Sunday, June 25, 2017

What Does The Swooning Commodity Index Of 2017 Mean For Gold Miners ?

If you haven't noticed, commodities are diving badly this year:


Commodities are consumed by a healthy economy, and dives like this can come before overall downturns. Gold is a commodity that historically is thought to be correlated with the CRB Index. Commodities soared along with gold in the 1970s as capital flowed into hard assets, away from a bad economy. This is all very confusing. So does the bad CRB behavior of late bode ill for gold and the miners now?

Well, if you compare gold and the CRB index over various time frames, you see a somewhat loose correlation. Sometimes they move together, sometimes they don't. But there is one thing the CRB is correlated with much more than gold, and that's oil.


Here we see a broader two year view of the CRB and oil and they look like the very same chart. Since the 2005 massive revision to the CRB index, it mainly does whatever oil does. This oil correlation of the CRB is much tighter than with gold or anything else. The energy complex is about 40% of raw index weighting, but because of the new arithmetic averaging, and oil being much more volatile than most other index components, the CRB winds up being pretty much just the oil chart.

So the real question is "What does swooning oil mean for gold miners? If we look at the year 2001, we have a comparable period where the CRB, much less slaved to oil back then, was also diving like it is this year, and the price of gold wasn't doing much:


Even back then, they were essentially the same chart. Did the gold miners, lacking any clear guidance from the gold price, follow the horrible CRB chart back then?:


Not really. Here, the miners as represented by the HUI index, did not have a bad year with the commodity dive. The gold price ended the year about right where it started, yet the gold miners did a stunning 60% return. And oil, not gold, was probably a big reason why. Gold mines are some of the biggest energy hogs on earth and when oil goes down, gold mining profits go up. You can't be quite that simplistic as gold stocks have a way of anticipating what the prices of both their product and their inputs are going to be. The gold price was beginning its long ascent the next year in 2002 and the stocks were perhaps getting wind of that. And they seemed to be a few months ahead of oil as well. But by and large, other things being equal, gold mining has a strong inverse relation with oil.

When thinking about the energy costs of gold mining, you first consider the monster trucks, bigger than your house, that carry the ore at 0.3 mpg. This is a big part of it as this article shows, giving us this chart of the climbing diesel use for the top five gold miners:


Because the higher ore grades are mined first, the declining grades mean much more rock processed to produce the same amount of gold. This has run diesel usage to a 100% increase the last 10 years producing about the same amount of gold. But the trucking is just a part of overall energy usage. Overall, gold mining is the second most energy intensive product in the world as this British engineering report shows:

Gold is literally off the charts as the arrow points to on this log scale (9000 pound sterling/kg and 6000 Megajoules/kg) and that makes sense when you consider that, as they explain:
Gold is a precious metal which can be sold for a very high price; this means that more energy can be spent in extracting it by mining rocks containing only a small fraction of gold
So they can tolerate a whole bunch of digging and energy use. This is why gold miners typically have total energy cost run roughly a third of their total cost of operation, their biggest single expense. If gold is the second most energy intensive, what is #1? It's diamond mining with many times the energy usage of gold.

Also in the expensive quarter of the above graph is all the metals that makeup the miner's massive equipment. A big chunk of what they don't spend on energy goes to buy and maintain their monster machines. Deflation is good for gold miners. Either inflation or deflation can accompany gold miner climbs as long as currency-in-the-bank is being threatened, as I discussed here. This was the case in the 1920s and '30s when the price of everything went way down, banks failed at record rates, and the gold miners were in massive climbs, both before and after the stock market crash.

As I've written before several times, I think oil will stay moderately priced ($40-$60) for a couple years at least as the shale overcapacity is gradually worked off. Gold miners did exceedingly well in gold's run to $1900 in 2011 on $100 plus oil. If we get a next bull phase for the gold price, they could do vastly better on oil at half that price. That's exactly what happened in last year's mini run up in gold. In 2009-2011, gold climbed 110% with the HUI doing 100%. In 2016, gold climbed just 28%, but the HUI blitzed for 155%. Gold CEOs will be cheering for the "horrible" CRB charts shown above and shale will be the gold miners' new best friend.

