WoW! Gold’s Wall of Worry

Excerpted from this week’s newsletter, NFTRH186:

Gold is grinding out a wall of worry that began construction out of a natural unwinding of the momentum that came in during the acute phase of the Euro crisis. More bricks were added weekly by various luminaries calling bearish; the most recent being Buffett’s right hand man, Charlie Munger: “Gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939 but civilized people don’t buy gold – they invest in productive businesses.”

The Munger quote was forwarded by a subscriber as was another piece by an analyst extrapolating George Lindsay’s work to forecast a coming “Thelma & Louise moment” (as in cliff dive) for gold. Add to the list an analyst calling ‘buy’ on US stocks and ‘sell’ on gold (after the Au-SPX ratio has made a long consolidation to support) and the first few minutes of this BNN interview with respected geologist Brent Cook – clip671131 (“we’re going to see some real destruction across the board in the junior sector”) and we can see the makings of some nasty sentiment that is
opposite the over bullish condition we noted was so dangerous last summer.

With the methods I use, timing is applied to the intermediate swings and on this swing the sentiment backdrop is now pervasively bearish. That means that the conditions are right for a bullish setup, although as you will see in this week’s report, the technical situation remains far from resolved in gold, and still negative in the miners.

Here is a little illustration of the events pre and post the Euro panic blow off compliments of the Au-SPX ratio chart.

I do not mean to make light of the events in play, but I have seen too often in my years of market management the tendency for analysis and commentary to come out in justification of whatever trend happens to be in play. Credit to Buffett and Roubini, they always hate the idea of gold and what it represents. Gartman is just following his interpretation of chart signals. No problem there either. He is only notable because he is widely followed by a lot of big entities with the ability to move markets.

Then came the last two gentlemen (among many others), making proclamations that it is time to buy stocks and shun gold. These high-risk statements are being made just as the relic is settling down into a support zone vs. the S&P 500 after an intermediate-term bullish-looking consolidation of last summer’s excess.

Interlude on Deflation: What If?

Let me interject within my own commentary for a moment by stating that if US policy makers stand on the verge of changing policies designed to promote inflation, then the gold bull market would likely be over; stopped dead in its tracks. It is debatable as to how the above chart would react, because many companies (esp. financials) in the S&P 500 benefit from the policies of interest rate manipulation, debt monetization and money printing out of nowhere. So the SPX could still decline faster than gold.

But gold’s bull market in nominal terms would be cooked as a real deflation of the massive credit bubble that has been carried forward would be undeniable. This bubble began with mortgage related credit and now has morphed into the credit extended to Uncle Sam. In fact Uncle Sam, already out on an un-payable limb, is basically setting the terms of his own credit with the help of the Federal Reserve. That is one of the scariest things imaginable from a monetary standpoint.

So if Uncle Sam aborts this modus operandi (Wimpy: “I’ll gladly pay you Tuesday for a hamburger today”), or if the people force him to do so then it is time to button everything down and prepare for ‘Prechter time’. EWI has been out in the wilderness for years, foretelling the hell that would be an undeniable deflationary unwinding of credit.

As I have noted several times over the years, Robert Prechter is one of my primary influences. and NFTRH are not gold bug services. In fact, it has been very difficult at times for me personally to continue to move forward with inflationary themes over the last 10 years with Prechter in my ear making so much sense.

So, is the US government going to stop eating free hamburgers? Is the government going to stop devouring whole barbecued pigs at a single sitting? Is the government going to get itself under control?

Or is the government going to go forward as is, enabled by a Federal Reserve that has taken to manipulating the government’s own debt in search of favorable outcomes in a presidential election year? Maybe here in the midst of an agonizing time for the tattered gold ‘community’ it would be productive to think about a setup that is settling in; one that sees no signs of inflationary ‘price’ pressure (was that crude oil I saw getting hammered at the end of last week?), and an economy starting to decelerate.

There is one main reason to be fundamentally bullish gold, and that is due to pressure on policy makers to compromise currency in the name of inflationary growth.

Back on Topic – WoW

Here is the status of nominal gold as it finished the week. NFTRH projected the low 1600’s with the potential for the low 1500’s about 7 months ago and has been managing the EMA 70 (currently 1588) since the December low marked it as an important support level. Those objectives are in the books.

