The Gold Bug: January 2012

Tuesday, January 31, 2012

Golden Cross

By Scott Silva

Editor, The Gold Speculator

1-31-12

Technical analysts define the “Golden Cross” as the chart feature that occurs when a security's short-term moving average (such as the 50-day simple moving average) breaks above its long-term moving average (such as the 200-day simple moving average) or resistance level.

Long term indicators carry are considered to have more weight, so crossing the longer-term average by short-term average price line is a significant indicator of a change in momentum. The Golden Cross indicates a bull trend may be starting and is confirmed by higher trading volume. The long-term moving average becomes the new support level in the rising market after a Golden Cross.

The S&P 500 index is approaching a Golden Cross now. If it happens, some analysts will forecast a new bull market for stocks. And they will have the numbers on their side.

The S&P 500 has produced 16 “golden crosses” since 1962, 75 percent of which were followed by positive returns in the next six months, with gains averaging 4.4 percent, according to historical studies. There were 26 instances in the past 50 years when the S&P 500’s short-term average crossed above the long-term measure. The data show the index rose 81 percent of the time with an average increase of 6.6 percent in the next six months.

We can also see the Golden Cross in the great bull market for gold. The last occurrence of the 50/200 crossover can only be seen on the monthly basis chart. It occurred back in 2005. Since then, the price of gold on the spot market has moved up from $348/oz to $1734oz today, a 398% percent increase.

Investors who spotted the start of the great bull market in gold early on have done very well.

But what about now? Is there more profit to be had in gold and the precious metals going forward? Can I determine the best time to enter the market? I say yes, and we can use the Golden Cross concept to pinpoint profitable trading opportunities.

Here’s how. We use technical analysis tools which are based on momentum, the best of which, in my opinion, is Ichimoku Kinko Hyo combined with MACD. The Ichimoku Kinko Hyo is a well established technical trading system developed by Goichi Hosoda in the 1930’s. Today, it is used by almost every securities trader in Japan, Asia and a growing number in Europe and North America. The indicator can be found on most trading platforms. Ichimoku Kino Hyo translates from Japanese to mean “one glance equilibrium chart”. It gives the analyst, at once, the trend and momentum of the market, and a good forecast of future price action, as if he could see everything at an instant.

The key to Ichimoku Kinko Hyo is crossovers. That is, four of the five components that comprise the system are comprised of short-term and long-term moving averages. Two establish support and resistance levels and are represented by the “cloud”, or moku. Two others (Tenkan Sen and Kijun Sen) establish trend. The fifth component, known as the Chikou Span, is not an average, but measures momentum.

Like the Golden Cross, crossovers by Ichimoku Kinko Hyo indicators signal changes in momentum. But the Ichimoku Kinko Hyo indicators provide much more information than the cross by a short-term simple moving average and a longer-term simple moving average. Ichimoku Kinko Hyo provides valuable trading information. It can tell the speculator when to enter the market with the best chance for profit.

So let’s examine the case for gold using Ichimoku Kinko Hyo and its trading discipline.

A look at the daily spot gold chart with 50/200-day moving average indicators shows no Golden Cross events over the last year. Also, support and resistance levels are not evident. Price action suggests the long-term trend is bullish, but more recent price action shows some consolidation. There is little information here to support a decision to trade.

Now let’s see what Ichimoku Kinko Hyo says about spot gold.

There is much more information here. To the uninitiated, it may seem confusing. But to the skilled trader, it provides almost everything needed for profitable trading.

Here’s what I see from this single chart. There have been two high probability buy signals and one high probability sell signal over the last four months for spot gold. These correspond to crossovers of the Tenkan Sen (blue line) and the Kijun Sen (red line) moving averages. The trading rule is momentum turns bullish when the Tenkan Sen crosses the Kijun Sen from below.

We can see this buy signal with a bullish crossover on October 26th and another on January 17^th.

Likewise, momentum turns bearish when the Tenkan Sen crosses the Kijun Sen from above. This sell signal occurred on November 29^th.

High probability trading requires confirmation by other indictors. Ichimoku Kinko Hyo provides these by the Chikou Span (green line), and price action in relation to support and resistance levels, displayed by the cloud, or “moku” (shaded areas of the chart). There are trading rules associated with each of the five Ichimoku indicators. Trading volume and the MACD are two separate indicators that support the decision to trade. We can see that crossovers of the MACD tend to lead Ichimoku crossovers. The aggressive trader can act on MACD crossovers for timing trades. The conservative trader will use Ichimoku to trade into the meat of a momentum move.