Saturday, June 17, 2017

Fed Rate Hikes - The Best Algorithm For Predicting Gold Upside

As nearly the whole world knows, higher interest rates are gold investing's worst enemy. As Warren Buffett has explained, gold is something where we pay to dig it up, we pay to put it away, we pay people to stand around and guard it, and all the while it produces no goods, pays us no dividend or gives us any interest. Well, Warren, if you take the trouble to closely examine the history of Federal Reserve raises in interest rates and gold, you got some more 'splainin to do!

If you look at what happened in the 1970's gold bull market, you see that the more gold had to compete with interest bearing investment, the better it did. In fact, there was a very close, positive correlation between the two:



These were the most extreme US interest rates of all time running to well over 10% and dwarfing our current numbers. Yet they did not kill the gold bull back then. Indeed, they seemingly waved a red cape in its face.

The 70s rate cycle was not an isolated case in its correlation with gold.  Adam Hamilton presents a detailed history of this in his article this week. He notes:
Before today’s rate-hike cycle was born in mid-December 2015, the Fed had executed fully 11 rate-hike cycles since 1971. Those are defined as 3 or more consecutive FFR increases by the FOMC with no interrupting decreases. Our current rate-hike cycle to which the Fed added a fourth hike this week is the 12th of the modern era, certainly nothing new. So there’s a substantial rate-hike dataset to evaluate gold’s action.
He notes that the average reaction of gold during all 11 previous rate ramp-ups is a climb of 27% including the most recent cycle (2004 - 2006) where rates were aggressively quintupled and gold reacted with a 50% climb over that time. If you are an investor with the mindset that rising rates is a reason to sell or avoid gold, you need to read Adam's article. He points out that our present rate hike cycle is playing out as in the past:

If you look at the four rate raises so far in our current cycle, we see that you are hard pressed to find a guru or algo that predicts gold climbs any better. If you were a newsletter with this track record, you could sell a zillion subscriptions. Note that the arrows all fall on an ascending trend since the first one in late 2015. As the above chart shows, there is typically a decline in gold leading into a much talked about FOMC meeting where everyone has come to expect a rate increase. This weakness also lasts a couple weeks or so after the fact, then a vigorous climb ensues.

Because we have just had a rate increase June 14, that would schedule our current gold weakness into July, which also agrees with many wave counters and technical analysts who are saying July/August is going to be a major bottom. It also agrees with the simple up-trending channel in the above chart that would put a visit to the bottom at about $1220-$1240, probably in July/August. It also agrees quite nicely with my fractal argument presented here. But these rate hikes can also send gold straight into a tizzy as it did the last time in March. So waiting for a bottom could leave you chasing any new exposure you want.

But why would gold, with no interest return and even a cost of storage for physical ownership, behave in such a counter-intuitive way? Is this just to punish investors who try to think logically, Mr. Market's specialty? Hamilton makes the point that these rate changes are well telegraphed. The Fed doesn't like to roil markets, so they don't like to move unless at least 70% in the polling expect them to. So you could have a longer term fundamental working in the background pressuring gold higher while the buy-the-rumor-sell-the-news effect works in the short-term around the Fed meetings.

What could that longer term fundamental be? Well, I don't really know with any certainty. But I suspect it is the age old thing about gold being an alternative currency. Fed rate raising cycles always come after they have done some kind of financial rigging, and that always somehow lessens the soundness of the dollar. It also undermines the natural viability of the economy.

As I discussed in "Fractal And Fundamental Gurus Agreeing On A Gold Mega-Bull" gold has a long history of going into bull phases, along with the stock market, years ahead of some calamity involving dollars in the bank. This was true in the 1920s when the banks were the problem, it was true in the 1960s when a gold decoupling with the dollar and double digit inflation approaching made the dollars the problem. And it is probably true now with some kind of dollars-in-the-bank problem approaching.

You can only speculate on what the gold market may be seeing. But with the European banks on shaky ground and linked to all banks no matter how healthy, you could say it's the banks. And with the dollar's soundness continuing its decay as the world's reserve currency, you could say it's the dollars. There are plenty of problems to choose from. Let's hope the problems are fixed before they get here. But a gold hedge would be in order in the mean time.

