Gold and Derivatives

The "financial weapons of mass destruction " as Warren Buffett has been calling derivatives since 2002, are harmless and mostly beneficial most of the time - like bacteria. But when something upsets the natural, stable balance they thrive in, we can all get very, very sick. If you have ever bought a simple call option, you have dabbled in derivatives. Sometimes, these things work out and deliver an exciting homerun, but 80% or more of these contracts, which have deadlines, expire worthless. So "fun but dangerous" is the name of the game.

Having said that, derivatives have always been used like insurance policies with periodic premiums (worthless expirations) happily being paid by producers of all manner of crops and mined goods that have surprise price fluctuations. They purchase this insurance to hedge any unexpected price movement whilst they are busy getting their goods sold. So why does a smart guy like Buffett call them weapons of mass destruction?

I think a comment on an article  from ABC "$710 Trillion: That's A Lot Of Exposure To Derivatives" explains the problem well:

...the problem is that too many people can take out derivatives beyond the real needs of the market. For example, imagine I can insure my $100,000 house against fire by paying a fee of $500. Imagine also that 199 other people take out the same fire insurance on MY property, perhaps even using borrowed money to do so. This is the current state of much derivatives activity. If the house burns down the insurance company is up for $20 million. They might well go broke since it is the same to them as having to pay out on 200 property fires. If they did go broke I might not even get my claim paid, yet the other claimants have no underlying real interest in the property or the fire. They have simply made a $500 bet with a $100,000 possible outcome and have done so on borrowed money. The liability should lie with me and my insurance company. So why should the government agree to bail out the 199?

It is simply way too many people playing with derivatives, not as sensible insurance, but for a fast buck. They are not producers. They are not owners. They are just players. I won't go into the massive scale of the problem, that is beyond the scope of this article. But if you are not aware, you should read up on this, in case you don't have enough things to worry about.

What I want to focus on here is banks. That is because the 4 or 5 mega US banks are exposed to about 90 - 95% of the total derivatives for the whole country. And this is typical globally. It is not mainly farmers hedging their crops or producers of anything buying insurance. It is financiers playing with OPM (Other Peoples' Money) in out-of-control complication, not protecting crops or insuring anything except their own investments. Thus a staggering 80% of all derivatives are gambles on interest rates. When you have the Fed announcing four rate increases this year, the rest of the world charging into negative rate territory, and the US economy in a manufacturing recession, it is a little worrisome that our banks are riverboat gambling over the next twitch in interest rates.

More than oil, China, recession, Greece, or any one thing, banking derivative abuse could be our number one problem. It is the one thing that ties all the other problems together and gives them an amplification device. And I would like to show how it may be what's driving gold right now.

The conventional wisdom for explaining what gold is doing is to look at what it's supposed to be dependent on. You know - it has to be doing the opposite of the USD, or be doing whatever commodities are doing, or opposite the broad stock market. Well, don't look now but it's not doing any of those things very well recently! Let's not try too hard to figure out what gold should be doing and just look at the market's message on what gold is doing.

Gold is breaking its historical correlation with the commodity complex. If you look at the CRB/gold pair, you see that in 2016, gold is sharply breaking away from commodities, and actually began doing this clear back in late 2014. Oil and gold are moving sharply in opposite directions. The gold miners, whose biggest cost is energy, may soon have a field day. (click on images to enlarge)

Gold began latching itself to something else in late 2014. Note the sharp, opposite move by gold up as the stunning drop in commodities got a little crazy. Gold then resisted rejoining the CRB, building even more divergence until late 2015, where it is again bolting sharply in the opposite direction.  Gold is not just another commodity anymore. So is gold just doing the opposite of the dollar now?

This is not a very good correlation either. Note that in the sharp, late 2014 commodities swoon, the dollar followed commodities, but gold clearly started to follow something else. Then gold and the USD started to dance together for awhile, as is their custom - until late 2015. Here gold is bolting away from both commodities and the inverse dollar.

So is gold just being inverse to the broad stock market?  Let's take a good measure of that with the 2000 stocks of the Russell:

Here we have a little better correlation, especially in the last two months. So gold seems to be responding to something that's now vexing the stock market in general. Let's see if we can narrow that down to something more specific:

In horseshoes, we call this a "leaner", the next best thing to a dead ringer. Here we see that gold has been strongly correlating to the inverse of the financials. It's the banks that gold seems to be mainly concerned with, not the usual stuff. If you look over the charts of the biggest banks of Europe, you may be shocked to find that they nearly all went into a very bad technical breakdown starting clear back in early/mid 2014 as commodities were swooning and their debt and derivative books were taking a beating. By late 2014, gold may have taken note, because it was then where gold sharply broke away from the commodity complex as shown in our first chart above. Now we are seeing the bank stocks being decimated and gold responding in kind. By virtue of commodities being the flavor of the era in the malinvestment cycle, gold has ironically become the anti-commodity.

This gold/bank correlation seems stronger with the US banks (chart above) than with the uglier European bank charts. This suggests that gold is more concerned with spill-over from the European borders, which do not stop the flow of digital information on the derivatives superhighway into every other big financial in the world. We keep hearing that all the markets are being controlled by oil. But, if you look at gold/oil you don't see the gold/bank correlation at all. It's as if gold isn't focused on oil, or any one problem or bank, but on the connection webs involved - that is to say derivatives.

But what about the great inflation/deflation debate with gold? Isn't that supposed to control what gold does? Well, nowadays it's pure moronic nonsense. It really misses the point. All of the out-of-control debauched currency is in one of two locations. It is either residing in financial institutions or out on the street chasing goods and services. Right now, with the lowest money velocity since the Depression, most of it is sitting in financial institutions, which are all tied together via exposure to commodity operations and related over cooked derivatives. Many are going under and writing off debt. If it weren't for Faber's "Zero Hour" phenomena where we have reached the point of zero economic return for each new Fed dollar of debt, the market would say "no worries".  But we have reached that point. That's deflation, fixable only by frantically throwing more printed money at a failing process and failing banks, which is bullish for gold, which is now fixated on this very problem.

If all the debauched currency is not in the troubled financials causing deflation, it is out on the street in the form of money velocity, causing inflation. Both tend to be bullish for gold now. So why debate inflation/deflation on gold? They are two sides of the same gold eagle. The point is currencies are imploding, and gold is the only alternative currency to this implosion.

