pushed out towards 2017-2018 where the FED's balance sheet will be closer to $8T.

When will we reach 6.5 percent unemployment

So that brings us back to the FED's support of the economy through asset purchases of bonds and mortgage back securities. I find it almost impossible that the FED can withdraw prematurely; especially as the economy is now feeling the effects of the government implementing growth slowing austerity. But regardless of the government cuts, the US will continue to rack up $1T annual deficits that will add to the pile of $16T IOU's that have been issued. By 2017, that number will easily exceed $20T and the US will find itself in the position where it simply could not sustain any increase in the interest rate it pays on this debt. There is just no way the FED could possibly withdraw itself from the bond market at that point, as we're beyond the 100% of Debt to GDP level and climbing. The interest burden alone will force the FED to remain active, regardless of what the unemployment rate is.

For those members who fear an end to this great gold bull market, please put this into perspective. Understand that the powers to be will not or cannot tell the public what is really occurring. Partisan battles in Washington regarding debt containment are just choreographed noises to appease the masses. We've entered the final stages of a debt super cycle and the powers have chosen to confront this cycle by printing more fiat to "cover the tab". By increasing the amount of fiat is supply, you reduce the burden of debt as you devalue its worth and raise the "nominal" price of all assets.

It's why within the Long Wealth Portfolio I stay invested in precious metals to the tune of 35-40%. It's also why I have purchased hard assets such as income producing property. My associated debt on this property is fixed, however the asset value and income will rise in relative proportion to inflation. I'm not calling for a hyper-inflationary crash, but it would be naïve not to believe that the FED's primary goal here is to inflate all assets.

Of course we're talking about longer term themes in the above section. For the immediate concern of our Investor portfolio positions, the Gold Cycle continues to "spin its wheels". Any traction gained or attempts at forward progress are quickly reversed with a rush of powerful selling. It's hard to tell what the intermediate cycle significance of this see-sawing action is. I'm at the point here where I just need to give up on tracking the Daily Cycle swings and focus more of my attention on the Investor Cycle.

$GOLD Gold - Spot Price (EOD) CMD
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The Investor Cycle is only entering Week 5 and it remains under-loved with plenty of potential to make a big run higher. But in the same breath, it has failed to attract the type of demand needed to break out into the $1,700's and beyond. The Cycle is showing us two very important resistance lines, which when broken, will likely determine the course of the Cycle over the next 10 weeks.

As has been discussed before, a move above $1,700 will move the Cycle out into new Cycle highs and clearly break the downtrend established since the October top. A move above $1,700 should be aggressively bought. However a drop below $1,651 (prior Half Cycle Low) and more importantly below $1,626 (last ICL), would be a very negative development. Such a failure this early in the Investor Cycle might well signal that this great Gold bull market wants to put the investor through one last massive draw-down.

As for the miners, it's "groundhog day", again. All members are familiar with the chart below, along with my usual warning that the trend remains lower and the action is weak. Recent volumes and selling pressure have suggested capitulation, possibly pointing to a Cycle that may have reached a significant low. But with so many shares changing hands, we still see no price appreciation, and this is concerning.

GDX Market Vectors Gold Miners NYSE
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This as is an excerpt from "The Financial Tap" weekend premium report focusing on the Gold Cycles. The service is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets, delivered twice weekly, as well as real time trade alerts to profit from market inefficiencies. Visit the site for a zero obligation $0.99 15 day trial. www.TheFinancialTap.com

 

Author: Poly

Poly
The Financial Tap

Poly is the founder of "The Financial Tap", a membership site dedicated to helping traders and investors navigate the markets while increasing their expertise and understanding. Poly has over 20 years of experience in trading the markets, is a life-long student of economics, and has an abiding passion for the financial markets. Much of his investment philosophy is top-down in nature, beginning with a global and macro outlook which is used to create a framework that drives his intermediate investments.

Poly is a leading expert in Market Cycles. His love of Cycles grew after his introduction to the work of Walter Bressert, one of the pioneers in the field. Cycles were a natural fit with Poly's passion for top-down analysis. As Cycles are intertwined on multiple time frames, understanding the global outlook greatly helps him to identify the long dated Secular Cycles. From that point Poly is better able to identify the shorter Cycles and to build a cohesive investment strategy. Poly's Cycle Analyzer, a software based analytical and intelligence system, is used to predict the future movements of the major financial markets.

Originally from Sydney, Australia, he is now settled and has been working in New York City for the past 13 years. His background and education is in Computer Sciences and he holds a bachelor's degree from Monash University in Melbourne Australia. He has extensive experience in the Financial Software area and has served as a senior executive at various Fortune 50 management teams developing financial trading and reporting software.

Happily married with two children, family is a big part of his everyday life. Other passions including golf and long distance running. He plans to complete the 2012 New York City marathon.

Copyright © 2012 Poly