The weekly chart shows a Symmetrical Triangle, which is a bullish ‘continuation’ pattern. MACD is thoroughly drained of momentum but it is triggered down (recall that it is and has been triggered down on a monthly chart for some time now) which means momentum is still going in the ‘wrong’ direction.

Since defaults to log scale charts (as opposed to the linear scale I usually use because I feel they show a more ‘real’ picture) and many chartists use log, let’s review above what they are seeing. The trend line is broken out of 2008 (this happens to all trends eventually) and there is another, shorter term Symmetrical Triangle in play. It does not change the analysis. The Triangle or a ‘higher low’ to the December low must hold for the bullish technical case to remain on track.

I am supposed to be bearish. Everybody says so. And indeed NFTRH would have no choice but to be bearish on the ‘price’ of gold if the Symmetrical Triangle and the weekly EMA 70 are violated.

Perhaps some people find this type of plodding analysis unacceptable. But I find that it pays not to write something up as having happened (in the face of everyone telling me it is going to happen) until it, well… happens.

Perhaps the Sym-Tri is patently obvious and it is just a matter of time before it breaks down. Indeed, current analysis certainly allows for a breakdown because current analysis as of last week’s ‘jobs’ report on the back of previous economic reports, implies a lurch toward economic contraction. And in an economy built on inflationary policy, economic contractions have a nasty habit of turning into deflationary episodes.

The play we are working is not one where gold and USD rise to the heavens during a deflationary episode. It is one where Uncle Buck benefits on his own for a time as gold potentially declines but out performs most assets. This is the RPG (real price of gold).

Subscribers and blog readers have probably noted my lack of patience with authoritative figures out there micro managing the nominal price of gold. That is because they did the same in 2008, scaring many people out of position, only to see gold double. But also, it is because the gold mining fundamental case depends on a rising RPG, and the RPG is not dependent on a rising ‘NPG’, or nominal price of gold. It is dependent upon what happens on the economic counter-cycle, like what appears to be setting up now in the economy. This is when gold out performs other markets and tangible assets.

That is the bigger picture, but the here and now is another matter and it is near time now to leave this rambling segment and get on to some analysis. I’ll leave you with some words from Mark Hulbert, a rare member of the mainstream media who I have found to be helpful throughout the gold bull market and the various Walls of Worry that have been erected over its lifespan:

“While bullion’s listless behavior over the last couple of months is undeniably frustrating, a very robust wall of worry is being built. Eventually, gold will begin to climb it.”
“Gold traders’ increasing impatience has led even more of them to throw in the towel than before — which, in turn, is why contrarians are confident that gold’s next major move is most likely up…

When I wrote about gold sentiment two months ago, this average stood at 16.7%. Today, in contrast, it is at minus 14.8%, which means that the average gold timer is now allocating about a seventh of his gold-oriented portfolio to shorting the market. That’s a relatively aggressive bet on lower gold prices…
In fact, except for a couple of days in late March when the HGNSI dropped marginally lower to minus 15.7%, its current level is the lowest it’s been since March 2009, more than three years ago.
And that’s really quite amazing, given that gold at that time was trading only slightly above $900 an ounce.
In other words, gold traders today are just as pessimistic about gold’s prospects as they were when gold was trading for more than $700 less. No wonder contrarians are impressed by the wall of worry that exists in the gold arena these days.”

All of the above illustrates why we proceed in a manner that emphasizes risk management and survival in anticipation of the moment when this massive wall breaks down in the gold stock sector and in the metal itself. The correction has gone on longer and in the gold stocks’ case, deeper than I originally anticipated, but is right in line with the short-term parameters set when HUI broke down from the early 2012 uptrend (Bear Flag to resistance at 555) and then, the 475 ‘neckline’.

This proves why it is always a good idea to manage risk and keep cash for opportunity. The ‘Wall of Worry’ will probably prove bullish ultimately, but it will only feel that way to patient individual players who are positioned for it.

Things have been tough in this sector since the mini mania blew out last year, first in silver and then in gold’s euro crisis momentum.  That was last year and this is the hangover.  Either the bull market has ended (I see no evidence of that) or this intermediate swing is a rare opportunity point in the precious metals.  There is no middle ground.  NFTRH will continue to manage risk with an eye toward opportunity and I would be delighted to have you would join me for weekly precious metals market management, along with other areas of interest anticipated to provide opportunity in the future.