The Gold Price Update…A Diamond In The Rough

Astute market observers are likely aware that Mr. James Dimon (JPMorgan Chase's Chairman and President and Chief Executive Officer, like so many folks in this economy having to hold down three jobs), noted in his annual shareholders letter this past Wednesday that "There will be another crisis, and its impact will be felt by the financial markets."  That is rough, Mr. Dimon. The catalyst for his warning of volatility in the next stocks submergence (my words) is the limiting post-Black Swan regulatory environment placed upon StateSide banks so that they maintain enough available cash in the event of "runs" such that these institutions lack the otherwise necessary risk mobility to essentially practice "business as usual". Thus when it all goes wrong, the banks shall be holding the bags whilst leaking the Bucks.

But as we've noted before, a long-valued reader of The Gold Update occasionally quips: "Does it really matter which snowflake causes the avalanche?" As many of you know our snowflake of concern is the live price-earnings ratio of the S&P 500 Index, which at this writing is 35.5x; (if we ignore the capitalized weighting of the 500 components, 'tis 28.3x ... but that would be cheating). Still, cut the Index in half via a crisis, and by "B-School" standards, 'twould then still be "overvalued", just as by "debasement" standards, Gold's halved price today is "undervalued".

Either way, be it the snowflake of bank balance sheets blowing up, or the snowflake from a capitulative dose of common sense that equity values are horribly high based on earnings generation (or lack thereof), Mr. Dimon's "another crisis" surely must be coming. In fact, one might substitute the word "crisis" with the phrase "return to normalized valuation". Indeed, history has taught us that complacent financial gain oft results in crestfallen financial pain -- and whilst we never wish financial damage on anyone who's worked hard and honestly tried to grow their dough -- we're nonetheless heartened that a visible, high-level figure has openly stated that further financial fallout is forthcoming.

Others, too, see the writing on the wall. Right in stride with the poor payrolls data reported a week ago, the other Morgan (Stanley's) David Darst has since said "We're in very irrational times ... Things don't work the way they should", (duh!). Meanwhile MarketWatch's Mike Sincere being true to his namesake furnished a rash of reasons to convert equities into cash. Then we've the good folks over at Forbes explaining "Why This Earnings Season Could Be The Worst Since 2009" (albeit they've all been relatively lousy given our aforementioned P/E of the S&P). In any event, given that "The Great Revaluation of Assets" is inevitable, it ought rightfully put Gold -- The Diamond in the Rough -- well north of $2,000/oz. upon eventual massive central bank intervention in yet again seeking some kind of economic calming through debasement, aka "Quantitative Easing to Gold's pleasing, across the nation and throughout creation." Tick-tick-tick...

Back in the day, were the head of a major investment banking firm or Federal Reserve Bank official voice concern of pending financial crisis, global stock markets would typically drop like a stone. But today 'tis totally atypical. In spite of Mr. Dimon's words, the S&P closed with gains on Wednesday, Thursday and again in closing out the week yesterday at 2102, a scant 15 points short of its all-time closing high of 2117. Such neurotic sophistry notwithstanding, I am reminded of another James -- one Mr. Sinclair -- who whilst addressing his local followers here in San Francisco last autumn put forth that the markets are no longer driven by persons, but rather by algorithms. Thus by my reasoning, the algorithms are not programmed to follow the FinMedia, let alone give a derrière du rat about who Mr. Dimon is. But then again, we ought not be surprised, for today's trend-following algorithms respond as per their procreation from the infamous "World Ends, Dow Up 2. Dept". Crisis averted, what? "Hip-hip!"

What appears is about to turn "hip" is Gold. In the following year-over-year chart of Gold's weekly bars, price (currently at 1208) appears on track to pierce the declining red dots (the rightmost at 1234): that 26 point upside difference is reachable in the new week, given the weighted-average weekly trading range is now 41 points. Then upon eclipsing those Short red dots, the presence of a new series of rising blue Long dots should have enough initial motivational muscle to break price up and through the 1240-1280 resistance zone as bounded by the purple lines, such that a return to the 1300s is waiting in the wings:

"Seems like a bit of a stretch there, mmb..."

A valid comment well-taken, Squire. "Support" and "Resistance" are to mean just that and have provided guidelines to market order placements, I suppose, since the times of trading the tulips. But even our beloved WestPalmBeachers know that if such levels always contained price, markets would be rutted in sideways perpetuity.

Moreover, this past week was a "test" of Gold's resilience following price's gapping higher in response to the materially weaker growth in March payrolls. Below in this next graphic of Gold's 4-hr. bars encompassing the last two weeks, there in the center (at a week ago) is the leaping 10-point "poor payrolls gap", (you weren't Short, were you?), followed by the classic "gap filled" procedure and then the "upside resumed" stance into week's end:

Of course, the fact that Gold is displaying resilience can only mean within the warped walls of the anti-Gold pop-culture establishment that price has merely gotten ahead of itself once again, such that one's focus ought instead be on accumulating as much of the S&P's $100+/share earningless companies as possible, (there are actually four of 'em per the website's Valuations & Rankings page). For our part, we'll stick with Gold, and as the next dual-panel graphic shows, price is hardly ahead of itself. On the left we've the last three months of daily closes for Gold with its smooth, pearly valuation line of regressed price movement from the markets that comprise BEGOS (Bond / Euro / Gold / Oil / S&P), the oscillator (price less valuation) below the panel indicative that nothing is far afield there. On the right for these same three months is Gold with its Market Magnet (the 10-day volume-weighted price consensus from which Gold shan't stray too far), its oscillator (price less magnet) showing all as being in harmony there:

Still, with a more prudently cautious eye, we next turn to the 21-day linear regression trends' "Baby Blues" consistency readings of both Gold (left) and Silver (right). Again, the time frame is the last three months-to-date, and you can see why here we take a bit of pause, for the baby blue dots have begun to descend. The "rule" is for the Baby Blues to swing between the +80% and -80% levels; the "exception" is the Baby Blues not completing such swing, but instead turning (what in both cases would be back up) against the otherwise impending tide. 'Tis something upon which to maintain focus, (and I know many of you follow these dots each day at the website):

And so to the 10-day trading profiles themselves. Gold on the left appears better supported than does Silver on the right, the white bar in each panel depicting the current price. Odd, given Gold of late is up, and further that the S&P of late (if not as always) is up, that Silver's current price (16.485) seems comparatively low in its profile:

However, with respect to Sister Silver, we've learned over the years that if not all dolled-up in her precious metal pinstripes, she has a hankerin' of appearing a bit irrational in her industrial metal jacket, notably when her flirtations with Dr. Copper get fired up, (or in this case, down). Here are the red metal's own "Baby Blues" and Market Profile, neither looking recently dissimilar from those we've just seen above for the white metal:

In closing, let's assess another "hint" of the approaching "crisis". We read this past week that General Electric is going to sell off the vast majority of its $30 billion real estate portfolio, (Blackstone and Wells Fargo taking much of the BuySide risk), with proceeds also working their way back to investors. But for GE, in hindsight the transaction's timing may turn out to be nothing short of clairvoyant should property values plunge, given the lurking crisis. From land and buildings back to washing machines and light bulbs. Cleansingly brilliant!

Next week brings a cavalcade of data for the Economic Barometer, plus notably on Wednesday we get the Fed's Tan Tome and the U.S. Treasury's hoovering up our payments of income tax! Aren't you glad that Gold is your Diamond in the Rough!

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