Tuesday, June 13, 2017

The FANG Gang Is Challenging The Ascending Wedge

As we all wonder what to do with the mini "tech wreck" that is upon us, it is helpful to step back and check the big technical picture of this group. The group could be defined as big cap growth, not necessarily tech, that has produced a handful of big growth superstars. These stock climbs will sometimes produce a technical condition known as the ascending wedge, which is bearish, and typically result in a trend change, either to a stagnation period or a protracted decline.

To illustrate, let's look at a good growth stock of the recent past that can seemingly do no wrong - Tractor Supply (TSCO), the specialty "recreational farming" supply retailer. If you have ever worked on a small farm like I have, you wonder why they call this "recreational". They have somehow escaped the Amazon squash with their results, but the stock went into a wedge and was squashed anyway:

What is especially bearish is when the A/D trend (upper graph) is broken in conjunction with a wedge. In TSCO's case the trend was blasted with the monster gap down move, and you had no chance to get out ahead of the damage. When this is more gradual, the warning should be heeded.

So where is the FANG gang in relation to the ascending wedge? Not in a good place:

Here we see Netflix earnestly tracing out a wedge, but the A/D trend is intact.

Google is also wedging but with no A/D problem. But stocks often break the wedge before they break the A/D trend, as TSCO did above.

An honorary FANG stock outside of tech is ULTA, the make-up and beauty supply growth beast. It is forming a wedge and also threatening an A/D breakdown as well.

Apple isn't forming a wedge, but it hasn't had much of a chance having broken out of a big downtrend just this year. But Facebook is:

And the leader of the gang:


Amazon's wedge is the most pressuring with a break imminent.  Does all this mean the FANG move is near an end? No, because ascending wedges do break to the upside as well. A case in point is Nvidia :

And another is Dave and Buster's:

But these are the exceptions, and it takes a lot of growth horsepower to break these to the upside, especially when they are proceeding at a valuation speed limit on a basic fundamental like their cash flow:

You can see from the above numbers (from Morningstar) that it took a jump to a 60 multiple on cash flow, not to mention the 13 on sales, for Nvidia to break its wedge to the upside, a rather extreme valuation for an established growth operation. Will all of FANG make this kind of jump? It's possible, but that would be a little crazy.

The large cap growth stocks are up against something of a valuation speed limit, and also up against a trend expiration limit as well. Big trends with wedge formations typically break up before they go over five years or so, and the FANG types are in wedges pushing about four years now.

If this sector does breakup into sideways or moderate declines, it will likely be in conjunction with market leadership rotation into the other good performing but neglected areas, like the financials, especially the quality growth regional banks, materials, and the other bull market sectors.

Wednesday, May 24, 2017

Fractal And Fundamental Gurus Agreeing On A Gold Mega-Bull

Back in early February, 2016,  I floated the screwball theory about gold following a fractal replication of the prior gold bull market of 1971-1980.  Fractal factors are best corroborated by sensible fundamentals, regular technicals, and respected opinion.  But the fractal things have an uncanny way of happening with or without the more proper analysis.  The markets do tend to "misbehave" as Mandelbrot, the founding father of fractal analysis, claimed in his classic book "The (Mis) Behavior of Markets".

My article of February 14, 2016 "Gold's Bull/Bear Status" explains this fractal view, and suggested a big move up in gold was beginning.  This did indeed happen as gold went from $1100 to $1370 in just four months, a 25% rise.  We've been consolidating that move, but as I showed here, the technicals now suggest a resumption of 2016's move.

I thought I was the only one noticing the two parabola progression going on in gold's behavior, with only a fractal pattern to explain it.  But I've found somebody saying the same exact thing, but from a purely fundamental perspective.  Luke Burgess gives a fundamental explanation here .  I doubt he has ever heard of the fractal explanation, but to summarize this, from my article:


As I showed in the article, many mega bull markets around the world have exhibited this basic pattern of two parabolas separated by a big downtrend.  It shows up a lot in big bull markets, especially involving currency and/or gold.  It is this same pattern that Luke Burgess discerns from the fundamental factors alone.  He derives this chart, which he claims we are repeating in our current gold market:


Before we look at his reasoning, just who is this Luke Burgess?  According to Streetwise Reports, he serves as investment director to two high-end investment advisory services, Underground Profits and Hard Money Millionaire.  He is a weekly contributor to Wealth Daily and has written for StockHouse and Goldseek.  He is a frequent guest on "Trader's Nation", "The Bill Meyer Show", and other radio programs.  He co-edits Gold World with Greg McCoach.  He was long gold until the summer of 2011, when he sold all gold stocks.  Then in October, 2015, very near the bottom of the four year decline, he went long again.  He has been playing this gold bull like a violin, so his opinion should be considered.  And his opinion is this.  The gold bull did not end in 2011 and is "going exactly as expected.  Investors simply can't see the forest for the trees" with the biggest part of the bull market still ahead.