How troubled are the financials anyway? We recently heard a lot about Jamie Dimon doing a massive insider buy of JPMorgan stock. Since then, the Dow has rallied and his buy has been called the "Dimon bottom". On the 2/24 Fast Money on CNBC, bank health was the debate as they discussed the report out by RBC Capital by Gerard Cassidy on the exposure of all the major American banks to the oil industry. His take was that it is a containable problem, and that opinion was echoed by the Fast crew with Dimon groupie Karen Finerman saying that all of JPM's oil exposure amounts to just $0.30 a share.

I am a big fan of insider buying, but this buy will not induce me to buy any JPM. While Dimon expressed much confidence in his bank, his CEO of investment banking just released a somewhat shocking article titled "It Is Worse Than Anyone Thought On Wall Street"! Daniel Pinto, CEO of JPMorgan's corporate investment bank stated that the bank's investment banking revenues are forecast to be down 25% in Q1 and went on to detail the deterioration in banking. It notes that JPM's performance is better than the rest of the banks (they have, in fact, been the hero of the banks) and the rough Q1 was going to be industry wide. While JPM's oil exposure has a face value of just $0.30 a share, you must consider that JPM has $1.5 trillion in assets and around $70 trillion in derivatives exposure. That's a very dangerous multiplier of 47 on not just oil but everything else they are playing with under duress.  I find it interesting to read what they blame for the bad Q1. It's not the price of oil. It is:

...the Swiss National Bank decided to unpeg the franc...higher market volatility, wider credit spreads, lower equity valuations, slowing issuance, a tough comparison period, and uncertainty around the trajectory of economic growth across the globe.

To me, this sounds less like "it's the price of oil" and more like "our derivative book has suffered a great beating".  I think the gold market would agree. 

This irresponsibility with derivatives thing is, of course, nothing new under the sun. And it tends to run in cycles throughout history. You probably have heard of the 75 year cycle in the economy where the banking depressions tend to occur every 75 years, plus or minus 10 or so. This started right out of the gate for America with the Panic of 1796 which sounds a lot like the invention of the Fed and derivatives when you read the Wikipedia account:

Frequent instability characterized the United States economy during the 1780s and 1790s. Rampant inflation of Continental Currency during the Revolutionary War gave rise to the phrase “not worth a Continental.” Lacking a stable currency, banks issued their own notes, and calls for stronger public credit led to the establishment under the Articles of Confederation of the Bank of North America in 1781. After the adoption of the Constitution, the First Bank of the United States succeeded it as a de facto central bank... 

During this time, speculation was the investment of choice, leading to the Panic of 1792. Former Continental Congressman William Duer raised large sums of money to invest in bank stock and government securities, novel and financially sophisticated assets whose risks many contemporaries failed to understand. Duer soon defaulted on his debts, destroying the savings of many middle- and working-class people

Duer and his small group of prehistoric one percenters then sought to fix things "by applying unprecedented scale to an old concept: land speculation. This set the stage for the bubble that burst in 1797". Was it this group that Ben Bernanke studied and took as heros?

The cycle, which I think is mainly based on one human generation life span's typical 75 year length dividing the young and stupid from the old and wise, was repeated with the pivotal Panic of 1873, 76 years later. Then, we had the massive banking collapse of the mid 1930s dragging clear to 1944, 71 years later. If you take the depths of this banking catastrophe, which was 1934 and add 75 years, we arrive at 2009, where the Fed/banking/derivative problem appears to be dragging on to our day.

The old, wise men who enacted Glass-Steagall in 1933 were supplanted by the young and stupid 69 years later, with the 1999 repeal of this protective legislation that had given us decades of banking peace.

There also appears to be a half cycle to this generational thing. It makes sense to take half the average of these life spans, say 72 years, half of which is 36, and expect that the transformation form stupid to wise happens typically between ages 36 and 72.

David Nichols wrote an article published at Kitco May 7, 2013 "The Monetary Cycle And Gold" where he notes this 36 year cycle in currency and banking. If you wanted to assign a starting point to this 36 year thing, the Panic of 1873 would be a good choice according to the teachinghistory.org writeup:

The Panic of 1873 stands as the first global depression brought about by industrial capitalism. It began a regular pattern of boom and bust cycles that distinguish our current economic system and which continue to this day

They go on to say that this was really the beginning of the money supply capitalism we know of today:

Unlike earlier mercantile capitalism, which is dependent on local markets and periodic shortages of labor or materials, industrial capitalism is controlled by access to venture capital and the productivity of capital investments in stocks

Here began the rule that "money supply acts like oxygen" to quote the Teaching History writeup. The downturn was especially severe with bank failures triggering soon after October of 1873 and lasting until 1879.

The next 36 year cycle arrives at 1909 and the momentous aftermath of The Great Banking Panic of 1907. This was so bad that JP Morgan, along with other prominent bankers, stepped in with their personal wealth to stop a total freeze up. This led to the creation of the Fed 6 years later in 1913.  In 1908, Nelson Aldrich, father-in-law of John D. Rockefeller, convened the conference that investigated the causes of the panic, and the Fed was the replacement for the personal money of Morgan and friends. After 1908, we saw a 36 year period of financial chaos exacerbated by the two wars with Germany and associated bank collapses.

The next swing thing that happens in the banking world was exactly 36 years later in 1944. Here we had another monumental conference called Bretton Woods. From The Economist article "What Was Decided At The Bretton Woods Conference":

The Bretton Woods system that emerged from the conference saw the creation of two global institutions that still play important roles today, the International Monetary Fund (IMF) and the World Bank. It also instituted a fixed exchange-rate system that lasted until the early 1970s. A key motivation for participants at the conference was a sense that the inter-war financial system had been chaotic, seeing the collapse of the gold standard,

 John Maynard Keynes was at this conference arguing with Harry White, Roosevelt's rep, attempting even back then to destroy America's currency:

But while White, as the representative of a creditor nation (and one with a trade surplus), wanted all the burden of adjustment to fall on the debtors, Keynes wanted constraints on the creditors as well. He wanted an international balance-of-payments clearing mechanism based, not on the dollar, but a new currency called bancor. White worried that America would end up being paid for its exports in “funny money”; Keynes lost the argument

No Keynesian funny money, and what happened?

