Gold Update: Solid Performance, Higher Levels Ahead

The COMEX triumvirate of Gold, Silver and Copper really put on a positive show this past week. It may not feel like it, nor with specific respect to a Gold chart look like it, but 'tis rather the resiliency that made it so. And if I could take an internal meter reading of my sense of sentiment, 'twould be pointing more bullishly than has been in many-a-week.

"But c'mon mmb, you're always bullish on Gold..."

Generally that is correct, Squire, if for no other reason than its natural inclination to correlate positively with accounting-created levels of money supply, such renewed correlation as we'll herein see becoming more in sync of late. But one can emote varying degrees of being bullish, for example being cautiously so upon Gold's "having gotten ahead of itself" back in September 2011.

Yet specific to The Now, the intra-week resiliency displayed by the main metals is the kind of activity that gives one a sense that higher market levels are ahead. And to the seemingly few market watchers not aimlessly wandering about, detached from it all on their vacations, those of us focused on the week's trading were afforded a fabulous show.

And you have to like the way that Gold was the only market in the BEGOS bunch to get a bid in commencing the week last Sunday (03 August), its positive start early-on as encircled below some three hours into the session, (from top-to-bottom: Bond, Euro, Swiss,Gold, Silver, Copper, Oil, S&P):

There's nothing like a hint as to where the earliest of market participants are most desired to be positioned.

Come Monday however, Gold began sliding in earnest back lower toward Big Ben Gap (which as you recall spans from 1283 down to 1248), and indeed by Wednesday 'twas tippy-toeing upon the wall's narrow shelves to as low as 1272. Fortunately, 'twas at that point the bungee cord reached maximum stretch.

From their respective Wednesday lows into week's end, King Gold then rose as much as 3.5%, Sister Silver 7.7%, and Dr. Copper 6.0%. Now that's a Solid-Gold Performance. And as we go to the Gold bars, you can see that the week's lost ground was regained in full, and that the hurdle of the descending parabolic red dots will flip the trend back to Long should Gold penetrate 1363 this week:

Again with respect to resiliency, look in the above chart at the closing price "nubs" for each of the last five weeks: every one of them is well off their respective intra-week lows. As we've been emphasizing in our most recent missives, time and again, the buyer's keep coming back into Gold on trading weakness.

Now you might reflect that five consecutive weeks of Gold's closing nearer to its high than to its low is a cute stat, but the law of averages says such trend must now be pushing unsustainability. Actually, these types of streaks have occured with much more endurance than one might think: late in 2003 into 2004, Gold closed nearer to its weekly high for 10 straight weeks; it did so again for 10 in late 2004; and to stamp it with a bit more authority, through autumn of 2007 'twas a 12-week streak of same.

Moreover, despite dealing with the doldrums of these Dog Days, is Gold displaying enough volatility to reach up those requisite 50 points in the new week to eclipse the 1363 level and thus flip the parabolic trend to Long? I don't see why not, given that Gold's "expected" weekly trading range is now 68 points, (our Market Ranges having the daily "expected" range current set at 25 points). But wait, there's more...

One of the standouts making our Market Rhythms list is Gold's standard MACD (moving average convergence divergence) study on the time-frame of daily bars. The study has been producing a high probability of profitable price follow-through upon the MACD lines crossing one another, (for those of you familiar with such study, meaning upon the histogram's changing from pointing positively to negatively and vice-versa). And Gold on yesterday (Friday) closed the week with such an upside crossing for the daily MACD.

Indeed in 9 of the last 10 crossings, (both Long or Short as measured from 04 February-to-date), Gold has further traded in the same direction by at least as many as 17 points, (the median being 48 points!), before the MACD's crossing back in the opposite direction. Of course given the "can't-be-wrong-benefit-of-hindsight", one's results if taking those last 10 crossing signals and targeting gains of 17 points per trade, (including the most recent downside crossing being the only one that failed for a loss), would have one sittin' pretty with a gross profit-to-date of $12,430 per contract. Tradin' Tens and that's $124,300 just since February without having had to commute anywhere. (And given a minimum equity requirement of $8,800 per contract, that's a return of 141% in just over five months). We calculate; you decide.

So at this juncture, I'll bet that even some of the more pessimistic of you are starting to feel a bit more bulled up out there, (if not having simply dismissed it all as bull). Either way, here's another positive indicator: Gold versus its smooth, pearly valuation line, (daily closes over the last three months):

'Tis seemingly been beyond forever since Gold last made any material ground above that smooth line, (borne of price movements relative to those in BEGOS), albeit per the oscillator, price has gotten a bit flirty of late with the valuation line. But a run up from here at 1314 through the parabolic price at 1363 toward getting atop Base Camp 1377 would obviously change that valuation perspective.

