Bonds Smashed, Gold Hashed

On Wednesday whilst munchingmy modest tuna half-sandwich at the club bar, a fine friend with a budding interest in Gold asked where one would be if having dollar-cost averaged into Gold over the last couple of years. “Well under water!” was my knee-jerk response, although ‘twas an intriguing question. (For you WestPalmBeachers down there, dollar-cost averaging is the periodic investment of the same amount of money into a security regardless of its price).

Clearly if having already been dollar-cost averaging into Gold since it was $365/oz. on this date 10 years ago, one would certainly be sitting in the pound seats today: buying $1,000 worth of Gold at each month’s opening price, (basis COMEX futures), beginning in July 2003 would be a total investment to date of $134,000 into 205 units of Gold with a current profit of $116,000 and a break-even price of $654/oz.

More specifically to my friend’s question however, dollar-cost averaging into Gold only during its decline from the 06 September 2011 All-Time High of $1,923/oz. wouldn’t even find one today in the 50¢ bleacher seats, at best peering in through a knot hole in the right field wall.

Nevertheless, to exemplify using dollar-cost averaging via the poor man’s convenient method of buying Gold “shares” via the SPDR Gold Shares ETF (GLD)…which is regularly priced at just under one-tenth (9.7%) the level of Gold itself, had one purchased $1,000-worth at each monthly opening price from October 2011-to-date, the accumulation thus far would be 132 shares, (rounding down to the nearest whole share at each purchase), for a cumulative investment of $21,077 (including round-trip commissions of $18/purchase), resulting in a current loss of $5,474 with the break-even price now at 159.67, some 25% below July 2013’s opening price of 119.94:

GLD at this writing is just 118, yet it goes without saying that upon Gold reaching 2000, the price of GLD ought be 194, in turning whirling ‘round that $5k loss into a least $4k gain, and that’s without any further purchases from here, (which obviously would be a mistake). At Gold 2500, we’d find GLD at 243, such profit then having increased to just under $11k, (again without any added units), and so forth.

The point of the exercise really is to emphasize the wisdom of buying Gold, especially when ‘tis on the cheap like this. Were I to offer you one Dollar for two quarters, you’d indubitably make that exchange. Similarly today, you might value what you perceive to be $2,400-worth of Gold that is being offered for a mere $1,200 as an absolute bargain. Think about it; ‘tis hardly rocket science.

“But mmb, you always say the market is never wrong, so isn’t $1,200 the right price?”

‘Tis absolutely the right price, Squire. The net result of the market’s buyers and sellers hashed Gold into a 1% loss for the week down to the 1222 level…

…and as you can see on the chart, the rightmost bar was comparatively a bit of a stub, (higher-low and lower-high), given in part to the StateSide Independence Holiday.

Still, dear Squire, expand that cranial capacity for a moment and consider the difference between price and value. Recall from last week’s missive the selling of a sports car back in the 1980s for $2,500? That was the price. Today, what is $100,000+? That is the value.

‘Tis the same with Gold. Regular readers have seen us come up with all sorts of measurement tools for valuing Gold, (a favourite being its offset to the debasing growth in StateSide M2 money supply alone over the last thirty years, suggesting Gold ought already be north of 3000). Yet whilst this pounding down of market price is very real, in terms of value, such selling gone beyond the absurd. As an illustration, let’s look at Gold versus Oil after the dive of 2008’s Black Swan-to-date.

The following graphic shows the percentage tracks of these two markets per their daily closing prices since the start of 2009:

Naturally, Gold and Oil have a proven tendency to generally be in positive correlation, whether it be due to geo-political concerns as we’re currently seeing over in Egypt, or to the more normative aspects of inflation and Dollar debasement. Pay particular attention to the two dashed lines in the chart: those are the linear regression trendlines for both markets, and note that they are practically parallel. Yet look how far the percentage track of Gold’s actual price has wandered from trend: you don’t think this market is crazy-oversold? Such refined technical terminology aside, one ought well recognize value when one sees it.

And briefly with respect to Oil, which traded during the week from as low as 96.07 to close yesterday (Friday) at 103.63, that should work its way into your local petrol pump over the next week or two. I just filled up for $4.46/gallon here in San Francisco, (which as you may have read is now America’s “snobbiest city” according to some travel publication; I realize we’re known the world over for our fruits and nuts, but this is really pushing it). Anyway, five bucks per gallon in due course for this town shan’t surprise me a wit.

Yet, whilst watching the Tour de France this past week on the télé, I saw the lads pedaling past a petrol station near Bastia, Corsica, the green neon sign sporting a price of €1.68/litre. In the event you’re heading in that direction for the summer’s vacation, let’s do the math: €1.68 x 3.79 litres/gallon = €6.37/gallon x $1.2839/€ = $8.17/gallon. Best forget the rental car and simply cycle about.

How’s the Bond? Simply Smashing!

Or more accurately stated: smashed. In Bond Land, the yield on the US 10-Year Treasury Note has risen better than 100 basis points in just the last nine weeks. When was the last time that happened? The nine weeks ending in the first week of 2011. What did Gold then do right into that September? It rose as much as 553 points, (40%). Let’s review our chart of the 10-year yield which as you know at 2.715% has already broken above the orange resistance triangle formed from 2011 into 2012:

Not that history would necessarily repeat itself with such timed precision, however a 40% rise in Gold from the current 1222 level would put the price at 1711 by Springtime en route to The Northern Front (1750-1800). With rising yields comes the whiff of inflation, which in turn is the foundation of The Gold Story. Recent demand for Dollars is adding to their cost and clearly the StateSide economy must be on the move given the rosy June employment statistic of 195,000 jobs having been created, an increase of 17% over expectations, as further embellished with an upside revision for the May data.

