Trifecta Of Events All Break In Favor Of Gold

Tom Luongo

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Coming into this week, there were three events that were standing in the way of a potential turnaround in the price of gold (GLD). The initial monetary policy decison by the new head of the Bank of Japan, the monthly policy statement by ECB President Mario Draghi and the dual release of employment and unemployment data from the U.S.. In the days leading up to these events, gold was literally the victim of multiple drive-by shootings in the futures markets, which pushed the price down to $1540 per ounce. Once the events began unfolding, however, the Mac-10s were put away and the cars idled as the bulls stood their ground and the price drop halted.

A directionless equity market, which has seen the S&P 500 (SPY) vacillate up and down for 13 days now has not helped matters as oil inventory data in the U.S. sent oil prices sliding after putting in a strong reversal signal last week. The indecision in equities and the general weakness in commodities has weighed heavily on both copper (CPER) and silver (SLV), both of which correlate highly with gold on a day-to-day basis. So, if there was going to be one more short push to the downside in gold in an attempt to break the price below $1550 on a weekly basis, then this was the opportunity to do so.

All three of the events broke decisively in gold’s favor. All of them were either explicit or implicit guarantees of more inflationary behavior on the part of the three most influential central banks in the world, the Federal Reserve, the ECB and the Bank of Japan:

  1. The Bank of Japan is going to add $1.4 trillion to its already bloated balance sheet over the next 7 quarters, well above what the market was expecting.
  2. Mario Draghi denounced the Cyprus depositor theft plan as ill-advised but also dusted off his speech from last July and reiterated for everyone in no uncertain terms that the euro, like certain venereal diseases, is forever.
  3. Between the initial unemployment claims of 385,000 on Thursday and the huge miss on the BLS non-farm payroll data on Friday — 88,000 low paying jobs and a labor force participation rate not seen since the Carter Administration — we haven’t seen a labor report this bad in over a year.

It was one thing to watch the gold market continue to sink post-Cyprus, it was another to watch it refuse to respond to an unfathomable amount of quantitative easing from the BoJ and the yen (FXY), getting clocked for nearly 4% in an hour. But when the market for 10 year JGBs has to be halted on breath-taking volatility and the BLS pretty much made Fed governor Richard Fisher look like an idiot for suggesting that QE in the U.S. will end soon, it was impossible to think that gold bulls would not pick up the pitchforks and torches and push the price in the direction of the fundamentals.

You will note the sheer number of articles declaring the break of support by gold to the downside and the calls for $1400 or $1350 because of an intra-day price move. Here’s a hint. They mean almost nothing except to skew the near-term probabilities of an upside reversal. Whenever I discuss trading strategies, you will note that I almost never talk about daily movements. In today’s highly manipulated and correlated markets daily price movements, especially in gold, are simply noise generated to create a perception and adjust sentiment not to discover price. Weekly and monthly prices reveal trends.

The only day of the week I take seriously in the gold market is Friday.

And at this point, even though gold put in one of its single most impressive days of the year, I’m not convinced that Monday the markets won’t open and we’ll have to watch the bulls plough the same row all over again.

I’ll finish up here with some other observations heading into the weekend to ponder:

  1. The TIPS (TIP) market has stopped vacillating. The 10 year yield plunged this week from -0.65% to -0.74%, the lowest yield since the days following the QE IV announcement.
  2. The TIPS curve contracted on the last two days of this week with the 5/30 dropped from 2.02% to 1.80%. The 5 year TIPS refuses to break below -1.50%.
  3. Excess reserves held by the banks at the Federal Reserve reached an all-time high in March at $1.698 trillion. There is no recovery in the health of the U.S. banking system. Bank credit growth has flat-lined in 2013 as well.
  4. Brent Crude (BNO) dropped from $111 to $104 per barrel in 4 trading days. Friday sent the gold to Brent Ratio soaring back to 15.18 which was the highest reading since late January.
  5. The gold to silver ratio is currently 57.97 and is very high. It has always reversed (4 times) from this level since the correction in gold began in September 2011. It is also been trending against the historic trend, which is down.
  6. Gold needs to put in a weekly close above this week’s high of $1604 to create a preliminary reversal signal. The real reversal signal occurs at $1620, however.
  7. The Draghi put is back in place and the euro (FXE) is headed higher from here. The reversal in the euro was made on structural reasons, not moral ones.
  8. April is already an outside month, which would normally limit the upside reversal potential but March was exceptionally quiet — less than 50% of normal monthly volatility — so the chance to break the March high and low are much higher than normal. So I would still give a potential rally to $1700 an outside shot in April, especially if gold closes over $1620 next week.

About abwehra group

The Art&Science of Trading Gold
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