When trying to advise clients on what to do with their hard earned dollars, especially when I have a natural bias towards gold that is bullish, I look at many indicators that hopefully give me insight on timing the markets. It's not easy to say "hold off" to clients or to "dollar cost average into a position" but I have too many clients and prospects alike and they know my advice has been good over the years. This article will provide you with many of the indicators I look at in helping you judge for yourself where we are and where might be a good point to buy gold and silver. You may not agree with me on direction, that's okay, but when deciding whether to buy today, you have to have full conviction, as I do, that gold is going to go much higher (I use gold and silver interchangeably in my articles).
It's like buying Apple stock (NASDAQ:AAPL) at $300 one month and $400 the next. If each investor sold at $700 earlier this year, then both more than likely will be happy. If each kept their shares, in the years ahead, they have to have conviction Apple stock is going higher and when they sell they will both be happy. Yet one paid 25% more than the other for the stock. On to the gold market.
First off, I want to make a point that last year in June when I wrote an article where I said there would be an "80% Probability of Higher Prices for Gold the Next 3 Months." This has been a reliable pattern and I did miss it on a micro level this year and should have mentioned it again, but I didn't miss by much. Another indicator I have where I should have went bullish on gold on a micro level at $1,258 I missed as well. I can only blame this on the fact I was away from where I normally write, in seclusion working on my next book "Illusions of Wealth" and not as organized as usual. I'm back to normal now. With the miss of the micro turn, technically, when I wrote the article in May "Why I See Lower Gold and Silver Prices Over the Next 3 to 4 Months," I was right by about $7 an ounce as of the time of this writing, so I don't feel too bad. The Ask price for gold then was $1,290.30 and today at the time of this writing is $1,283.00. But where do we go from here? Are we going to get that final "smack down" I have been predicting? Let's see what some of my indicators tell us.
8 Indicators That Tell Us Where Gold Might Go Next
Please keep in mind that these indicators below can change quickly. So what you read about today can change in the weeks ahead to cause me to reconsider my thinking. But overall it has been a slow grind down for gold buyers. The bottom will be here soon enough. My indicators have to tell me to call it before I can be 100% bullish in the present. What it really comes down to for me is the same battle of inflation vs. deflation and as a result, a bullish dollar. Which of these do you see with these 8 indicators?
1. Demand from Buyers Down
One of the most important indicators I have of course is the phone ringing. While my phone may not be ringing as much because I have not been real active in marketing my business while writing my next book, and business could be slow because I tell people to hold off in buying, my suppliers give me insight on a national scale that your typical gold dealer can't have access to. Below is a comment from one of the head traders at one of my suppliers that sums up what's going on at present from their perspective.
Besides pressure from outside markets such as the euro and crude oil, physical demand has also been waning. The China Gold Association last week suggested a 19% fall in total H1 gold consumption to 569 tons (18,293,350 ounces). Gold bar demand in the first half of the year suffered a 62% fall to 105.6 tons. Silver eagle sales by the US Mint have been in steady decline with less than 1.7 million being sold in the month of July. To put that in perspective, in July of 2013, 4.4 million silver eagles were sold. With equities still near all-time highs, demand has dried up and margins have contracted even further in the precious metals sphere. Chinese jewelry demand fell for the first time in eight years in the second quarter and a weaker Chinese Yuan has discouraged investors from loading up on precious metals bars recently. Gold has held its 200 day moving average at $1,285.50 so far today and this is really the level to watch. It is semi worrying that gold is not rallying at all with Argentina on the verge of yet another default. What will make it trade higher?
2. Stock Market at New Highs
When you see an asset falling and another rising, an investor wants to jump on board of the rising asset which means they will sell or refrain from buying the falling asset. The old saying is, as many of you know, "the trend is your friend." Despite the recent weakness in the stock market, with the Dow down 143 today, it is still in a bullish pattern, but only up about 1% to date. Most investors are the last to the show and typically hurt the most when chasing higher highs. We may see many of them move into the market on the next run up. When that market reverses, they will be the ones who take the losses. Many have been sitting on the sidelines since the last crash and when they finally say, OK, I will get back in the market; they will find themselves in the midst of another crash. While the smart investor may not have begun selling their stocks yet, they are getting closer to that point. Perhaps later this year we'll see a top after we hit new highs. I don't think the stock market is poised to fall from here just yet. This can put pressure on gold and silver that can possibly get us that one more smack down.