Using the technical trading tools Ichimoku Kinko Hyo and MACD has produced excellent results in trading gold, silver and other commodities. These are golden crossovers that work.

Investors from around the world benefit from timely market analysis on gold and silver and portfolio recommendations contained in The Gold Speculator investment newsletter, which is based on the principles of free markets, private property, sound money and Austrian School economics.

The question for you to consider is how are you going to protect yourself from the vagaries of the fiat money and economic uncertainty? We publish The Gold Speculator to help people make better decisions about their money. Our Model Conservative Portfolio has outperformed the DJIA and the S&P 500 by more than 3:1 over the last several years. Subscribe at our web site www.thegoldspeculatorllc.com with credit card or PayPal ($300/yr) or by sending your check for $290 ($10 cash discount) The Gold Speculator, 614 Nashua St. #142 Milford, NH 03055

Monday, January 23, 2012

More QE on the Way

By Scott Silva

Editor, The Gold Speculator

1-23-12

There is an old saying around Wall Street: “So goes January, so goes the year.” Many traders believe that if the stock market is up in January, then the stock market will finish for the year in the black. Actually, there is some truth to the old saying. Data collected on the S&P 500 over the 65 year period of 1940-2004 show that the broad market closed higher for the year 69% of the time when stocks were up in January. Well, that’s better than flipping a coin, but it is hardly a basis for a successful trading strategy.

Fortunes are made by selecting the best investment compared to others. We have seen, for example, in 2011, stocks fared poorly compared to precious metals, investors in Treasurys lost capital and real estate values continued to decline. Many investors simply gave up and retreated to cash, which turned out to be a losing proposition as inflation cut into purchasing power of every dollar stashed away.

But there seems to be a change in sentiment in the air now. Despite massive debt, political gridlock, numbing high unemployment and turmoil abroad, there are some faint signs of optimism. The manufacturing indices have ticked up a bit, productivity has improved and even wages have inched up a bit. Consumer confidence is improving, and corporate profits may bring good news as the earnings season unfolds.

Even the Fed appears to be more optimistic. Last week, the Fed signaled it would hold off on new bond buying (QE3) for now, even though it trimmed its estimates for GDP growth for the New Year.

But not everyone is so sanguine about Fed restraint. Most traders and some economists believe the Fed will step in with another round of Quantitative Easing (QE3) in the first half of 2012. This round would be huge, as much as $1 Trillion and targeted to support the ailing housing market. Under QE3, the Fed would purchase Mortgage Backed Securities (MBS), the derivative instruments that bundle thousands of home mortgages into a single, collateralized package. Many MBS’s were considered “toxic” assets because they contained subprime mortgages that defaulted, making them very difficult to price in secondary markets. When enough MBS’s failed to fetch a bid, mark-to-market rules rendered them worthless, which destroyed many bank balance sheets and created the financial meltdown of 2008.

The next FOMC meeting is scheduled for this week, but there is little chance that the Chairman will announce the new round of bond-buying. But listen for Bernanke to list the continuing woes of the housing market, and its drain on the economy and growth. Housing will be the new demon. And Ben will excise it with a Trillion dollar dose of his favorite restorative quantitative elixir.

But the Fed has already injected $2.9 Trillion into the banking system through expanded credit. The unprecedented credit expansion has failed to turn the ailing economy around. GDP is limping along at 2% or less. Unemployment remains at record highs. Capital is on strike, or out of the country. Adding another $1 Trillion to the Fed balance sheet is not likely to make a positive difference. The technical reason is we have been stuck in a liquidity trap, where no amount of additional easing is effective.

Austrian economics gives the answer why. Fed intervention created a bubble in the housing market by artificially depressing interest rates. This encouraged malinvestment in housing assets by homeowners and speculators. Federal social engineering embodied in the Community Reinvestment Act, permitted unqualified applicants to receive taxpayer guaranteed mortgages, many of which ultimately defaulted. Government intervention in the markets is the cause, not the cure for our economic problems.

More QE would be welcomed by the Keynesians in Washington. More QE would pump up the stock market, particularly bank stocks. Higher stock prices give the impression that the US economy can’t be that bad, after all. But more QE means higher prices in general. More QE debases the Dollar and reduces purchasing power. More QE means more inflation.

More QE means there is more reason to guard against inflation and artificially inflated assets. To the prudent investor, more QE means buy more gold.

