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.