3. VIX Volatility Index Not Showing a Lot of Fear
VIX The volatility indices measure the implied volatility for a basket of put and call options related to a specific index or ETF. The most popular is the CBOE Volatility Index ($VIX), which measures the implied volatility for a basket of out-of-the-money put and call options for the S&P 500. Specifically, the VIX is designed to measure the expected 30-day volatility for the S&P 500.
Despite the VIX being up big today, it is still well below the October 2013 and February 2014 peaks. While there is trouble in the Middle East that is threatening worldwide turmoil, CNBC's headline is "Dow down 1 percent on Europe deflation fears." The world is waking up for what I have been talking about for years; deflation. More on that next, but I see the VIX falling again as Consumer Confidence came in higher than expected and most here in the U.S. aren't yet feeling the effects of the Middle East turmoil. At the very least, those who are worried abroad will send money to the U.S. for safe keeping.
4. Europe Fighting Deflation
I don't know why CNBC is trying to write today that the stock market is down because of worries about European deflation. Did they not see what the ECB did in June by offering negative interest rates to banks for the first time ever in trying to stimulate their economy?
The European Central Bank has introduced a raft of measures aimed at stimulating the Eurozone economy, including negative interest rates and cheap long-term loans to banks. It cut its deposit rate for banks from zero to -0.1%, to encourage banks to lend to businesses rather than hold on to money.
Europe has many issues with their banks which I first pointed out in July of 2010 calling the stress tests then, "one big con." Europe did get propped up but they never resolved their issues and with the beginning of next year capitalization requirements being enforced, the banks are scrambling to meet that deadline. One of the weakest links is Portugal whose second largest bank just reported a loss of $4.68 billion. How do you lose that much money unless it is still related to the fact these banks never took care of their 2008 financial crisis issues? This has been the main reason I have been negative on the Euro all this time, despite the magic words of ECB president Draghi (blowing smoke mind you).
Portugal's No. 2 lender by assets, reported a record €3.49 billion ($4.68 billion) net loss for the second quarter after its troubled parent found ways to use the bank-and its customers-to raise funds that are now largely unrecoverable.
The news caused the bank's Lisbon-listed shares to plunge more than 50% Thursday morning.
The result of this European mess has been a negative Euro which by default means a positive for the dollar, our next indicator.
5. Dollar Bullish
I know many of you reading what I have written for a while don't understand or even agree with my stance of being dollar bullish. How can one be so dollar bullish when we here in the U.S. have so much debt and so many issues? You hear so many gold dealers and others calling for the dollar crash. Even one of my biggest competitors, Mike Maloney author of one of the Rich Dad Poor Dad books on gold said in 2010 (13:10 minute mark) "I think the most dangerous thing to be invested in is U.S. dollars."
I myself have used the word "unsustainable" in many of my articles. However, I also use another word called "perception." The world sees the U.S. dollar as the last bastion of safety. Gold dealers will try and convince you that the dollar will crash and all these countries are moving away from the dollar and yet with all these agreements and rumors the dollar gets stronger and stronger, especially of late. While nothing goes straight up, the dollar has been in a bullish trend since the high in gold since May 2011 when it was sitting around 73.
Here is what I said in March of 2011
It goes against all conventional wisdom for a gold dealer to caution investors on the price of gold and silver moving lower. There are literally trillions of reasons why the price of gold and silver will move higher in the years to come, including a multitude of unsustainable future government obligations. But from a short term perspective I have seen some things of late and some going back to the end of September that lead me to believe the dollar will move higher in the months to come, possibly putting some selling pressure on gold and silver, both of which have had a nice run with gold up 5.29% the last 30 days and 29.68% the last year while silver is up 20.39% and 110.95% respectively.
While the Euro makes up 57.6% of the Dollar Index, the Yen, which makes up 13.6% of the Index, has caused the USD/JPY to go from 80.67 in May of 2011 to 102.75 today. Japan leads the G20 nations in Debt to GDP ratio and keep an eye on what Prime Minister Shinzo Abe does next after his 2012 call for "unlimited easing" from the Bank of Japan.
Combined the Euro and Yen make up 71.2% of the Dollar. The Fed has given the gift of QE to banks here in the U.S. and while we here in the U.S. are sitting on a rather calm economy with the latest GDP report coming in with good data, Europe's banks are a mess and is closer to the war zones of Ukraine and the Middle East while Japan is mired in its own conflicts over various islands. Where would you put your wealth at present if you had to choose?
