Gold: An Interesting Dynamic at Play

You gotta love financial markets, don'tcha? Thursday was supposed to be the quiet day, the day between the Fed and payrolls, the day when most of Asia and Europe were off. Instead, after the poor S&P close on Wednesday, the market decided to "grip it and rip it", with the SPX breaking through the heavily-watched 1400-1405 band of resistance.

While volume wasn't massive, it was still better than Monday's and Tuesday's, and there was some anecdotal evidence of real money managers putting cash to work with the new month. Not for them, this "sell in May and go away" nonsense! More interestingly, there was a pretty clear rotation out of erstwhile favorites like the energy sector, with the cash redeployed into the new leader, big-cap tech, and former laggards like the financials. The recent underperformance of energy versus financials is notable.

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That having been said, this sort of correction is hardly unprecedented during this bear market. And while the chart of the Nasdaq looks pretty darned bullish, Macro Man remains wary. Growth in other regions of the world is starting to slow a bit, and nothing that Macro Man sees suggests that the US cycle is anywhere close to troughing. Low delta Nasdaq calls might be the play here.

Friday's payroll number is largely a random event, though for reasons expressed earlier in the week, Macro Man expects a healthy uptick in the unemployment rate. Thursday's jobless claims and ISM survey did little to dissuade him of this notion. That having been said, both the dollar and stocks were more than willing to ignore the macro figures Thursday; while this is probably unsustainable in the medium term, Macro Man wouldn't be massively surprised to see a horrible payroll number get trumped by dollar and equity fund buying.

On the dollar, we seem to have come full circle. A number of punters were bullish the buck early in the year, a call that could charitably be described as "mistimed." It seems that this bullishness has returned...though perhaps it is more a reflection of euro bearishness than dollar bullishness.

There's an interesting dynamic playing out in gold. While Macro Man has some sympathy for the Moldbugian structural bull view on gold, the near term outlook looks less than 24-carat. Indeed, price action since XAU breached $1000/oz has been more pyrite than golden; music to Cassandra's ears, no doubt. Chartists (an occasionally pejorative term of which, alas, your humble scribe has been on the receiving end) would point out that bullion appears to have broken through a head and shoulders neckline, a move that would be confirmed by a sustained break below the vital $850 area.

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The pattern targets $725 or so, a move that would certainly cause the multitude of the product tourists in the commodity space to reach for the Pepto-Bismol. Given what other markets have done over the past couple of months, Macro Man wouldn't be shocked to see it happen. With vol having fallen recently, low delta puts look attractive, and Macro Man had a stab at the trade Thursday.

Comments

[User 30121]

Hey Macro Man, looks to me like you are in the "wishful thinking/hoping" mode. Beware! If you short gold, YOU WILL BE SORRY! Think longer term...like 6-24 months...when gold will be four digits again...and oil will be $140ish.

[sorgmot]

Consider patterns of gold/oz and gold stock prices in previous business cycles before jumping to any conclusions about their patterns in this business cycle. Also, look at your graph in terms of Elliott wave patterns.

Our read of the business cycle is that we are now (2008) in a replay of 2001 with the big cut in interest rates behind us in the USA. If we repeat the last cycle, the Fed Funds rate will hit bottom in 2 years, or in 2010 at 1%. Now, May 2008, it is very inexpensive to own gold at 2% interest. USA debt held by foreigners is yielding less than the USA inflation rate (4%) in USA dollar prices. Interest rates on USA debt are in mid 2008 is rising and the value of the debt is falling in USA dollars. Why not switch to gold from USA debt as did occur in 2002 and 209?

If one looks at your graph, above, one sees an upward 1(up), 2(down), 3(up), 4(down a little extended but not unusual) pattern unfolding. This is within a huge I, II, so far pattern from 2001 to 2008.

Be careful with your bet and the amount of money you risk on a down bet for gold or gold stocks as May 2008 progresses.

[EE]

Well, it is possibile for gold to break under 800 as the summer doldrums approach, but reading Ted Butler (found at ) investmentrarities.com , both gold & silver are in manipulated markets to an extreme degree with concentrated shorts trying to activate sellers and begin to cover at least some of their huge,huge, huge, back against the wall position. Since gold has limited industrial use, it operates on percieved values and habits. Silver is industrially important and in very short supply and in a much smaller market. When less than 1% of the gold investors see silver out perform gold, understand the small market shortage, the ungodly short position, and switch gold for physical in fist silver, the climb past $100/oz silver will begin and gold could stagnate. You want to be early in the play this year, probably this month! Junior silver miners planning to dig before 2011 are under valued now along with silver maple leafs, eagles, rounds, and bars. Just read Butler and Jason Hommels silverstockreport.com A lifetime opportunity is on a silver plate. The illegal short position waiting to be destroyed will be a history lesson in the near future. Live it profitably.

[wsigler]

Macro: Don't see where your chart supports a gold move to $725. Looks like the $800 level is an obvious next support level - though I wouldn't count on that, either. As for silver, there may be shortage in production - but not in supply...and production will soon make up the difference to demand at these prices...