The Bretton Woods exchange-rate system saw all currencies linked to the dollar, and the dollar linked to gold. To prevent speculation against currency pegs, capital flows were severely restricted. This system was accompanied by more than two decades of rapid economic growth, and a relative paucity of financial crises

Then our brilliant President Nixon destroyed Bretton Woods in 1971 and we have had one severe economic collapse after another ever since, beginning with the recession of 1973, where the stock market lost 50%, about the same as the 2008 crash. We tend to think of the 1980s as good, but in the banking world it was one of the worst decades ever. Something came along in 1980 called the Savings and Loan Crisis. If you were to lay all these banking swing events out on a timeline comparing it with bank failures, it would look like this:

The first thing that stands out is that these 36 year periods are characterized either by a great ramp up in banking problems or, as in the period right after Bretton Woods, a near complete absence of banking problems.

Maybe the second thing that stands out is that these past banking episodes dwarf the 2008 Financial Crisis in terms of bank failures, thanks to the invention of the FDIC in 1933 and the bail-out age that started in the 1980s and has now gone parabolic with central bank central planning. But as bank failures have come down, currency soundness and derivative instability have gone out of control.

If you back up 36 years from the Panic of 1873, you arrive at the Panic of 1837, not shown on the graph above, but it was also a banking nightmare causing a depression. While this one isn't as well known as the 1930s, it was as horrible and lasted until 1844. Out of the 850 banks in the nation back then, 343 failed permanently and another 62 failed partially. That was about half the banks in the nation. It was another malinvestment cycle with cotton being the plaything.

David Nichols, who first brought my attention to the 36 year banking cycle, is a fractal analyst, but he does not claim this to be a fractal item of any kind. Nichols said in his article that 2016 will be a top for gold because of the 36 year cycle, looking back 36 years to 1980, the top for gold back then. But the 36 year cycle is all about banking, not the price of gold. If the cycle repeats in 2016, it will mean some kind of major turn point in banking. So it coincides with the fractal point that gold is at in 2016 (the start of a large climb, see my article on that) but doesn't necessarily mean the top of that climb.

My article pointed out the fractal significance of gold's 4 year cycling with our present gold market looking like a 2X fractal scaleup of the 8 year '70s fractal and 2 year down portion ('75/'76). The Swiss bank USB just published a USB Technical Research note January 6 pointing out the same thing with both the 4 and 8 year cycling.

A potential bottom in 2016 could be a rather powerful bottom, since together with a four-year cycle low we have also an eight-year cycle low projection for this year. In this context we expect a potential 2016 low in gold to be the basis of a new multi-year bull market.

UBS doesn't say fractals is their reason, but they see the same similarity between the '70s gold bull and our present gold market that I showed graphically in my fractal article:

Pattern wise we continue to see the 2011/2016 cyclical bear market in the same context as the 1975/1976 bear cycle in gold. Keep in mind, in the mid-70s gold lost 43% of its value from its January 1975 top before another gold bull market started into the January 1980 bubble peak. It is amazing to see that with a loss of 45% from its August 2011 top into the early December 2015 low, the decline in gold has more or less exactly the same proportion as in the mid-70s.

The 36 year banking cycle seems to lend itself to being broken up into 6 periods of 6 years each with significant banking happenings occurring in a 6 year cycle.

In any given year, there are several banking problems somewhere in the world, but there seems to be a tendency for the more significant ones to run in 6 year cycles. The latest iteration in 2010 with Greece may be especially foreboding as it could lead to a precedent for a banking contagion as a comment from the ABC article mentioned above explains:

In Cyprus when their banks failed people's savings were confiscated and they were given bank shares as a substitute, nominally at the same value but in fact worth much less. There were restrictions on cash withdrawals. This is the global solution for a major derivatives crisis put forward by the Bank of International Settlements (BIS). It's called a bank 'bail-in'. When the derivatives markets fail and banks go under, derivatives transactions take precedence over all other bank claimants ... Ordinary bank cash depositors go the way of Cyprus overnight. Effectively bank cash deposits are confiscated to pay out derivatives trades.

Since this "game changer" banking swing point, several articles have appeared outlining the dire danger these crazed idiots pose to the rest of us that are not going crazy with derivatives. Ravaging FDIC insured amounts results in government, taxpayer bail-out of the FDIC, so the wealthy accounts over the FDIC limit are becoming fair game for bail-in of any derivatives bust. The new "template" now being legislated - steal from the rich to finance derivative fun of the idle filthy rich. They seem to have a seared conscience about stealing from our bank accounts. Didn't the feds shoot Bonnie and Clyde and their stolen car full of holes for this?

This is what we used to do to bank robbers. Now they are Vice President In Charge of New Templates at Big Bank International. As a Huffington Post  piece phrased it "Bail-Out Is Out, Bail-In Is In". No wonder gold appears to be responding to all this. Criminal lunatics are taking over our banks, and the definition of money is changing.  How far we've come in one generation since 1934, when Clyde Barrow was shot for stealing from banks, and they enacted Glass-Steagall to erect a wall between our deposit banking and the young and stupid.

Now it's OK to steal from those awful rich, meaning anyone who is capable of creating good jobs in a free enterprise economy. They apparently are there just to provide funds for derivative shenanigans - funding free economic collapses and advancing socialism. And we wonder what's wrong with the economy.

Putting one's money in a bank has always been an investment contract. When you sign to create an account, you are legally making the bank owner of the funds to do with as they see fit. Your deposit immediately gets lost in a maze of loans amongst many banks. Of course, banks have typically been about the business of investing your money in the interest world to give both you and them a little profit, and they give all your money back whenever you say. That's changing.

With the new templates, depositing with banks is becoming more like investing in the derivatives world. Only you don't get any gain at all, just guaranteed loss in our new world of zero or negative rates. Either you get a little loss with the rates, or a big loss with a blowup in derivatives. This is not a good deal except for those playing with derivatives. What Bonnie, Clyde, and John Dillinger did was illegal. What Joe Derivatives Junkie is doing is perfectly legal. The definition of money is changing, and gold may be picking up on that.