The above chart is from his July, 2016 Wealth Daily article. His fundamental explanation for the 1970s gold bull market involves not wars, politics, catastrophe, recessions, or stock market declines, but gold as an alternative currency.  Stage One was when Nixon closed the convertibility of the USD into gold in 1971.  The dollar index declined by 25% from 1971 to 1973.  This was accompanied by the Great Recession One, the first global recession since WWII. Few today realize that this was about as bad as 2008.  The Dow was smashed by half, and the Fed went beserk (for that day) and chopped rates.

Stage Two was where the Fed's action worked for a time, and the recession eased. Gold declined for two years.  But the Fed's policies "eventually caught up with them" (Stage Three) and the dollar sank and we descended into the inflation pit sending gold into the late '70s blitz.

Burgess sees the same story driving the gold market today saying that "Nearly the same exact scenario started in 2001 and continues to unfold before our very eyes today" with 1976 being analogous to 2017.  Starting in 2001, the dollar began a plunge, then the Great Recession in 2008.  Burgess shows a side by side dollar comparison for '71-'73 vs '01-'08 with the dollar falling 120 to 92 and 120 to 72.  This was Stage One.  The Fed went beserk again, only more so with QE this time. And for a long time, it worked and the Great Recession has eased, which is where we are today, near the end of Stage Two.  The whole process today involves way more currency debasement against a way bigger mountain of debt than in the '70s.  This may explain why the whole fractal winds up being a 2X scale up (time-wise) of what happened before.  That's what fractals are all about - same thing, different scale.

So will wreckless monetary policy catch up with the dollar and cause a gold bull, or will we get away with it this time and go peacefully into calm seas? Burgess thinks not:
"make no mistake about it...The Federal Reserve and corrupt politicians can’t save the value of the U.S. dollar or your hard-earned assets, even if they wanted to.  Take control of your own money and do what the smart money did in 1976 ... buy gold."
Burgess points out the big bankers' market for gold where they lease it out amongst themselves effecting the gold lease rate.  He says the banks control the gold price more than anyone, and when they do a shuffle with it, running up the lease rates, it often signals a major move.  Such a lease rate run up is occurring right now:


There was a run up of rates going into late 2015, in front of the big move up in the gold price in 2016.  Currently, the 12 month rate (black line) has run up to its highest level since early 2009, which was just in front of the gold price running up to the 2011 peak of $1900.  So the lease rates are signaling a major move.

Does all this mean we must suffer another Great Recession and bear market soon?  For some reason we have been conditioned to think of gold as a reverse day-to-day barometer on the economy and thus the stock market.  Short term moves can reflect this, and the financial media dote on every bit of economic data released as an explanation for gold and stock market going opposite ways.

But there is another guru, a fractal practitioner, who is saying both the US stock market and gold are soon going much higher, hand in hand.  He is David Nichols, publisher of The Fractal Market Report and, like Burgess, he has been playing the gold market like a violin for many years.  Last August, he wrote a piece where he looked at some currency challenged third world countries and points out that when a government gets too powerful and self-serving, "capital gets scared and scrambles to find any kind of home that isn't a manipulated currency, or a bank that could confiscate, or debt that will inevitably default".  Capital finds a home like stocks, even if the real economy is mediocre or even bad.  This he says, is why Argentina's overpriced stock market is soaring in defiance of real economic justification.  Sound familiar?  Nichols titled his article "The US Is Becoming Argentina" and thinks our stocks will fly for similar reasons.  A quick check of where Argentina stands among the nations, as well as the Venezuela market he mentions, shows these two at the very bottom of GDP growth with inflation rates of 40% and 741%.  This is, of course, the extreme end game.  But Nichols sees the US starting to play.

