Tuesday, August 13, 2013

Golden Opportunity


By Scott Silva
7-24-13

Gold is signaling its next move up in its long term secular bull market. That’s good news for the miners, which are also signaling “Buy, Buy, Buy”. For gold bugs, there is always a good reason to buy gold. As it turns out, now may the opportune time to buy as these bargain prices may not be available for long.

Technical analysts know that price action and trading volume over time establish recognizable chart patterns. Valid chart patterns are reliable predictors of future price levels. Because historical data show that the most reliable patterns are accurate about 70% of the time, many professional traders include technical analysis when making investment decisions. Some successful traders rely almost exclusively on the “technicals”.

As subscribers to The Gold Speculator know, on July 11th and July 20th, we issued buy recommendations on gold, silver and selected gold and silver stocks. Today we are gratified to see gold and silver climbing above our identified breakout levels, on their way to higher targets. Also today, respected Wall Street analysts upgraded their opinions of some gold and silver stocks we own in our Model Conservative Portfolio. Welcome aboard, Macquarie!

Here is the analysis that backed our bullish call on gold and gold stocks of last week:


            Gold is trading in a consolidation manner, creating a bullish ascending triangle pattern from the July low. The breakout to the target price of 1427 could happen with a close above 1303 (top trend line level) on volume.

            The Ichimoku indicators are bearish at the moment, but these signals are tending toward a bullish bias. For instance, the Tenkan Sen is in bearish territory below the Kijun Sen, but it has moved up toward a bullish cross. Likewise, the Chikou Span is currently in bearish territory, but may emerge above price action by moving sideways or slightly higher over the next several trading sessions. Support is now 1265.90 with resistance at 1337.”

Tuesday’s chart shows the breakout from the bullish ascending triangle pattern. The close above the top trend line is the most significant signal. Also important, but difficult to see on this chart is the bullish cross of the Kijun Sen by the Tenkan Sen from below. Such a cross signals the beginning of a new trend. The Ichimoku indicators will confirm the bullish trend is complete when the three remaining Ichimoku indicators turn bullish, which each appears to be doing. Price action needs to break through the cloud, which can happen with even sideways trading from here. The projected cloud needs to “flip” from bearish to bullish (the cloud is already narrowing prior to such a “kumo flip”). And finally, the Chikou Span (green trace) needs to move above price action, where it appears to be headed. The separate MACD indicator is also bullish. We have found such MACD crosses useful in identifying trend reversals earlier than the Ichimoku indicators. We have referred to these MACD crosses as trade “triggers”. 


The bullish ascending triangle was formed by price action beginning in early July. The measured move brings a target price of 1427 for spot gold. If price action on the way up prints higher highs and higher lows, then a price action may form a larger, more powerful ascending triangle pattern dating back to mid-June. This is not uncommon in a strong uptrend. We will be watching for that happy case to play out.

Last week, we recommended clients buy selected gold and silver mining stocks. We had seen similar bullish chart patterns develop for our recommended names. The AMEX Gold Bugs Index (HUI) has some bullish features, although not as well defined as those of selected issues. The HUI gapped up on Monday’s open and continued higher in trading Tuesday. In general, miners are catching the bid. That’s good news for gold bugs everywhere.

The miners have been neglected by investors for a while. Now their stock prices are at very attractive levels for value investors. Mining stocks tend to be more volatile than the price of the underlying metal, so the mining stocks may climb faster in an uptrend. We believe that to be the case for several gold and silver producers right now.



The planets are lining up for the next leg up in the long term bull market for gold and gold stocks. Don’t miss your golden opportunity to profit.

Responsible citizens and prudent investors protect themselves and their wealth against the ambitions of over-reaching government authority and debasement of the currency by owning gold. Gold is honest money. 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. Follow @TheGoldSpec   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

Sunday, March 3, 2013

Gold in the Time of QE


By Scott Silva
2-27-13

Within the last two weeks, the price of gold dropped sharply to levels not seen since July 2012 and nearly as low as the lows of December 2011. Spot gold lost 112 points in the ten days from February 11th to February 21st, a 6.7% slide.