As for the six year or 36 year cycles, I really don't think this is a fractal thing, and I am puzzled as to why this would happen. I can only equate it to the 7 year debt cycle that I showed in my article "A Study In Crashology" that I wrote back in October. The UBS Technical Research note also shows this 7 year cycle. In fact the title of their piece is "The 7 Year Cycle In Equities Is Rolling Over - Buy Gold". The 7 year cycle that I discussed was only concerned with the debt world, but there is, of course, a very strong correlation with equities. In my article "When The Canaries Die, Get Out Of The Mine" I go over the 7 year Shemitah cycles and the 7 periods of 7 years each that make up the 49 years between the Biblical Jubilee years of debt release.

As I showed in the article, big things tend to happen with debt and Israel in the Shemitah and Jubilee years. And it is very similar to the 36 year banking thing. Hmmm - banking and debt. They could be related. Both numbers, 6 and 7, are very significant Biblical numbers. This year, 2016 is both a 49 year Jubilee year and a 36 year banking cycle year, which is a very rare coincidence. Even if you were totally oblivious to all our boiling derivatives problems, banking troubles, and ugly market signals, you would have to be a little concerned about this cycling phenomena, no matter what you think may be causing it.

 

Gold's Bull/Bear Status

The time tested proverb "A gold mine is a hole in the ground with a liar at the top" is generally attributed to Mark Twain, although he may have just popularized it. The last few years,  he has a lot of company in feeling that way. Other than the coal miners, gold miners have probably been the most despised stock sector on earth the last 3 years. But then along comes the surprise January beat down in the stock market, and gold is showing some signs of life. A passing two month start-of-the-year blip some are saying, just like the start of every year since 2011, except for 2013, the crash year for gold. But there are some big differences this time at the start of 2016.

There is a banking angst building over the malinvestment debt of the ZIRP years, as I've mentioned in previous articles, and that has been boiling over here in mid February with a decimation of the big bank stocks. The whole banking/bad commodities loan mess engulfing our markets nowadays is perhaps sparking a major turn to gold, not as a commodity but as an alternative currency. If you want to look at a leading edge in all this, the country of South Africa is a good place to look.

This nation is a major gold miner and is also caught up in the emerging market currency problems typical of nations exporting a lot of commodities. The leading export destination of the copper, nickel, and whatnot from South Africa is China. During the years they were producing 60% or more of the world's gold supply (to the late '80s) many South African gold companies became public mainstays in the stock market. Currently they have slipped just out of the top 5 global producers, but the 5 ahead of them are either not emerging market nations or don't have a lot of major public gold miners. As such, this nation's currency/gold situation is an early tell of any major turn in gold.  A Bloomberg article last month noted this South African thing as their gold miners pay all their costs in the local currency, the rand, and reap all their revenue in dollars:

“The gold price has held up pretty well, but the rand has blown off terribly,” Peter Major, a mining analyst at Cadiz Specialized Asset Management in Cape Town, said by phone. “Gold companies, which were marginal and barely making money when the rand was 13 to one, will benefit when the rand suddenly goes to 16 or 17. All of a sudden they’re making 20 percent more revenue and it all goes to the bottom-line.”

So how is this early gold tell doing? (click on images to enlarge)

Here I compared a half dozen of South Africa's largest gold companies with the gold price (GLD) and with the general gold miners ETF (GDX) over the last three months. A very large outperformance is clear and began even before the start of January. The above article points out that the currency problems of the world are responsible for some 20% more revenue coming the way of South Africa domiciled gold companies. And this is at no cost of revenue whatsoever for them and it all goes straight to profit, and stock values. If you average the performance of these stocks, you get a massive 98% outperformance over the GDX - in just three months. The market seems to think currency problems are here to stay, as well as better gold prices.

The steady decline of gold since the 2011 peak is generally thought of as a bear market. But I would like to explore the possibility that a very large scale bull market actually includes this 4 year decline, and may be departing into a phase 3 of this type of bull market, agreeing with the tell of the South African miners. Major bull markets tend to run in repeating patterns or fractals. Markets, as well as many things in nature, move in these patterns at different scales. One such pattern I have written about before is the separated parabola. An example of this is the currency market of 1920's Germany, which was the most prevalent scale of this fractal, the 64 month:

This basic pattern of a parabolic growth phase going into a cool down trend, then a new parabolic growth phase, typically more violent than the first, has been repeated many times in history totaling 64 months give or take a couple months. That sounds kooky when differing bull markets are controlled by vastly different causes in different times. But such is the fractal nature of markets. David Nichols is probably the leading explorer into market fractals and offers The Fractal Gold Report  where he explains some of this weird stuff and monitors mainly the gold market. Below is an example of his month counting on Toll Brothers during the housing bull alongside another national bull market of the 64 month variety that I found on my own:

Some other examples of the 64 month fractal that Nichols points out are the Dow of the 1920s, the Nikkei of the 1980s, and the Nasdaq of the tech boom. I have found several other examples similar to the case of Egypt above. Nichols doesn't discuss any time frame from other than 64 months for this pattern to play out over, but I have found that it shows up in both shorter and longer time periods. For example, there seems to be a 3 year version:

Homestake Mining was a major gold miner in the 1930s and led a huge boom in gold mining then. Brazil was a case of currency instability. Fractal behavior is primarily a reflection of human psychology. As such, it has particular utility with gold and currency issues. Gold, as Warren Buffett sarcastically points out, doesn't produce anything of value while we pay to dig it up, put it in another hole, and pay to have it guarded. The only value it has is what human psychology puts on it. It's true that 68% of gold demand is jewelry and technology, but that's always been true of gold, and it hasn't stopped these fractally charged bull markets of the past from occurring. Speaking of which, was the gold bull of the 1970s such a fractally charged thing?:

You would have to say yes, it was. It formed yet another twin parabola with the downtrend separator. Note that it was also a non 64 month case being 8 years long. I have shown another of the larger time scale versions alongside it, the runaway Swiss bull which ran 7 1/2 years.

The fixed gold price of the '60s possibly warped the shape of the '70s bull market, as an article at Kitco recently speculated naming the piece "The Problematic Comparison With The 1970s". Instead of looking at the government fixed gold price part, they look at the gold bull via the BGMI (Barron's Gold Mining Index) to see where the '70s gold bull really might have been born. They suggest it really started in the 1960s when, despite the fixed gold price, the miners shot up before the US allowed gold to trade per a free market, except for the central banks, in 1968.