6. Velocity of Money Still Pushing On a String - Deflation
Until the economy picks up full steam, as noted in the chart below, don't believe anything the Fed or GDP numbers say. Money needs to get moving instead of sitting at banks. When I wrote my first book, "Buy Gold and Silver Safely" in 2010, I made the case for deflation. You can see this occurring in the chart below and the next indicator where I show a chart of the commodities index. The Fed has been fighting deflation exactly the way Bernanke said they would in his 2002 speech 'Deflation: Making Sure "It" Doesn't Happen Here'. The Fed, always acting after the fact, began to do things they have never done before with the buying of mortgage backed securities and long dated bonds (aka QE). They are under the false impression that the economy is picking up steam when overall from my talking to business owners and reading of the data, I don't see it that way at all. It's an "illusion." The Fed is now stopping QE reducing it to under $20 billion a month, and all the talk is about when they will raise rates sooner than expected. The answer is NO!, they can't! Not until the Velocity of Money picks up steam. I'm not a conspiracy theorist, but I don't discount the fact that the world is becoming less stable and what a way to get money moving than propping up the war machines. My 3rd book, "We the Serfs!" (8 years in the making) is trying to preempt that move. Just know I am aware of this tactical strategy by governments.
7. Commodity Prices Heading Lower
If we are indeed still in a deflationary economy, then this little move up in prices for various commodities would be just a dead cat bounce. While some prices of food items were affected by the drought in California, U.S. wheat futures prices are down about 13% over the past 12 months, while corn futures are down 38% in the same period. Oil has come back down off its highs despite the turmoil abroad. Natural Gas has fallen off a cliff of late until today.
The CRB Index is another indicator I follow to see what the world is doing. If economies are in good shape, then the world is buying and the CRB is moving higher and inflation is going to rear its ugly head. But if the CRB is moving lower, then it's deflation that is in control.
The CRB 6 month moving average was 26% lower on June 30, 2014 than it was on September 30, 2008 as the chart below shows.
You can see the little blip up for this year, but as just pointed out above, the next update of this chart will show a continued decline in the CRB index.
8. 10 Year Treasury Still Below 3% - Safety in Treasuries?
The 10 Year Treasury is still showing no signs of a problem and I still think we may have lower rates ahead as long as things in Europe continue to implode. This is exactly what the Fed wants so even though they are tapering, their goal of keeping rates low should occur with all the demand for "perceived" safety of U.S. treasuries from abroad. I expect this to continue until at least the beginning of next year.
These are just 8 of the indicators I follow to help me decide where we are going next in the economy (inflation vs. deflation) and with gold. It by no means makes me bearish gold long term. I'm as bullish as anyone who uses fear tactics to get you to buy today. Of course most gold dealers do that to get you to buy numismatic/rate/collectible/proof or other coins where they make 15% to 30% commissions from you. That's why I don't sell those coins and how I set myself apart, first by giving the best advice possible to dollar cost average into a position and second, when you are ready to buy, providing you with the bullion metals that will allow you to capture all of the appreciation that is forthcoming.
Bounces will come in gold and we may get a bounce from this level higher, but it's looking pretty bleak at present. Personally I would love to see one more bounce before the smack down. My indicators keep me balanced and while I may not call the bottom exactly, I do look at other things for more insight, including trying to think like a Market Maker, Elliott Wave Theory (including www.elliottwavetrader.net/), reading as much as I can, watching many, many videos on other people's points of views, talking to as many business owners as I can, attending Charity events to see what those who have money are doing with discretionary funds (they are giving a lot still), pre-supposing what the Fed and government may do next, debating people on issues, and many more.
On a final note, I want to reiterate that to move higher from this level and off to new highs I don't think we're ready for that yet, but it could always occur. It would absolutely shock the heck out of me with my indicators showing me something different. So you might have to judge for yourself and caveat emptor if you think differently. Like others who are bullish on gold, I could convince anyone that we are going higher with all the negative data and historical precedence. But I still give the Fed some relevance. For now. It's Europe I am keeping the closest eye on.
Hopefully you find what I write to be of value and now you have more of the indicators that I follow to be on the same page as I am.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Long term holder of physical gold and silver.