Gold, Nichols says, will be the destination of much of the capital flight.  In August, 2016, with gold at the top of its sprint last year, he said this (from the above mentioned article):
Gold is responding to the switch to tangible assets.  It's got some work left to do to put the multi-year correction in the rear-view mirror, but once that happens, the "hot money" will pour right back into gold.
Since that top last August, gold has indeed done just what he predicted it would do.  It has done many months of consolidation "work" that appears close to an end.  He says the next phase should be the hot money pouring right back into gold.

Do I agree with him about joyful days ahead for both the stock market and gold, contrary to conventional wisdom?  Well, one thing that strikes me as I look at the history of gold is that you don't have to have a lousy stock market to have a gold bull market.  You just have to have a crisis of confidence in currency.  This was true in 2001-2007.  Here you had a booming stock market and no recession - just a bad drop in the dollar and resultant climb in gold.

Investor confidence with dollars in the bank seems to be the overriding factor for what gold does.  As another example of this, consider the roaring 1920s.  Here we had a booming stock market and economy.  We also had a booming gold market as measured by the few major gold miners' stocks. The gold price was set by the government then, so the handful of big miners was the gold market. The stock market and gold miners were climbing hand in hand, but there was a growing threat to dollars in the bank:

Gold miner climb "A" saw Homestead Mining appreciate by nearly 100% from 1924 to 1929, others had similar gains - and it had nothing to do with a Great Recession or a bad stock market.  It had everything to do with waning confidence in dollars in the banks.

Note the complete void of banking problems in the above chart in the 36 year cycle after Bretton Woods.  That's because this global event put us on the gold standard.  But as the monetary safe haven it created began to come under duress in the 1960s from government dollar killing practices, a gold mining bull market ensued, even though there were no Great Recessions and the stock market was good.  The only miner index for that period was BGMI, Barron's Gold Mining Index.  Take a close look at what it did in this nonrecessionary period:
All we needed was dollar-dumb policy.  The gold market saw the handwriting on the wall far before the president had to officially close the gold "window" in August of 1971.  It was pretty much the same with the housing tom foolery of 2002-2008.

So do we absolutely have to have another Great Recession and stock bear market to go along with a booming gold bull market?  Absolutely not if history is any guide.  The bad stuff seems to happen after the gold bulls have seen it coming for years.

Wednesday, May 17, 2017

Gold Miners Are At A Technical Juncture To Watch

The gold miners have been in a limbo for months now, but that is approaching an interesting condition. To better appreciate just how interesting, it would be good to go back a couple of posts to "Will Gold Ride Again?" and read that first.

So what is gold doing now that's so interesting? The miners are replicating a breakout condition they did in early 2016. Back then, it was a breakout that ended the four year decline, now it appears to want to end a continuation pattern. This is the common consolidation pattern after a big move where the bigger trend is continued after a mostly sideways period:


Here we have the two pennant formations compared. The first was the end of the long four years of decline, then we had the sharp climb in 2016, then we have had the limbo going into 2017. If this breaks to the upside, it will have been the classic continuation pattern with a new bull leg ensuing, continuing the 2016 move. The A/D (Accumulation/Distribution) and CMF (Chaikin Money Flow) cycling is very similar. In both formations, there was a positive switch trend in place in money flow, and we are at the takeoff point in that cycling.

I've also shown what I call the MAPS divider (Moving Average Pair Separator) which is the best divider of bull and bear market I've found. This is the 140 day exponential moving average plotted with the 200 day alongside, the blue and red lines in the chart. All during the four year decline, the miner index kept below MAPS very consistently. Once the break occurred in early 2016, we had a brisk positive moving average crossover which has morphed into essentially no separation in 2017's consolidation. If the formation breaks to the downside, it will produce a negative cross and puts gold back into bear mode. If it breaks to the upside, it will keep the bull cross in place.

The forces that will move gold from here are many and complicated. If interest rates go up, the dollar is defended, the economy is OK, and gold goes down. But gold has historically gone up when rates start going up, as in the late '70s. We've had political turmoil in Britain, France, the US, and elsewhere, which should move gold up. But we had gold in bull mode before any of that came along - in the politically uneventful times.

