Tuesday, March 22, 2011

Is Gold Now The Last Safe Haven Standing ?

Gold usually must compete with other choices for safe haven money. Bonds, real estate, and the world's reserve currency, the US dollar are the chief rivals. Real estate has become a troubled no man's land for investors. Bonds have been very popular, but now many people, using the term "bond bubble", are turning on them, including none other than Bill Gross, the biggest bond fund manager in the country. He has now become an outspoken critic of the federal deficits and the Fed's loose money policies. In a gurufocus.com piece, he states:

"...nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns. Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the
Fed doesn’t?

Gross is still bullish on some corporate bonds and foreign bonds, or any bond not denominated in the USD. But aren't even the best corporate bonds denominated in the dollar? And what about the dollar as safe haven? Why should we worry? It has been weakened by an oversupply, but don't investors still flock to this safe haven in stock market downturns? Well, no actually! Take a look at how the dollar behaved over many of the recent stock market sell-offs, then compare these to what it's doing in our present correction:

There seems to be a quandary over the safe haven flight nowadays. Money doesn't want the dollar anymore, as the above chart clearly shows, and bonds - well they are fast becoming a pariah. Cash is beginning to severely under-perform real inflation. It seems all the alternatives to a 1% return on cash are coming to suffer a malady know as "counterparty risk". Whether the counterparties are named Madoff, Ponzi, or Bernanke, the markets are getting into a mood where they want to have nothing to do with them.

The word "counterparty" was once one of those fine print words you didn't concern yourself with much unless you were an attorney. Now they are becoming investor enemy #1. Is the counterparty over? They have a really poor track record versus gold, and this is coming to be a front and center focus among investors:

This is just the casualty rate the last hundred years. Over the last 5000 years, this would be a much busier chart. Will our foolhardy counterparties of today fare any better ? I have my doubts. They seem to be much more talented fools with computers to help them.

When George Soros made his famous comment about gold being "the ultimate bubble" in January last year at the World Economic Forum in Davos, Switzerland, it was not in a derogatory sense as was commonly thought. He was essentially referring to gold as the last safe haven standing after the housing bubble, the bond bubble, and all the other bubbles have been decimated by our modern day counterparties. He meant "ultimate" as in "last in a series". "Gold is the only actual bull market currently" he told Reuters but stressed that it won't last forever. While it's true that he has described gold as "not safe", this must be taken in the context that, in his words, "this is a period of great uncertainty, so nothing is very safe".

Sunday, March 20, 2011

Gold's Four Month Habit

Gold is a very fractal animal for whatever reasons, and its inscrutable repetitious habits can be taken advantage of. As investors, ours is not to reason why; ours is to profiteer off whatever we can as long as it's legal. With that proverb in mind, let's look at an odd habit gold has - the four month phases.

David Nichols emphasizes in his work that gold tends to make its moves in well defined time frames. In a February 27, 2009 article he wrote for kitco.com he describes one of those:

Although most of my work on market fractal patterns is concerned with the patterns and structures in price movement, there is also a clear time component to this amazing growth pattern in gold. Gold has been moving in 4 month units, with the hyper-growth phases -- and also the big recent correction -- consisting of 2 of these units, or 8 months.

This was clear in gold's behavior up to that date, and it certainly has been clear in its behavior since: (click to enlarge charts)

Here we see the pattern of a four or 8 month climb always followed by a four month consolidation. There are pullbacks to a nice, smoothly climbing, parallel set of 140 and 200 day EMA curves, which are the ideal buy points like clockwork. We just experienced one of these going into February. And the RSI dips to near 30 every time along with these trips to the 140, my favorite bull/bear reference. It's strange that we are just off all time highs, yet the RSI is moving around the 50 mark. The last time this happened was August 2009, and a powerful climb soon followed.

This all coincides with another time frame habit of another very related animal - the US dollar. It has an often noted 3 year cycle where approximately every 3 years it sharply dives to a new low. An excellent article on this is the one by Toby Conner in the 2/28/11 Financial Sense. The last new low was April/July 2008, and the really bad behavior of the dollar lately lends credence to Conner's projection of a dollar collapse to below the 2008 low of 70 - a sharp move from the 76 we're at now:

There seems to be a quandary over the safe-haven flight at this correction. Money doesn't want the dollar, as the above chart clearly shows, and bonds - well they are fast becoming a pariah. Cash is beginning to severely under-perform real inflation. That leaves gold and silver as the last safe-haven standing. So the 3 year habit of the dollar animal is matching up perfectly with the 4 month habit of the gold beast. How do these dumb animals know ahead of time what we shrewd humans are thinking?

Ours is not to reason why. If these creatures of habit live on, we are due for a major new profiteering gold climb starting in April.