“But wait a sec, mmb, the U6 rate of unemployment went up from 13.8 to 14.3%.”

Good on ya, Squire: evidently you’ve stopped watching the news and turned to more substantive sources. Were more to so do we’d see Gold far higher that currently ‘tis. In any event, the permeation of worsening unemployment into the economic fabric ought keep monetary accommodation in continuance which naturally shall redound to higher Gold levels. “More Dollars Please”. Fundamentally elsewhere as well, the one economic constant remains that there is simply not enough dough to make it all go out there. The slowing of growth in China is now being reported as significantly bleak such that it highlights the precarious health of the world’s economy at large. “More ¥uan please”. In Portugal meanwhile, the political turmoil borne of recession-weary austerity is such that their finance minister Vitor Go-Go Gaspar has indeed gone. “More €uros please”. Contact your own Central Bank for further information on upcoming accrual accounting entries.

Nonetheless, ‘tis been a rugged 22 months or so since Gold, after having gotten ahead of itself, more recently then got behind itself, and now of late has completely lost hold of itself. And struggling at an even more sorrowful pace have been the paper Gold vehicles of the HUI Gold Bugs Index, the Philly Exchange’s XAU Precious Metals Index, the exchange-traded miners fund GDX, and roller-coastin’ RGLD (Royal Gold). Here are their comparative year-over-year percentage tracks with the paper players all down ‘round -50%. Ouch:

Still, in the July-September period of a year ago, you can see how the paper brethren outperformed Gold itself to the upside. But as queried by the chart’s question mark, can the equities again outpace the yellow metal in the next surge? ‘Tis their wont to so do, however fighting the tide of a declining stock market would require extra effort.

Gold’s Valuation via BEGOS: A Broader View

Generally our charts for the BEGOS markets (Bond/Euro/Gold/Oil/S&P) in valuing each component by its movement versus that of the other four are via a three-month view, the two primary interests being: 1) observing price crossings of the smooth pearly valuation line, and 2) oscillator distance of price from that line, (as displayed in the lower panel of the chart). However, this time for Gold we’re presenting the full year-over-year view, (as will be the case at the new website which I thought of launching on Bastille Day -- 14 July -- but given the fragile nature of the French economy, have instead opted for 01 August, which is of course Swiss National Day and thus has more of a Solid Gold, weighty feel to it). And for some nine months now, look at how the smooth valuation line has time and again repelled Gold from passing above it, shown ever so starkly as well in the oscillator view:

Technically to me, this is unsustainable and is yet another reason to expect Gold’s imminently turning higher, dare I say, with a vengeance that shall surprise the "Cool to be Cruel to Gold" crowd.

How about some more evidence of downside unsustainability: let’s next turn to this two-panel graphic as regards trend consistency for the BEGOS bunch. On the left we’ve the familiar chart of Gold, its daily bars spanning the last three months-to-date along with the Baby Blues which measure the ~consistency~ of Gold’s 21-day linear regression trend. When the baby blue dots are above the +80% level, a bonafide consistent uptrend is declared as in place. On the right we’ve thus ranked the BEGOS markets (including their sub-markets) by the number of trading days that have passed since the last time each product’s Baby Blues were greater than +80%. (And 192 trading days for Gold encompasses nine months, which without running a millennium-to-date study, I have to think is a record):

Think we’re overdo for a Great Gold Rally? “HELLO???”

So to get the party started, here we’ve Gold’s trading profile spanning the last 10 sessions, (the current 1222 level in red), and it suggests we first try to ascend through that trading resistance up to 1256…


…following which with a little surge of herd we can get over the next resistance hump in those upper 1200s and move back up into the 1300s … and beyond. Shan’t be necessarily easy of course, as there is a lot of work to do given the inglorious state of the Gold Stack:

Gold’s All-Time High: 1923 (06 September 2011)

The Gateway to 2000: 1900+

The Final Frontier: 1800-1900

The Northern Front: 1750-1800

The 300-day Moving Average: 1599

The Floor: 1579-1466

Sous-Sol: Sub-1466

The Weekly Parabolic: 1404

Base Camp: 1377

Structural Resistance: 1310 / 1322-1337 / 1381 / 1463-1479 / 1527-1581

10-Session “volume-weighted” average price: 1245, (range: 1302-to-1179 = 123 points or 9%)

Trading Resistance: 1232 / 1241 / 1248 / 1256 / 1275 / 1283 / 1293

Gold Currently: 1222, (weighted-average trading range per day: 36 points)

Trading Support: 1213 / 1202 / 1192

Structural Support: 1195 / 1033

Finally, I realize I didn’t beat up too much on the S&P 500 this week. Given its multi-week run down from the year’s high of 1687, (which I still think is firm for the duration), to as low as 1561, the S&P actually moved into a technically near-term oversold condition, unwinding it in rising this past week. Still, our “live” price-earnings ratio remains excessive at 26.5x, (Bob Shiller’s 10-year inflation-adjusted version is 23.9x), and the live yield is 2.157%, (which now pales even more in comparison to the afore-displayed 2.715% yield on the 10-year T-Note). But if both markets are to tank, there’s always that flight to the safety of cash, mine currency of choice being Gold.

(Jeepers: I sure hope I didn’t make John Paulson too nervous up there with that dollar-cost averaging into GLD exhibit …)