The Tell

Which way do we go as we emerge from the summer cycle? Certainly lots of people looking around now trying to gain any insight that might give them a handle on what’s goin on and which way we’re headed.

At present we’ve got Dow theorists and contrarians alike getting jiggy as they view the failure of the INDU to take out its May high as a sell signal. Inversely, bulls are arguing that we ‘re simply coiling below the May highs and that in the next several weeks volume will pick up, volatility will reappear, those highs will have been breached and we’ll be back to the races in terms of advancing.

Whoever proves correct, fact is that in the here and now, there is a lot of guessin goin on…and notwithstanding all the pontification, we are stuck! The major indices remain range bound and rather lackadaisical in their movement… volatility IS non-existent and nobody seems interested in putting a trade on…Like I said – STUCK!

I’ve always found that when you don’t have a good feel for where things stand that it’s best to gain some perspective by lookin in the rearview mirror—doing so often provides invaluable insight as to what lies ahead. One area in particular that might provide real perspective is Gold.

Granted you’ve no doubt been hearing the talkin heads starting to ramp up their “rantations” (yeah, I made that up) bout the precious metal in the past week or so. Frankly, that’s just noise coming out of the monkey cages as far as I’m concerned. Truth is, the markets lost interest in Gold a year ago and we’ve seen coiling action since that time (I’ll come back to that in a bit)—simply stated, nobody has had
much taste for the metal for some time…until now!

So why the interest now, other than the recent advance? For my part, I gotta say that I’m no gold bug…you know, the people out there that believe it’s heading to 3, 4 or 5 thousand dollars in the next couple years… I’ve traded it on and off, but frankly have never been overly enamored with it…other than wanting a pinky-ring ever since getting hooked on The Sopranos. K, that’s a bit of a fabrication—while I did get hooked on The Sopranos, I never really wanted a pinky ring—maybe a Gold tooth or a bling chain with some heft to it…nothing over the top though…

But I digress…

Kiddin aside, there is a real story goin on in Gold worth examining. If you go back to late 2008 when the wheels really started to come off the market, and in turn, the economy, Gold started what would become a powerful rally leg that led us all the way through roughly a year ago.

The precious metal actually turned up as the crises began to unfold during the last quarter of ‘08 and continued on its upward trajectory during the first quarter of ‘09, even as the major equity indices here and abroad appeared to be imploding. When equities did begin their powerful rebound off the March ‘09 lows, Gold continued to lead in mostly unabated fashion.

Then……………………….stimulus dried up. Ben and his Band of Bros closed down the cash spigot, ending QE2 on June 30, 2011. Gold actually went parabolic thereafter on what looked like a serious run at the 2K mark. But in truth, it was a blowoff move on an overextended rally.

With the benefit of hindsight now, it’s not so hard to understand why people lost their interest in Gold the second half of last year, evidenced by a couple false rallies since that time that ended in lower highs. Meanwhile, the macroeconomic picture remained pretty nasty throughout the latter half of 2011, especially given the EU mess.

Surprisingly (at least to me…there’s some honesty for ya…), despite a nasty backdrop, the markets opened the New Year in high fashion. As the first quarter of 2012 played out, more people seemed to be finding their way to the camp that believed the Fed had good reason to feel confident they had done enough to prop up our economy. To be fair, the economic numbers seemed to be pointing in the right direction.

While debatable as to the merit of such a belief, a collective acknowledgment seemed to emerge within the markets that an adjustment to the accommodative stance was probably justified. The market appeared to be telling us that we were on our way back to business as usual…at last. Real expectationemerged that 2012 would be the year the U.S. economy would once again attain organic, sustainable growth. In fact, the real fear was that we were gonna be looking at some serious inflationary issues.

The net result was the highs hit on the major indices back in May. Since that time we’ve settled into the morass we find ourselves in now.

So….what does Gold have to tell us now in terms of what to expect economically? What might it foretell for the equity markets here and abroad near-term?

Dunno…no idea! (some more real honesty for ya…)

K, me thinks there is something going on that is worth note…perhaps a “tell” on the market looking forward. Take a gander at the Gold chart over the past four years.

There’s no denying that since hitting the high the second half of last year, Gold has coiled and appears to have stored much energy as the highs and lows have contracted to the recent consolidation. It’s presently sitting on the trendline that supported the bull leg dating back to ’08. Tis no doubt a fair share of traders out there expect some sort of resolution soon…be it an up- or downside break, given the
technical profile.

Certainly looks like a setup for a major move. But trying to front-run that move on a technical basis can be a sucker’s game.

Which is why we need to look at the fundamentals now present. While the economic numbers have been somewhat conflicting over the summer, recent numbers have been less encouraging compared to what we were seeing early in the year. Sustainable growth is seriously in question once again…front and center. Forget the fears that we are gonna be dealing with inflationary issues near term.

More telling is the re-emergence of the drumbeat calling for Fed assistance…from Fed members and other influential members of the “elite.” The possibility of QE3 is no longer remote.

Time will tell who is right… What is clear from the activity as of recent is that some people out there are comfortable laying down bets. Interest in Gold does appear to be picking up across the board within the media and amongst traders…

Bottom line, Gold appears to be heating up again.

What we can say for certain is that Gold benefited in recent years from stimulus. Makes sense…stimulus weakens the dollar, which creates demand for dollar-denominated assets, such as commodities. Additionally, stimulus is accompanied by low rates…and low rates tend to favor equity investment…

Looking back at the chart a last time, a good case can be made that Gold provided a “tell” for what was to occur in the equity markets back in ’09. Might the same be true this time around? You gotta decide that for yourself…

~LH