As Nichols does, I assign a "sprout" point to these things, which is somewhat subjective. But it is the point where a downtrend, flat, or mild rise behavior changes to a stronger, smooth rise, a notable change in trading patterns. Gold traded freely for years after 1968 before a notable sprout point arrived in 1972. So I assign the length of this fractal as 8 years. The miners jumping first in the  1960s was probably just a case of them typically leading the price of gold.

So what does all this have to do with gold today? Well, if we are indeed in a larger scale version of the twin parabola bull fractal, you have to scale everything up proportionately. That's the main principle of fractals - same thing different scale:

If you take the four year downtrend from the 2011 peak as the separator, the trend of which is now breaking, we are transitioning into the second parabolic rise. I wrote some pieces back a couple years speculating that the 2007/8 weakness was a separator of about 1 3/4 years. But it wasn't a pronounced downtrend as is typical in this fractal and was caused mainly by hedge funds having to dump their most profitable holdings in the face of the market crash - an anomaly in the first parabola as it may turn out to be.

Gold is now the most hated and purged from funds it has been since 2001, so it has the freedom to run inverse to stocks in what I think is a current bear stock market, similar to the way it ran in the 2002 brutal bear.

Scaling a length of the current separator is a little tricky. The '70s first parabola transpired from 1972 to 1975 - about 3 years. The current first parabola could be taken from September, 2005 (Nichols' fractal sprout point) to September, 2011 - about 6 years. So if we are doing a 2X scale up now, the two year separator (1975 and 1976) should scale to 4 years. We are at 4 years with the post 2011 trend, so it could be breaking up, as the miners are clearly suggesting. And it is noteworthy that 4 years is a major fractal period for gold per the research of David Nichols:

Nichols has his hits and misses like any of us in the markets. In 2010, he forecast a peak in gold and silver for February, 2011 - silver peaked in March and gold formed the first peak of a double top in August. So he was a little early, but right. I guess that's better than being a little late and right. But the fractal art is not infallible.  He goes a lot by the major period times for gold, one of which is 21 months, as the above graph shows. In 2012, he had been projecting a major power move in gold peaking in mid 2013, which was 21 months after the peak of 2011. He showed his fractal dimension algorithm chart showing an extremely high energy build, just like the one going into 2009 in front of the blitz to the 2011 top.

He assumed this would be a renewed upsurge, but as we know now, it was indeed a power move, only down. This was the sharp collapse in gold down from about $1800 going into late 2012, and the fractal stuff had it right, because all it tells us is that a big move is likely, but it doesn't tell us the direction. That's the contrary nature of the fractal dimension, it just suggests when and how energetic a big move will be, not where it's going. That's the math of a market fractal dimension, it just tells you how pent-up a moving object is in two planes, and that is equally resolved with a big move up or down. You can improve the up/down odds in your favor with other means of analysis, however, like good old fashioned technical and fundamental considerations. My own algorithm has gold's fractal dimension at a higher level right now than in 2009 before the big move up. And the miners are at the highest levels they've been at in years (on the weekly scale) so a big move seems likely.

Applying some technical principles to gold's current status:

The falling wedge with a heavy volume breakout has one of the highest bullish success rates of any indicator, rated as high as 98% by Options4Income. The volume break of the miners, South African or not, is even more convincing.

So is gold in a bull or bear market? Well, in the world of fractals, the usual definitions don't mean much. Something can be off well over 20% from its high and still be in a rip roaring bull market fractal. And length of time in a decline doesn't really classify a market in a fractal. I think your investment time frame and level of patience have more to do with the label you wish to use than percentages do.

If our present gold market plays out as a twin parabola, it would be the largest scale for this fractal that I have ever seen. But that makes sense considering that we are in the midst of the grandest global currency debauchery in all of history. Certainly the fundamentals have to favor any gold move being up. Other than the jewelry demand aspect, about the most common fundamental reasoning you here nowadays against gold is that if we are going into an interest rate tightening cycle, it will surely kill gold. But did that happen in the 1970s?

Gold and a super-aggressive tightening Fed climbed in near lock step clear to the end of the gold bull market in 1980. So are rates bullish or bearish for gold? We seem to have a plethora of bullish fundamentals for gold. We have currency instability, a global economy tilting into recession, a fast growing crisis of confidence in central banking solutions, and an unprecedented malinvestment debt avalanche about to come at us from the bankers' many years of lunacy.

Indicators Are Lining Up For More Than Just A Correction

I generally don't try to time normal corrections in the market, but I get more defensive when more major tops threaten. Now is such a time. I've been dialing up defense the last couple weeks, and I think the sell-off of the last couple days may be intensified into September. I haven't had time to write much about this here on my blog, but I did publish an article How Afraid Should We Be Of The Margin Debt Climb over at Seeking Alpha. This was an exclusive article, meaning I can't publish it anywhere else, so you will have to go there to read it.

My basic point was that there are too many good predictors lining up for a crash to be business as usual. Coincident with that I am changing the Smartphone Index I keep here at the blog to cash, as well as the portfolio.

The market instability that's coming on could get pretty dangerous with a lot of it swirling around debt and currency issues, meaning it could quickly become "systemic" as it did in 2008. I noticed on Fast Money last night they were talking about the race to devalue (not just the China move recently) and how it all seems to have started this round on May 2014 with the ECB's blitz of money printing. I have never been a fan of money printing, and I wrote an article attempting to project where it could all go back in 2012 A Triangulated Forecast For June 2013 wherein I projected where the money printing trend would become dangerously unstable. I was seeing a gold price move up along with the printing that hasn't happened, but the printing blitz has also involved a gold manipulation blitz.

My 2013 article was basically about the likely outcome of a global debt reset sometime after money printing destabilizes. It has been destabilizing for the last couple years and now be the start of the "reset" involving much market distress beforehand. Last night's Fast Money commentary featured the remark that currency moves that used to take 6 months are now happening in just hours. This idea of a global jubilee (or Shemitah as was the subject of the 2012 best-seller The Harbinger) has been bandied about for many years now, and if it plays out per the timing of Sabbath 7 year cycling, it will involve a lot of market turbulence in September. So far, the 7 year cycling has been dead on. In September, 2001 we had 9/11 and for the first time in America's modern history, Wall Street was shut down for many days. Seven years later we had the crash of 2008. It is now 7 years after that and the jubilee may be at hand. There are a lot of critics of Jonathan Cahn's book, but what are the odds of the 7 year timing we've had thus far being just pure coincidence?