Just prior to the selloff, many analysts identified an onerous chart pattern as well as a popular technical indicator that appeared to be turning bearish enough to reverse gold’s long standing bullish trend. The worrisome chart pattern is the bearish triple top. The indicator that anxious traders carefully watched for proof of a trend reversal to the downside is aptly named the “Death Cross”. 

The price of gold did fall in those ten days. But, did the bearish chart pattern predict a fall in the price of gold, or did traders create the patterns that confirmed the decline? 

A look at the market conditions surrounding the sudden selloff in gold shows the bearish chart pattern actually failed, and traders may have had more to do with the selloff than many observers might think.

First let’s examine the bearish triple top pattern, also known as the triple top reversal pattern.
We know the triple top chart pattern can lead to some powerful downdrafts, especially if the successive tops are separated greatly from support levels and the tops are spread over a long period of time. The triple top pattern occurs when price action meets resistance, falls, and retests resistance then falls, twice more.  The resistance level of gold recently is clearly established at 1805. The support level is also clearly evident; it appears as the bottom of a trading range. The support level is 1527. The three tops and the support level are evident in the daily chart for gold below. The depth of the trading range between resistance and support in this pattern is 278 points. A reversal occurs when price drops below support with relatively high volume.


But there are two elements missing in the bearish triple top pattern that are required to make the pattern valid. First and most obvious is the fact that price action has not dropped below the support level of 1527, although the drop came close. On February 19th, gold traded as low as 1554.30 but closed at 1559.60, quite a bit higher than the support level.  Price action has yet to close below the support level of the pattern.  Second is a lack of confirming higher relative volume, which may be moot without the breakout. Nevertheless, there is no sign of capitulation, or massive selling pressure. The conclusion is the triple top reversal in gold has not occurred.

But what did occur is a sudden selloff. What caused it?

The answer, in my opinion, is the power of the self-fulfilling prophesy. Traders believed that a selloff was coming and so they sold. Selling begot more selling, which continued until there were no sellers left, leaving the buyers in control. What did the sellers see coming for gold? It was the terrifying “Death Cross”, the bearish signal sent when the 50 day moving average drops below the 200 day moving average. It is highlighted by the circle on the chart below. Traders could see steady convergence in the averages days before the selloff. Then, just before the cross, sellers sold hoping to get ahead of the decline. And by selling, more sellers were alerted, all driving the bid lower.  The prophesy of a selloff became a selloff. It is a reliable phenomenon.  Traders with long positions set their stops at such junctions. And the shorts kick in at these points as well, hoping the decline will be deep. These sell long and buy short orders are made by humans and machines. Nowadays it’s difficult to tell which moves the market more.


The bullish trend for gold remains intact. We can make this statement because technical support has not been breached. In fact, the recent decline was healthy for gold. It has allowed some profit taking, and new buyers to enter at bargain prices. The major trend remains bullish for gold. Tuesday, Chairman Bernanke dispelled any rumors of gold’s demise, when he affirmed his commitment to continued Quantitative Easing, until such time as US unemployment shrinks to 6.5%.  The Chairman is referring to the administration’s favorite measure for the out or work. The true unemployment rate, the U-6 measure, is so much higher that it is deemed politically incorrect (a lofty 14.6% for January). At that rate of job growth over the last four years, the Fed will be buying bonds until 2035!

There is no doubt that more QE is good for gold, and evidently, stocks. QE is better for gold because gold cannot disappoint analysts and traders with lower quarterly earnings, which is one trap the ultra-easy monetary policy springs for stock market investors. Stock yields appear attractive compared to negative real interest rate fixed income assets. The Fed has distorted not only the yield curve but also the risk/return balance. This has pushed investors into stocks and in the stock indices higher. We are seeing companies manage earnings well while missing top line revenue expectations.  This is not a sustainable growth model for equities.  The model collapses as interest rates rise, and margins are squeezed further. Lower sales revenues are a symptom of recession in Europe, a slowdown in China and continued sluggishness in the US. QE Infinity is artificially pumping up stock prices. The forward PE for the S&P 500 Index, for example, is 17.90 compared to 15.78 a year ago. If there were true earnings growth, which only can be sustained by true revenue growth, the forward PE would be much higher.  Then, there is the $ 2 Trillion cash trove sitting on company balance sheets here and in overseas tax havens. Companies are not investing in growth. They would rather buy back shares and sit on cash.