Defying da Blues...

Oh those "Baby Blues", the blue dot patterns than determine 21-day linear regression trend ~consistency~. Here we've the daily bars for each of Gold, Silver and the S&P Futures (Spoo) from one month ago-to-date. Currently the panels below show both truth and defiance. Gold truthfully came off as its Baby Blues made the great turn from North to South, although you can clearly therein see that aforementioned resiliency over the last three days.

'Tis the same for Silver, whose own Baby Blues have just painted that first, slightly higher blue dot suggesting the incipient reinforcement of uptrend. But then there's the defiance by the S&P. "What?" Exactly my response as well, Squire. Yes, the uptrend has kept going despite earlier weakening by that market's Baby Blues; however their now moving sub-80% is indicative of such trend's consistency beginning to breakdown:

Now if that isn't enough of the quant stuff for you, then have a look at this next bit. Near the outset above, we alluded to Gold's recently getting back with the program of its properly being positively correlation to the supply of monetary accommodation. To wit, the following chart, (now stay with me here). The single line thereon is derived from a four-element calculation, made each week from one year ago-to-date. The first element is Gold's weekly percentage change; the second is the StateSide M2 money supply's weekly percentage change; the third is the ratio of the Gold change to the M2 change, and the fourth is a running accumulation of those ratios, which is the line in the chart that results as follows:

The line's having essentially flattened out since January suggests that Gold has stopped its ironic fall in the face of quantitative easing. Yes, Gold obviously suffered that terrific three-month plunge from April through June, which does not stand out in the line on the chart: for again, we're not so much measuring price direction here as are we summing the comparative rate changes in the levels of Gold's price and M2. And by this chart, it appears that Gold at long last is finally getting back into its natural role of offsetting currency debasement.

As we oft remind, such debasement is in vogue not just StateSide, but right 'round the world. Yet now, are economic conditions sufficiently on the mend such that the recent years of faux dough injections have actually achieved their motivational objectives and thus shan't be needed going forward? Bit of a leap of faith there, but at first blush, some areas apparently are perking up. For example, just when it seemed like China was on a linear path toward zero growth just a few years hence, we now see that their Copper imports in July alone leapt by 8.1%, the biggest monthly increase in better than a year, and thus the upside explosion in price we witnessed into week's end.

Meanwhile over in Germany, their industrial/factory orders rose 3.8% during June, whilst in the UK, manufacturing is picking back up per their PMI data. Still the Brits are airing on the side of caution, declaring they shan't considering raising interest rates for some three years, the time 'tis expected to bring the unemployment rate down to 7.0%, (which seems quite a long time given the current rate is hardly that far away at 7.8%).

Of course when it comes to Europe, the reality remains of a more economically buoyant Northern Microsphere versus that of the South. Which brings us to what had to have been the nuttiest headline of the week: "Italy signals end of EuroZone recession." I realize 'tis a stretch to extract any meaningful, material economic news out of the EuroZone during August when there's nobody there, but that one was a real hoot. The deal in this case was that Italy's economy, which continues to shrink, did not shrink during Q2 by the amount 'twas expected to shrink and therefore, direct from the FinMedia's own print, this is "suggesting the EuroZone may have managed to exit its longest ever recession." They ought visit the shrink, methinks.

Then, of course, there's always my beloved France, (which as you know ought really be part of the Southern Microsphere despite its not being officially recognized amongst the PIIGS), to then put a damper on it all as their own industrial production "unexpectedly" dropped in June. But I'm not really sure why 'twas reported as "unexpectedly", given that the French generally throughout the month of June spend their working hours at their guaranteed-by-law jobs preparing for their mandated nine-week July-through-August vacations. "Alors, du pastis, toi?"

Let's turn to Gold's trading profile for the past 10 sessions, the Golden Swath being Friday's range and white bar the 1314 closing level. Again, the bars' lengths represent the volume of contracts traded at each price point. And if we can take out that overhead trading resistance apex at 1324, Gold looks good to run higher still through the new week:

We'll wrap it here in support of the notion put forth earlier about Gold having returned to its being in sync with money supply growth. There currently is airing for a Gold retailer a radio advert that goes something like this. The lady narrator comes on and says, (paraphrased) "Wish you could buy Gold at almost half-off?" She then goes on to explain that Gold's percentage drop since its All-Time High (1923 on 06 September 2011) essentially justifies such sale as being on. But then comes the best bit, and with fundamental respect as to why Gold rises, she absolutely nails it with this closing punchline: "Remember: nothing has changed. Government continues to create money out of thin air." Spot on brilliant. Say no more.