I think the main fundamental controlling gold is probably its role as an alternative currency. That was the main concern in gold's bull market in the early 2000s as the debt/dollar situation grew worse. It was the concern after the financial crisis into the bull leg to 2011. And it is still probably the main concern.

Rick And Dave And Buster Are On The Same Beam.

If you've read my Forbes article on the new paradigm in restaurants and retail, as exemplified by Dave and Buster's, you will find what's happening at Rick's Hospitality of interest. I wrote an article on RICK back in 2013 at Seeking Alpha, and what they were about back then was certainly ahead of the curve in today's ongoing train wreck in retail. Just last week alone, Kohl's was down 9%, JC Penney was down 17%, Sears was down 12%, Macy's down 18%. The Rick's article was an exclusive and is available now with a Seeking Alpha Pro subscription. So I can't reproduce it here, but I'll comment on it.

The point of my Dave and Buster's article, as explained by Patrick Doyle of Domino's Pizza, is that if you are a restaurant or retailer looking to just serve good food or merchandise and prosper, you will probably be suffering in today's evolving environment, despite adequate offline consumer spending. "People still get out" as Doyle said. You have to also be serving up "experiential retail" as it is coming to be called. Rick's Hospitality, or Rick's Caberet as it was called before their name change, is all about just that.

Rick's is a growing restaurant/entertainment chain where the entertainment is "the most beautiful women in the world featured daily". It's a little like Hooter's but there's more fun with the girls. The dancers pay a "facilities use" fee to entertain and collect tips. They can make as much as $1000 in tips for a night's shaking of the booty. But before you dismiss them as a sleazy massage parlor that has somehow wound up a public company, be aware that no less than Forbes has not only put them on their America's 200 Best Small Companies List (they installed them at # 94) but they've also been written up at The Wall Street Journal, Fortune, Smart Money, and other places that don't normally cover massage parlors. They are simply some of the early settlers in the experiential retail frontier along with Domino's Pizza, Dave and Buster's and other's with the same idea - only their experience is a little more naughty.

And they combine naughtiness with alcohol, to make money, not trouble. In the tight margin world of competitive eateries, alcohol is everything. These beverages are market up more than anything on the menu. The study "Adding Value: Beverage Alcohol's contribution to Restaurant Sales Is Significant And Growing In Importance"  gives the numbers. Of the top 500 chains, only half deal with all the hassles of alcohol at all, and only eight are able to derive 30% or more of sales from it. Rick's is an elite player here with 40%. Alcohol at over 30% is sought after by everyone in the business.

This includes even the restaurant chain giant Darden. As I covered in my article, they are trying the new ideas too. I pointed out three comparables to Rick's:
The second sort-of comparable is Yard House Restaurants. This is a private seafood/pub combo with 44% of sales from alcohol and a focus on growth. They were snapped up by Darden (DRI) last year, who paid 1.8 times sales (compared to 0.8 for Darden itself) for Yard's 15-20% annual growth rate to add some punch to the Darden lineup.
Darden recruited them into their Specialty Restaurant Group, their SWAT team for future growth.
So the second of the quasi-RICK comps, Yard House, is also a case of blistering growth, but now available as an investment only in diluted form with DRI stock.
DRI has been performing well despite old style restaurant ("casual" dining) blues and the horrors of old style retail in general:


And so has RICK:


These charts don't look at all like most restaurant chains do nowadays.

But hasn't this been tried before - entertainment with meals? What about Buffalo Wild Wings and such? Well yes it has been tried here and there, and with great success. In my RICK article, I point out three comparables, BWLD, Yard House, and VCG. Eric Langan, CEO of Rick's has compared themselves to Buffalo in past presentations, with BWLD at 30% of sales from alcohol, Yard House is now in Darden, and VCG was merging with Rick's in mid 2010 after posting blistering growth numbers in the five years they were public! But the merger fell through, and the VCG chief bought up all the shares he didn't already own and it went private.

This new paradigm is not untested, and now several players are getting in on this new beam. And those that are able to execute geographical growth will likely be good growth stocks of the future. There is something of a store count barrier here at around the 30-50 store area where growth skills of management are severely tested, and parabolic growth ensues if they prove their skills there. I show this on a chart in the Rick's article for the history of Walgreens, Walmart, Lowe's, and Rick's. Dave and Busters is just beyond this barrier with about 80 locations, Rick's is at about 40. There will be many of the big chains trying to adapt their behemoths to the new concepts, but Rick, Dave, and Buster are growing with the right idea to begin with.