As for gold, a subject of my 2013 article, The twin parabola fractal may still play out, because the divider downtrend may end up being about four years, which would put the second parabola starting about now. If gold is to follow money printing exactly, the separator would be a little over three years according to the chart I showed for the eight central bank balance sheets as a percent of global market cap. If gold were to take off now into the second parabola here in late 2015, four years after its late 2011 peak of the first parabola, it would be following pretty closely this money printing formation allowing perhaps for the manipulation blitz.

The manipulation of gold may come to an end if a jubilee debt reset takes place and the financial world is reorganized. So what role gold would play or at what price is really unpredictable. The most likely direction would be up you would think, but who knows. I don't think gold would have the safety factor traditionally given to it in such a scenario.

Whether the current market turbulence is a beginning of such a development is far from certain. If money printing can continue with some stability, we still have a slow, stable recovery proceeding, and we will have very low interest rates for some time, and we still have US retailing wanting to lead the markets higher as is evident from a glance at the RLX. But the current situation certainly calls for a boatload of caution.

For Those Of Us Who Missed Puma

Puma Biotechnology (PBYI) was one of those legendary rocket rides in this thrill park of biotech that you want to buy in clear 20/20 hindsight. It is a development stage company working mainly on neratinib, a drug for breast cancer among other things, and its prospects moved the stock out of its slumber for its first couple months as a public company in 2012, into a wild ride up from around 20 to 260 in about two years. "Where was my buy order in 2012?" you have to ask yourself.

Well maybe the market is giving us a redo on that. There is another small, little known biotech working on the same thing and, if it makes you feel any better, Puma's neratinib has fallen on hard times as reported in the 2015 ASCO Conference. The drug is now showing some 2.3% more effectiveness than placebo with the added benefit of severe diarrhea. This news has crushed PBYI from 260 back to around 85: (click on image to enlarge)

Neratinib is not the only iron in the fire for Puma, but as this chart clearly shows, the market places a very high value on what happens to their breast cancer efforts. The incredible climb in the stock is now very broken.

Enter Oncothyreon (ONTY) and their similar effort against breast and other cancers. Their story is just the inverse of Puma with the stock sliding since 2012, but with a stunning reversal after some very promising data released just before ASCO this year:

The two are so similar that the developments of this year are creating some internet buzz about PBYI and ONTY being a pair trade, shorting PBYI and long ONTY, with talk of ONTY being the new Puma. I like ONTY technically and the insiders at the company have started liking the stock also lately with several million dollars worth being bought up over the last year or two by a variety of people. The "IH" (insider held) number is still a little too low for my taste (only around 8%) but this tiny company could possibly start attracting some more serious insider buys. The quiet consolidation it has been in the last two months showed virtually no response to the market correction - nice strong handed behavior that typically precedes nice climbs, if the other technicals are good.

So if you missed Puma and are willing to deal with the risk, you might want to look at ONTY as a redo.

A Drug Stock To Watch

If you're looking for a big biotech that is "not keeping up at all" with the hot sector, as a recent 24/7 Wall St piece on five laggards detailed, then check out Idera Pharmaceuticals (IDRA) for a possible catch up move. Actually Idera isn't all that big with less than a half billion dollar market cap, and it is just a $3 stock right now. But don't you wish you had bought all those $100 plus biotechs when they were just $3 ?

I won't even go into the fundamentals because there aren't any. Idera has no current revenue, but what's even worse is that they had some tiny revenue back in 2010 and then lost that. However, the new medicine developers don't trade on current numbers, and if you're going to profit from them, you have to turn a blind eye to the usual stuff.

If you need a brief primer on the new medicine, I refer you to my recent article at Seeking Alpha "Insider Wisdom And The New Medicine". Here I want to look at a part of the new medicine called "gene silencing". Since the completion of the 13 year Human Genome Project and the platforms that, since around 2006, have made a complete map of anyone's gene operations routine and cheap, they have been fooling around with our genes' programming and are on the verge of learning a few tricks to changing the channel on errant genes and the associated diseases.

DNA makes a material from which our proteins are made called RNA. Proteins facilitate everything including disease. Gene silencing was first conceptualized in 1998 when researchers at the University of Massachusetts found that certain types of RNA can turn off the programming of certain genes. And if you interfered the right way, you could turn off the production of any protein you wanted including those errantly causing a disorder. It was important and new because some 85% of our proteins can't be targeted with traditional medicine. This earned the Nobel Prize in Medicine in 2006 and began the wing of genetic medicine known today as RNAi (the "i" is for interference) and prompted the founding of Alnylan Pharmaceuticals (ALNY) in Cambridge.

Since then it's been a roller coaster ride for RNAi fans as recounted by a recent MIT Technology Review article "Gene-Silencing Drugs Finally Show Promise".

All told, there are about 15 RNAi-based drugs in clinical trials from several research groups and companies. “The world went from believing RNAi would change everything to thinking it wouldn’t work, to now thinking it will,” says Robert Langer, a professor at MIT, and one of Alnylam’s advisors.

But I don't want to look at ALNY in this post, but another of those companies working on RNAi, Idera Pharmaceuticals, also of Cambridge. It was founded in 1989, long before gene silencing came along, but now it is the major focus of the company. They have nothing in Phase III and are one of those speculations with all the associated risk, but I would like to point out a recent development that probably tilts the gambler's odds a good bit in your favor.

To appreciate that development, you should probably read the Seeking Alpha article mentioned above and also the Genomic Health article here on my blog. There are certain key insiders to pay attention to in biotech therapy development and Julian Baker is one of these. On February 13 this year, he stepped in with a near $20 million insider buy (he is a director) and this, along with the stock's fractal condition (my analysis method) makes this stock worth watching: (click on image to enlarge)

Idera came down from around $15 pre- '08 into a protracted base from which it began to emerge in 2013. The Bakers had it in their funds back then and sold some just before the market got really bad. As the graphs on the Bakers show in my articles, when they buy over about $20 million worth in any one year, big rises typically begin in a year or two. That just happened with Idera. It is in a 1 1/2 year base (black lines) and is not a buy until it is clear of it. But if and when such a break occurs, the climb could be pretty good.