So, how have investors fared in stocks vs gold during the time of QE? Since Chairman Ben and the Treasury began their ultra-easy monetary regime, gold has gained dramatically compared to
the broad stock index (SPX). 


No one can predict the future, including Ben Bernanke. But he seems intent on continuing his dovish ways. And as he does, those who own gold will be better off for it.

Responsible citizens and prudent investors protect themselves and their wealth against the ambitions of over-reaching government authority and debasement of the currency by owning gold. Gold is honest money. 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. Follow @TheGoldSpec   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

Wednesday, February 13, 2013

Catching the Bid

By Scott Silva
2-13-13

Stocks are catching the bid again, trading higher. The S&P 500 has topped 1500, a level not seen since 2007. The Dow has also recovered from its lows to pre-meltdown levels, above 14,000. Stock traders shrugged off fiscal cliff fears, to extend the rally into the new year. Small investors are now joining the professional buyers, who have viewed stocks as undervalued assets for over a year. They are cashing in their bonds and emptying the mattresses to put money into stocks.
What has propelled US equity markets? The answer may surprise you.

We’ll we know the presidential election has not pushed the stock market higher. To the contrary, stocks tumbled when the president was re-elected. Stocks had rallied with pre-election hopes of a new, pro-growth occupant in the Oval Office. But alas, that hope vanished when the final votes were tallied. The president could have won over traders by announcing a change in his economic policy to start his second term, but he didn’t, and his plan has consequences. More on that later.

So if the president’s economic policy did not stimulate the current rally, what did? The answer lies in a fundamental principle of free-market economics (and everyday life), namely, substitution. In his 1978 text Microeconomic Theory, Nicholson defines substitute goods as “those goods which, as a result of changed conditions, may replace each other in use (or consumption).” Investors treat risk-free yield as a desirable economic good. The world gold standard risk-free instrument has been the US Treasury bond, or note. Buyers of AAA-rated
10-year Treasury notes would typically collect 4% annual interest with virtually no risk of default. In contrast, equities as an asset class typically return 7%, commensurate with higher risk.
Companies could go bankrupt, products could fall out of favor, or stock prices could fall for any number of reasons. Throughout history, investors searching for yield have committed capital both to stocks and bonds, overweighting their portfolios in one or the other asset class according to their risk profile and investment objective.

But that time-tested strategy not longer holds. That’s because the Federal Reserve has changed the game. In his reverent adherence to Keynesian stimuli, Chairman Bernanke has taken away risk –free yield (or pushed it out to 30 year maturities), by instituting his Zero Interest Rate Policy (ZIRP). This massive credit intervention flattens the yield curve and drives real returns on medium term Treasury instruments (and CD’s) into negative territory. Investors naturally seek other instruments. They look for substitute goods. Many select high-yield dividend stocks, not for their equity value, but for their dividend income. When the buyers come in, stock prices rise.

Many investors have been holding cash since the great financial meltdown. They have lost capital while they held because the Dollar has lost purchasing power since then (and will continue to lose value). This too, is a result of the Federal Reserve’s massive credit intervention.
Big Ben loves to print money. But we know that Gresham’s Law still holds. The Fed debases and devalues the currency each month by printing more money out of thin air in its $1 Trillion/ year Quantitative Easing program.

That’s not all QE is doing. QE is pumping up stocks with hot air. The Fed’s ultra-easy money regime keeps margin rates low, which spurs stocks, and also keeps borrowing rates low for corporate capital investment. Because of investor substitution, incoming stock buyers benefit from low margin rates. But companies are not rushing to but capital equipment at low interest rates. Instead, companies are sitting on roughly $2 Trillion in cash here, and keeping another $2 Trillion offshore and out of reach of Federal taxes. Some companies can think of nothing better to do with their cash than buy back shares. Stock buybacks tend to push stock prices higher (less stock outstanding, higher P/E for the same earnings), but they are a tremendous waste of capital.
Excess corporate cash should rightly go to shareholder dividends or expansion.