Monday, April 3, 2017

Will Gold Ride Again ?


What happened to gold the last six months could best be called being shot out of the saddle. But is it dead? If you look closely, it could be crawling back into the saddle to continue the crazy ride of 2016. Gold has been a bit schizophrenic lately, not knowing if it's a bear or a bull. Although thought of as a dog since Trump's election, it actually has outperformed all the Trump commodities YTD and has trounced the Dow by almost double so far this year - seeming determined to disguise its true identity.

Back on Feb. 14, 2016 as gold was threatening to go on a tear from its long 4 year slide, I published an article here, at TalkMarkets, and at Seeking Alpha called "Gold's Bull/Bear Status". To understand this update, you need to go back and read this. The article correctly suggested a rampage upward in gold, which is what it did throughout most of 2016. But are we still in the large scale twin parabola fractal pattern that was the premise of the article? Gold has a very strong tendency to follow fractal patterns, as do a lot of big bull markets, as I illustrated in the article.

I drew a broad sweep diagram of this twin parabola fractal over a year ago that predicted last year's gold fireworks. Where are we on that map now?


I have added the black dot to update this as of April, 2017. Despite all the short-term schizophrenia of the last few months, in the bigger picture, gold seems to still be on track to do a roughly 2x scale up of the 1970s gold bull market. If we are to replicate the previous gold bull with its downtrend in the midst of the parabolic rises, we need to replicate this:

And so far we are doing this:


The two downtrends look similar in that there is churning against the resistance early on, then a sharp resignation to the downward move well below the resistance, then a return to churning on the resistance again, which is where we're at now. MAPS is what I call Moving Average Pairs for the 140 day and 200 day EMA that I find is a good separator of bull and bear moves. If GLD does a convincing break to 125-130 soon with high volume, a second parabolic rise starts to come into play.

But it is so hard to imagine gold going into a big bull market when its natural enemy, higher interest rates, are surely on the way. We seem to be going in the direction of all of gold's natural enemies - a good stock market, a defense of the dollar, an improving global economy, and a political sea change in Washington similar to the Reagan Revolution of 1981 that accompanied the death of the previous gold bull.

But gold can be very contrary to what it's supposed to be doing. For example, you can have bull markets in both stocks and gold at the same time, as in 2002 to 2007. In 1979, the year gold went ballistic in the last bull, the Dow was actually up 4.2%. And as for interest rates, if the last gold bull market is any indication, we should anticipate ramping gold alongside ramping rates:



The price of gold is very complicated and contrary, and maybe something like the science of fractals
is the best guide to what it will do.

The lead practitioner of fractal analysis of gold that I discussed in my aforementioned article back in February, 2016, is David Nichols, who publishes the Gold Fractal Report. His short-term calls on gold are somewhat hit or miss, but for long-term moves (say over two years) his accuracy is uncanny. He correctly was saying for months in 2010, when silver and gold seemed unstoppable, that precious metals would turn into a major bear move, and he gauged the time to be February/March, 2011. Silver hit its blow-off top in April and gold closely followed with its top in August, and the great four year slide began.

What is Nichols saying for our present timeframe? In August he published an article with his call for two things - the US stockmarket and gold. In August, if you will recall, we had just suffered a brutal pair of sell-offs, one in late 2015 and the plastering of early 2016. This was before the election and few were thinking run away bull, no matter who won. Nichols bad-mouthed the bears and predicted a nice bull market in stocks:
They are expecting a repeat of 2008, with a deflationary spiral that sends assets crashing down. Many seem downright gleeful at the prospect of the market doling out a brutal punishment to those holding long positions. But that was last decade's battle. The world has moved on ...
And he had this to say about gold:
Gold is responding to the switch to tangible assets. It's got some work left to do to put the multi-year correction in the rear view mirror, but once that happens the "hot money" will pour right back into gold.
Since August, gold has indeed done some "work" just as he said, being shot out of the saddle and perhaps now clawing back to put the four year slide "in the rear view mirror" and setting the stage for gold's next run. Giddyup.