A Couple of Short Squeezes in Drugs ?

I don't know how fond you are of profiteering off the misfortune and agony of other investors (as in being long short squeezes) but I've run across two that look interesting and may tweak your interest if you're the sadistic, opportunist type. Drug development by the small companies is a dangerous playground where short sellers like to play. Generally I venture there only when the technicals are very good and the insiders, who hopefully know as much or more than the shorts, show a lot of confidence. I don't go looking for a short squeeze.

But I'm long two names that also are becoming a worry for a very large shorted float - Newlink Genetics (NLNK) and Intercept Pharmaceuticals (ICPT).  Intercept has some Phase II and III drugs for liver and related illness with proprietary bile acid compounds. Newlink has a line of cancer drugs, but of particular interest lately is their ebola vaccine, which is being fast tracked into use. It is the new synthetic approach where the vaccine is 'built' not grown with live virus and is much safer and can be made in large quantities needed by such things as an ebola outbreak.

I won't bore you with more medical knowledge than that, mainly because that's about all I know anyway. Both stocks carry a huge shorted float of around 28% with days to cover 11 for NLNK and 4.5 for ICPT, creating a tight squeeze for shorts to get out if the stocks keep climbing, especially for the smaller Newlink. The NLNK shorts are in retreat having backed down from a 32% level just two months ago. Both stocks have extremely high insider ownership at 29% for NLNK and 41% for ICPT, making the insider army even greater than the short army. Both of these groups of people are very smart and well informed, and when they rumble, the gains can be extreme.

Stocks tend to repeat chart patterns, and a striking resemblance caught my attention between Newlink's condition now and Intercept's condition about a year ago. Let me show you: click on image to enlarge

Both stocks have a ramp up in short interest over this time frame, although ICPT was only around 10% of the float. The treatment of the market (also a very smart group) in both cases is remarkably similar, in a similar business. There is growing accumulation in both, a similar burst of very high volume, sharp up moves about 6 months previous, then a similar settling into a quiet climb atop the 140/200 day moving average support, which is about the best divider I've found between intact climbs and those breaking up. The quiet climb amid accumulation is also a similar positive.

What happened to ICPT after this pattern about a year ago? In one of the most brutal annihilations of shorts ever, ICPT reported a good trial result on their main liver drug, the only treatment for a disorder that about 12% of US adults suffer from, and the stock vaulted some 580% over the next two days. Bits and pieces of shorts were laying everywhere.

Will the same thing happen to Newlink? Who knows. But there is an interesting similarity. Just sayin'.

 

 

 

 

 

 

 

 

 

 

Genomic Health And The New Medicine

If I were to describe to you a movie plot where an imbalanced young college genius began experimenting with an inkjet printer building 3D structures, only using living human tissue paste instead of ink, you'd think it was a ghoulish invention of a Stephen King type, and you might not want to watch the movie. But such a thing has actually happened, and they are making, not a movie, but an industry about it.

Dr. Thomas Boland is our imbalanced young man, and as a write up last month in The Economist Printing a Bit Of Me described it:

Dr Boland started experimenting in the summer of 2000 using an old Lexmark inkjet printer that was sitting in his former lab at Clemson University in South Carolina ... At the time he wasn’t looking to print 3D biological structures, just proteins or cells in two-dimensional patterns

But the concept of 3D printing biological structures quickly began to catch on with other scientists over the next couple of years.

In Dr Boland’s case, he simply added to an HP printer a platform that could move up and down. In 2003 he filed for his first cell-printing patent and collaborated with Dr Forgacs and three other colleagues on a paper for Trends in Biotechnology in which they predicted that in this century “cell and organ printers will be as broadly used as biomedical research tools as was the electron microscope in the 20th century.”

"They've got to be kidding" was my first reaction to all this (click on images to enlarge):

But this image from explainingthefuture.com doesn't look very much different than the actual printer they are using at Organovo (ONVO) to print liver tissue samples they intend to begin selling to drug development companies this December! The whole-organ printing depicted above is something they see as maybe being 20 years into the future, although at Wake Forest, they are already printing bladders and putting them in people.

Anthony Atala, is a leader in this field and director of the Wake Forest Institute for Regenerative Medicine in North Carolina. In a Fool article last October, "Organovo's 3 Biggest Opportunities in 3-D Bioprinting", they discuss the progress made toward organ printing:

So far, surgeons have been able to implant a variety of engineered flat, tubular and hollow tissues into patients, including skin, cartilage and muscle. Dr Atala has also successfully implanted lab-grown bladders and urethras into young patients. But solid organs are another matter.

"Bioprinting" is the name given to this Herman Munster stuff, believe it or not, and as the "Printing a Bit Of Me" article notes in it's lead statement, "Bioprinting: Building living tissue with a 3D printer is becoming a new business". The business sense of it is easily seen when you consider what goes on in drug development. Of every 5000 drugs invented, only 5 are allowed to be tested on any of us living humans, with only 1 of those being approved for sale. But those 4999 failed drugs have soaked up some $5 billion dollars in testing, making the one approved very very expensive for us all. Our healthcare crisis, and I think you could call it that, could be solved in great part with a new era of drug testing on bioprinted human tissue.  As biopharma companies begin getting printed human tissue to test with, it is going to weed out the ones that can't ever be sold much more quickly and with only a tiny fraction of the cost.

One of every four failed drugs in phase III trials, or those yanked from the market once approved, fails because of liver toxicity. This is after the $5 billion wad has been blown to develop it. So Organovo, the only public company so far doing bioprinting for biotech development, is focusing on selling printed liver portions first, to possibly knock a huge hole in the typical drug approval cost.

This is a new direction in medicine possibly affecting Genomic Health (GHDX) in particular. It will effect many healthcare companies, but Genomic is in the business of working on cancer tissues taken from patients to develop custom tailored therapies based on the genomics of that particular patient. A "cure" for cancer as was envisioned years ago as some silver bullet discovery has given way these days to the reality of genetic differences in us all, and a cure for one of us isn't a cure for someone else, even with the same cancer. There likely may never be a silver bullet, other than good nutrition, inherited genes, and avoidance of toxins, etc. Genomic Health treats each cancer as a separate disease with only genetic predispositions and groupings to target with treatment designs. As was explained in the fool article:

Organovo is collaborating with Oregon Health and Science University's Knight Cancer Center to develop the technology. The pair is expected to publish results from several studies after the second half of next year, after which a pathway for commercial develop can be established. While any number of pharmaceutical companies would surely be interested, it would also be worthwhile to partner with a cancer diagnostics company such as Genomic Health to expedite commercialization and improve the chances of building a successful platform.