In general, US companies are not expanding. They certainly are not hiring. No amount of Federal Reserve QE will force them to do either. Simply put, the Fed cannot create aggregate demand. This is heresy, of course, to the Chairman and the president’s economic team. But the reason that the president’s entire economic team has deserted him is because their Keynesian policies have utterly failed. TARP was a failure. The GM bailout was illegal. The $800 Billion Stimulus Package failed. Cash of Clunkers failed. Mortgage modification failed. The Payroll tax holiday failed. GDP is hovering at low levels, and dipped into negative territory last quarter. Unemployment has not declined since 2009, despite the administration’s spin. It remains stubbornly at 14% (U-6 measure), a level not seen since the 1930’s. We simply cannot print money, tax, spend and regulate our way to prosperity.

So should investors join the buying spree in stocks?  Well, the speculator and the aggressive investor may find some gains in equities now. We have been realizing good profits each week in our Model Aggressive Portfolio (MAP), where we focus on near term trade (weekly) setups in stocks, options and futures. In MAP, we have been focused on stocks since November 2011 and our recommendations have made money each week. But the market holds risks for more conservative investors that enter at these levels. That’s because earnings, the mother’s milk of stocks, are beginning to top out for many large cap companies. We are seeing companies meet or beat 4th quarter earnings expectations and miss revenue expectations. Revenue growth is essential to earnings growth. Many companies are guiding analysts lower going forward. These companies are reflecting lower global demand and the realities of continued recession in Europe, a slowdown in China and slowing demand in the US.

Slowing, low demand in the US won’t be reversed by raising taxes. But raising taxes yet again is exactly what the president intends to do. What is puzzling about the president’s tax obsession is history shows cutting taxes stimulates the economy. The economy jumps when consumers have more discretionary income to spend. What’s more, the Federal government gets more revenue when marginal tax rates are reduced. This happened as a result of the Kennedy tax cuts, the Reagan tax cuts, the Clinton tax cuts and the Bush tax cuts. Reducing federal regulation also stimulates the economy, as we saw most prominently in the Reagan years, the longest period of prosperity and economic growth in our time.

The technical indicators are signaling stocks are reaching major resistance. For the S&P 500 index (SPX), a good measure of the broad equity market, prices has climbed to just over 1500, a key resistance level. Price action of the SPX has formed a bullish inverted head-and-shoulders pattern on the daily charts with a neckline at 1458. The measured move on a bullish breakout above the neckline is 105, which brings a target level of 1563. The SPX made its breakout of the bullish pattern on January 10th, and has been climbing steadily since. Yesterday, the SPX closed at 1522.29.


This move up can also be seen in the Fibonacci extensions of the previous run up (June -Sept 2012) and pullback (Sept-Election swoon of November 2012). Since the November lows, price action has powered up to the 50% Fib (1448) at circle #1 on the chart below, then fell back to just above the 23.6% Fibo (1398 at circle #2), and quickly jumped past the 38.2% Fibo and surged right up to the 61.8 Fibo at 1472 (circle #3).  After five days of consolidation at the 61.8 Fib, the SPX climbed steadily to the 78.6% Fibo at 1507 (circle #4) and appears to be headed higher still.

It is gratifying to see separate technical analyses in such lockstep agreement.


The speculator or aggressive investor that followed our Model Aggressive Portfolio (MAP) Recommendations has done very well with selected stocks, stock options and futures contracts over the last several months. Weekly returns have ranged from 30% to 77%. What choices are available to the conservative investor in today’s investment environment?

The answer certainly is not bonds, especially Treasurys. Treasury bonds yield negative real interest returns. Investment grade corporate bonds don’t offer much more for the added risk.
Conservative and prudent investors choose gold.