One indicator cuts through the conflicting themes that affect the markets and the economy: the price of gold. The gold price is telling us that we are not out of the woods yet, and that there are many risks facing the US economic recovery. Gold continues to move up in price. The gain in gold is telling us to expect more volatility in the equity markets and to expect more pain from the European debt crisis, and maybe a military showdown with Iran.

The bull market for gold has a long way to go yet.

Tuesday, January 17, 2012

Eurobomb Ticking Down

By Scott Silva

Editor, The Gold Speculator

1-17-12

When the ball dropped on New Year’s Eve, 2011 ended not with a bang, but with a soft ticking sound. Despite the fireworks and the merriment of joyous revelers ringing in the new year, a hidden clock continues its countdown. Tick, tick, tick. At the fateful hour, the bomb, buried deep under the global financial infrastructure will detonate, bringing down economies one after another. If you listen, you can hear the tick, tick ticking right now.

It is the sound of European sovereign debt interest rates ticking up, the sure sign that the European debt crisis has not been contained by the new EU financial regime.

The forces of economic meltdown in the European welfare state simply overpower the last minute rescue measures by the ECB. Sooner or later Greece will default, then maybe Spain and Portugal. By then even Italy could succumb as its bonds also are rendered worthless as the bottom drops out of the debt market.

The bond market is showing several EMU countries are facing interest rates of 7% or more on their long term debt instruments, a level deemed unsustainable.

The market is also signaling that the Greek default is imminent. The price of Credit Default Swaps on Greek sovereign notes is spiking.

The rating agencies recognize the coming financial storm in the Eurozone. Friday, Standard and Poor’s downgraded the credit ratings of nine of the seventeen Eurozone nations, including France and Austria to AA+.Monday, S&P downgraded the AAA rated European Financial Stability Fund (EFSF) one notch, based on the downgraded status of its major guarantors.

The major destabilizing force in Europe is the belief that the public sector is font of prosperity. Indeed, the European welfare state supports more than half of its citizens directly. The problem is, today there are fewer and fewer workers to tax and the costs of government supplied services continue to rise, particularly healthcare and retirement costs. In Italy, for example, Italian women have on average 1.2 children, putting the country's birth rate at 207th out of 221 countries. And, 20% of Italy’s 60 million citizens are 65 or older; they make expensive claims on state-paid pensions and other entitlements. It’s a death spiral that cannot be solved by hiking tax rates or imposing strict austerity measures. In fact, these “cures” produce precisely the opposite effect by removing the incentives for productive economic growth. To make matters worse, the ECB debases the common currency with every bailout it hands out.

The question now is: “How do I protect my wealth against the coming economic storm?” Many investors are moving out of European assets and into US Treasurys in an effort to preserve their capital. Is this a wise move?

But the facts show that there is a better safe haven available to investors. We can see that gold has outperformed Treasurys over the last few years, even as many investors fly to Treasurys in periods of risk-off trading. As we can see, Treasury prices have been much more volatile than gold prices over the last several years. Treasury prices have bounced up and down while gold has marched steadily higher since 2009.

Today’s market is characterized by negative real interest rates for Treasurys. That is, Fed monetary policy has kept near-zero interest rates for bank-bank borrowing, which has driven the yield curve down to the point where the 10-year coupon rate (nominal yield) is 2% or so. The real interest rate accounts for inflation, which is reported to be 2.5%, which pushes the real rate into negative territory. The Fed policy distorts the market for money, which distorts the natural interest rate that reflects the demand for money. This type of distortion drives investors to other instruments in the search for yield.

The central bank also creates inflation by printing more and more paper money. More dollars chasing the same goods drives prices up. As we know from Uncle Milton, inflation is always and everywhere a monetary phenomenon.

But the Fed cannot print gold, so it is powerless to control its price directly, as it controls the value of paper money. Printing more fiat currency actually boosts the price of gold. Gold is a store of value. Paper money is not.

It should not surprise the prudent investor, then, that gold has outperformed dollar-denominated assets. Technical analysis of the gold charts now shows that gold is preparing for another major move. Will you be prepared to benefit from it?

Tuesday, January 10, 2012

Golden Wall of Worry

By Scott Silva

Editor, The Gold Speculator

1-10-12

It is often said that gold climbs the wall of worry. What the old saw means is that the price of gold tends to rise in the face of economic uncertainty or peril. History shows that for the most part, this has been true of gold, and to a lesser degree, silver. In 2011, gold shot up to test the $2000/oz mark and silver topped $50/oz. 2011 was certainly a volatile year for world economies.