Genomic Health performs genomic analysis on tumor samples to identify tumor-specific characteristics. If Organovo can print multiple tumor types with certain genetic dispositions (as occurs in the real world), pharmaceutical companies or doctors could rapidly develop individual regimens based on the cancer tissue and patient's genetics

This possibly positive new development among others is attracting a high level of insider buying in GHDX from the Bakers. If you follow Biotech very much, you probably are aware of the Baker brothers, Felix and Julian, their investment funds and other corporate entities. Julian Baker has been on the Genomic Health Board since 2000 and was joined in 2012 by Dr. Felix Baker, who holds a PhD in immunology. They are also on the boards of several other biotech companies. They know more about biotech than you and I combined ever will, and have a reputation of astonishing success with their insider buying of biotech stocks.

I want to present here, not an involved chemical argument for Genomic Health, because, quite frankly, when I read discussions about myelodysplastic syndromes and multi-tyrosine kinase inhibitors, it just makes my head spin. I want, instead, to show some patterns in the insider activity of the biotech stocks the Bakers have been buying over the last decade and how that relates to GHDX. Insiders typically know more than the market participants as is evidenced by study after study concluding that stocks with high insider buying add several points of alpha to a portfolio. And the Bakers seem to know more than your average insider (I did some charting to check on that). There are just a handful of stocks that the Bakers have zeroed in on with massive buying, and by that I mean anything over about $40 million worth. I included the buys of their funds as well as their personal purchases. I did not include granted options or any activity other than market buys of shares.

First let's look at Seattle Genetics (SGEN) (click on images to enlarge)

Here we see $multi-million buys starting to crop up in 2006 at a very opportune low point in SGEN's price history. After a quick climb that more than doubled the stock, there was no big buying in 2007. Then the buying returns and intensifies until 2012, when the stock embarks on a fast multi-bagger and the buying shuts down again. Last year the buying is back at even higher levels. 

Now let's look at Incyte (INCY):

There was some small buying (by their standards) in 2003 and 2004, then two years of no buying. The heavy buying starts in 2007 with about $60 million bought in 2011. As with SGEN, the stock goes into a fast, multi-bagger explosion. The Bakers saw something very good many years before the market did.

Now let's look at  Pharmacyclics (PCYC):

Here, you get the feeling the Bakers were a little tardy in latching onto this rocket having only bought in two years and "only" about $40 million worth before the launch. All the buying in 2012 was done in January and a little in February, just ahead of ignition.

Which brings us to Genomic Health (GHDX):

Here we see the buying started in 2010 and heavy buying setting in during 2011 and intensifying in 2012 to a level much higher than in any year of the previous cases. You have to like the chances of a multi-bagger climb ensuing in the not-too-distant future. The Bakers tend to accumulate heavily for 3 or 4 years, which historically is a very good buy signal. And that's just what they have done with Genomic Health at this point.

The timing of the buying beginning in 2010 is interesting in light of the evolution of  bioprinting and what a massive help to GHDX it could be:

• 1984 - Charles Hull invents 3D printing in general, creating a 3D model from pictures that began to be used for tests before money was spent on manufacturing
• 2003 - Dr. Thomas Boland, in his lab at Clemson, modifies of a Lexmark printer to print 2D living cell arrays on a scaffold
• 2004 - Several other scientists begin modifying printers to print 3D cell structures on scaffolds, and Dr. Forgacs, co-founder of Orgnaovo, first prints 3D living tissue without scaffold
• 2010 - Organovo prints first human blood vessel without scaffold
• 2011 - Organovo develops multiple drug discovery platforms and 3D bioprinted disease models

The blood vessel accomplishment in 2010 may seem minor, but a huge hurdle in printing living matter for realistic testing of therapeutics is the creation of the circulatory part. With their buying of GHDX starting also in 2010, one has to wonder if the Bakers were watching this development and are optimistic about the game changing prospects it may hold for Genomic Health.

Their game is simply this, as stated at their Linkedin page:

Genomic Health, Inc. (NASDAQ: GHDX) is the world's leading provider of genomic-based diagnostic tests that address both the overtreatment and optimal treatment of early stage cancer, one of the greatest issues in healthcare today. The company is applying its world-class scientific and commercial expertise and infrastructure to lead the translation of massive amounts of genomic data into clinically-actionable results for treatment planning

The "massive amounts of genomic data" are the gene mapping that used to be a hot topic decades ago. The Human Genome Project was launched in a 1987 budget to Congress with the goal of mapping our genomic make up over the next 15 years. In 2006, they announced an essentially completed project, although "it remains the world's largest collaborative biological project" according to Wikipedia. That was the year coincidentally that the Bakers began their massive buying of Seattle Genetics in the above graph. Now with the advent of bioprinting, a new age of medicine may be dawning where $billions of development money will be chopped out of the creation of effective therapy . They can now begin testing willy nilly on real live human disease types, so much of which is gene determined, without the massive waste of time and money spent on animals, cultures, and all the poor substitutes they have been working on all these years.

Is this a possible reason for the bull market in the biotechs emerging the last couple of years? The biotechs are often thought of as unstable and dangerous in overpriced, frothy markets. But even if you feel that way about the present market, check the behavior of the Baker selections above over the '08 crash. They were vastly more resilient than the market. You can not even find an "08" in their charts. Maybe they're not a "safe place to hide" like a utility, but the advances in medicine will go on pretty much independent of the economy.

Genomic Health is just a $823 million market cap company with plenty of room for growth and a very tiny float of just 17 million (the Bakers have bought up most of the shares) so it could move fast in a bullish development. They have zero debt, $105 million in cash, and a 4.8 current ratio, but unexciting bottom line performance with downgrades and a slumping stock price.

As for basic fundamentals for GHDX, they have growing revenues over the last 5 years and a price/sales of  3, which is reasonable for a biotech. But that's about all you can say for it. The cash flow multiple is over 90 with earnings waffling between positive and negative. They need a game changer. The Bakers seem to think one is on the way.