The case for choosing gold today is as strong as it has ever been. It can be made efficiently in the form of a parliamentary inquiry, so often used in my own sovereign state of New Hampshire’s General Court:

     If you know, as I know, that stocks are full of Fed hot air, and the Fed has fenced off reasonable yields in fixed income instruments by intervening in the credit markets, and,
     If you know, as I know, that corporate bonds offer yields only at a significant risk of default, and,
     If you know, as I know, that the Federal Reserve is continuing to print money under  its Quantitative Easing program, and has stated it will not stop until the unemployment rate is lower than 6.5%, and
     If you know, as I know, that unlimited QE has no effect on the unemployment rate, and that
QE debases the currency and its purchasing power, and
     If you know, as I know, that gold increases in value as the Dollar decreases in value, and that gold is recognized as the ultimate global currency,
     Would you not agree with me that owning gold today will protect your wealth against the ravishing of fiat currency and tyrannical federal overreach?

That’s right. The answer for conservative investors is gold. In fact, aggressive investors should also own some gold to diversify their portfolios. Here’s why any investor should own gold now.

The great bull market for gold is continuing. The fundamentals are in force to push gold prices higher, and the technical analysis supports higher gold prices from here.

First, the fundamental case. It all boils down to central bank policy. The Fed, the ECB and BOJ are all maintaining accommodative monetary policies. That is, they will keep interest rates artificially low and continue to add liquidity by various forms of Quantitative Easing. QE itself debases the currency and drives commodity prices higher.  Loss of confidence in the Dollar, the world’s reserve currency, is also reflected in the price of gold. Political instability in sensitive regions of the world affects the price of gold (and oil). We are seeing the war premium boosting oil prices as tensions rise over nuclear weapons development in Iran and North Korea. Even central banks are buying gold. That’s because unlike fiat currency, gold has intrinsic value. Gold is recognized as the ultimate global currency and store of value.

Second, the technical case.  QE is weakening the Dollar. As the Dollar weakens the price of gold increases. The traditional inverse relationship between the Dollar and gold is present in today’s market. Global QE and US economic policy is keeping the Dollar weak. The weak Dollar supports higher commodity prices in general and higher gold prices in particular.

We can see this dynamic play out in the chart of gold vs Dollar below. Technical indicators on the daily and weekly basis charts are bearish for the Dollar. On the weekly basis charts, resistance is now 80.74 with support at 77.44. The Dollar is headed lower form here. A move down to the 78 level would command a gold price of 1800, a key resistance level.   


What would cause the gold price to drop significantly?  Well, if the Federal Reserve were to cease buying bonds (QE), the price of gold would drop. But Chairman Ben has reiterated his commitment to buying bonds at the rate of $85 Billion per month until unemployment is reduced to 6.5%. The January 2013 unemployment rate is 14.4% and the current regime has no pro-growth economic plan. The price of gold would drop if peace broke out in the Middle East and Iran, North Korea and China dismantled their nuclear weapons. Recent events in these tinderbox areas demonstrate there’s not much chance of that happening, particularly when the US is reducing its military strength to the point it can no longer fight in two theaters of operation  at once. Gold would fall if real estate became a safe investment asset again. But it will take 10 years to work through the housing overhang of 5 million foreclosed properties that is weighing down home prices. And gold would fall, as it did in the Reagan years, if pro-growth tax reform, and a plan to balance the budget within ten years, which would include entitlement reform, were adopted now. As we saw in yesterday’s State of the Union address, the president is campaigning for higher taxes, more spending and more Federal regulation. No pro-growth agenda there.

So now is a good time to buy and hold gold. Buy gold to protect your wealth against the corrosive effect of ultra-easy monetary policy. Buy gold to maintain a store of value that is recognized universally. Buy gold to diversify your investment portfolio. Buy gold for peace of mind in uncertain times. Buy gold to secure yourself and your family.

Responsible citizens and prudent investors protect themselves and their wealth against the ambitions of over-reaching government authority and debasement of the currency by owning gold. Gold is honest money. 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. Follow @TheGoldSpec   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

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