Political unrest in northern Africa and the Middle East toppled governments in Egypt and Libya, and the sovereign debt crisis in Europe came to head, forcing out Prime Ministers in Greece and Italy, threatening the survival of the Euro as a currency. In the US, the $15 Trillion US debt and continued deficit spending threatened to bring the government to a halt more than once, as ideologues in Washington played politics. The government did not shut down, but the nation’s sovereign credit rating was downgraded for the first time in its history.

Economic uncertainty continues into the New Year. The sovereign debt crisis has not been solved in Europe or the US. The EU now has a plan for new fiscal regime, but it is far from implementing a workable solution. Now there are signs that the plan could collapse over terms of the Greek bailout. Investors are balking over the earlier 50% haircut on Greek notes and a new revised plan in which bondholders receive only 35% of capital stretched out to 30 years. Closing the deal is an essential part of the 130-billion-euro ($165 billion) bailout package from European partners and the International Monetary Fund (IMF). Without an agreement from bondholders, which include hedge funds, Athens faces the threat of a debt default in March.

Italy and Spain are vulnerable and could fall if the Greece defaults. The bond market is giving us the sign. Italy's 10-year government bond is yielding 7.13%, 5.25 points over the German bund. Italy is planning to sell €440 billion ($561.67 billion) in government bonds and Treasury bills in 2012, but higher borrowing costs will stress its fiancés beyond the breaking point. The ECB has stepped in to purchase some Italian bonds, but the central bank cannot bail out Italy’s $1.9 Trillion in outstanding liabilities.

Italy has passed balanced budget legislation and is now implementing several austerity measures, but austerity can be a double edged sword. Austerity, combined with massive debt, tends to stifle economic growth. Investors shun credit risk, which drives yields up. In addition to cutting spending, the government raises taxes to close budget gaps. Higher taxes drive off investment capital, the engine of private sector growth.

Recession across the Eurozone may be here already. The Greek economy is now in its fifth straight year of contraction. EU data released Friday showed that unemployment in the Eurozone hit a new high and consumer spending declined in November. In Germany, the largest producer in the Eurozone, industrial orders fell 4.8% in November, nearly reversing October's 5% gain. Some industry estimates show that Eurozone gross domestic product fell by 1.75% in the last three months of 2011, at an annualized rate. The EU will publish official numbers in February, but forecasters expect continued contraction in the first quarter of 2012. Economists traditionally define recession as two consecutive quarters of economic contraction.

The Markit PMI index measures manufacturing output for the Eurozone. The index shows that manufacturing output in the Eurozone contracted in December, but at a slightly lower rate than the November 2011 contraction.The purchasing managers index for the 17-nation euro zone's manufacturing sector rose in December from a 28-month low the previous month but still signaled a further contraction in activity, The Markit manufacturing PMI rose to 46.9 in December from 46.4 in November, confirming an earlier, preliminary estimate. A reading of less than 50 indicates a contraction in activity, while a figure of more than 50 signals expansion.

A Eurozone recession would make it more difficult for vulnerable countries to recover from their debt problems. Also, a recession in the Eurozone would impact the US recovery. The EU and the US economies account together for about half the entire world GDP and for nearly a third of world trade flows. Slowing demand in the EU would impact US export sales, an important component to US growth.

A 2012 recession in the Eurozone would be a large brick in the wall of worry. But as we have seen, economic shocks can come from unexpected quarters, at any time. No one expected the Arab Spring. And no one could predict the natural disaster that struck in Japan last year. Today we are seeing some worrisome developments in Iran that have the potential of upsetting the balance of power in the Middle East, and the price of oil.

Given the slow growth/negative economic growth scenario, it’s no wonder that prudent investors turn to gold. Gold gained 10.1% in 2011 extending its eleventh consecutive annual gain since the bull market began in 2001. Gold has gained 17% a year, on average, since 2001, making it one of the highest performing asset classes for investors over the last decade.

Gold is outperforming because it is sound money. As government debt continues to explode in Eurozone and in the US, governments print more paper money. Recent disclosures of the US Federal Reserve operations during the financial meltdown of 2009 show the Fed issued over $16 Trillion to bail out US and foreign banks. The ECB has issued more than $3 Trillion in Euros so far. These massive increases in the money supply are beginning to translate into higher commodity and producer prices. Printing more paper money reduces its purchasing power because paper currency has no intrinsic value and is not a store of value. Gold, on the other hand has proven to be a store of value for thousands of years precisely because it has intrinsic value.

We can expect gold to outperform other asset classes in 2012.