Bruce Pile's  Instablog

We think of gold as a crowded "trade" as far as our investment alternatives are concerned.  I feel that way, and that's the main thing I don't like about gold.  But those feelings may be more psychological than based on actual fact. If you look at actual investment alternative facts, you see this excellent chart depiction in a November 20 article over at safehaven.com by Jordan Roy-Byrne "Gold Contrarians Will Get Killed" : (click to enlarge charts)
As a reserve asset, gold was put into the dog house in the 80's and is just now poking its nose back out of the doorway.  As for our stock market choices, the article shows gold as a dog as well:

I've seen it mentioned a time or two that in the paper money vs gold money dilemma, the entire market cap of gold investing was less than that of just one big stock like Microsoft. This Casey Research graph puts it in perspective. Precious metals tend to make big moves both up and down, and when you see the giant pool of money tilting from paper and usable assets to "useless" gold, you can see a lot of money crowding into a very small space with just a little bit of tilt.  Add to this the fact that the supply/demand equation for gold isn't like that for other investments where more demand is met with factory ramp-ups, IPOs and other supply increases. Over 99% of all the gold that's ever been mined is still around. So even if we could quickly ramp up mine production, it wouldn't make any big difference - a drop in the bucket of all the gold ever mined.  But mine production has actually been declining since 2000.

So it becomes very important to know just where we are in the investment tilt-o-whirl. The following map shows this pretty well:

As Jim Rogers is fond of pointing out, bull and bear cycles in commodities usually run in 12 to 18 year moves.  We are just in year 9 or 10 of an up cycle with monetary problems greater than in any previous cycle. In the big picture, we are probably not to the tulip phase of the gold move yet, even though it may feel like it.

Disclosure: long gold

I've been stalking this one for awhile.  John B. Sanfilippo & Son Inc. (JBSS for short) markets nuts in the U.S.  You wouldn't think that would be a very good thing right now with nuts being discretionary consumer spending - not exactly a necessary foodstuff.  But the downturn hasn't even put a dent in their climbing eps or cash flow curves. The stock has very good valuation with price/sales at 0.27 and price/cash flow from operations at an absurd 2.3, but its technical condition is even more interesting.  (click to enlarge)

The stock is moving out of a multi-year downtrend against a positive A/D divergence (usually a good thing) and seems to have developed a mind of its own since this breakout in August. The A/D curve is at a buy dip condition that was very rewarding the previous two occasions. I've bought and sold this one already this year, selling it at $10 and change for about a 20% gain, but now I'm slapping myself for exiting way too soon. If it stays in the A/D trend, it may be starting a nice new upleg.

When anyone asks Jim Rogers for his best advice nowadays, he says "become a farmer".  He is busy buying up farming operations all over the globe.  It is the farmer, he says, that will be driving the Maseratis of the future, not the growers of creative debt instruments on Wall Street. 

It is part of a seismic shift in valuing real assets over paper as is the case with commodities in general.  But with food, there is much more too it than that.  There is a food shortage developing that may wind up being more severe than say oil supply. A rapidly upgrading and very large BRIC population is placing a strain on global food production.  They estimate total food production will have to rise by 70% over the next 40 years.  That means $44 billion/year will have to be spent on Agriculture to produce that growth rate vs only $7.9 billion/year now. 

This food shortage problem began to show itself in 2007 running crop prices and fertilizer stocks to the moon - and then back to earth with the whacking of the Great Recession.  These investments have pretty much remained whacked this year, lagging about everything else, but they are reigniting. They have the potential to be some of the more explosive climbers available very soon, especially considering the historic droughts afflicting the chief food growing regions of the world right now.  It is looking like global food production could be down 20% or more because of this pinch.

The food shortage is compounded with the currency debasement problems around the world.  Nations will probably want to exchange devaluing paper bills more urgently for edible hard assets than for inedible ones.

Food crop shortage is also compounded with the oil shortage because fuel crops such as sugar (60% of the world's ethanol) compete with meal crops.  Inflation adjusted, crops have severely lagged other commodities as this historical chart shows:

Using the heights achieved during the previous commodity bull market as an inflation adjusted reference, you can see that crops have of lot catching up to do.
Be a farmer!

As discussed in some of my previous posts on Iran at my blog, the diplomatic talking efforts to resolve the nuclear facilities issue with Iran seem to have come to an end.  DEBKAfile has just published a report this evening on top U.S. and Israeli intelligence and defense officers meeting in Israel.  They said:             

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Besides the Nasdaq Transportation Index (TRANQ) woefully short of confirming the broad market's nice climb on the year, the rally has the recent action of the Russell 2000 as a fly in the ointment.  These two indexes are important. The TRANQ is the transports with almost no rails, which is what you want to look at for Dow Theory confirmation of developments in the broad market.  The rails have become very levered to commodities, and thus to currency debasement and the China story.  So they really tend to distort domestic economic health in a way Charles Dow did not intend. If you look at the difference this makes in the transport indexes, you see it is significant. The Russell 2000 is important because it is more broad based, having 2000 stocks instead of just 500 or 30.  And perhaps more significant, it is made up of small caps, which tend to make major turns ahead of the larger cap stocks. In fact, if you had just been watching the action of the Russell as your only canary in the coal mine, you would have been tipped off as to just when to get out in 2000 and in 2007.

Let's look at what the charts telegraphed back then:

Here the Russell refused to return to the early March high as did the rest of the market:

And in 2007, the Russell put in an early top, a double top this time:

This was well ahead of the S&P 500 topping action:

What is the Russell doing now?

So the canary has keeled over again.  This would lead one to be very suspicious of the new high being put in place by the other indexes:

We again have the negative RSI divergence not to mention a sharp weakening of the volume on this latest run by the S&P 500. 

However, the canary could turn out to be a false prophet of doom this time, predicting only a mild downtrend or consolidation if we continue to faithfully follow the key leader groups as has been the case all year - despite the technicals.  The RLX large cap retail index is still very healthy as is the QQQQ large cap technology index - albeit this could now be just by virtue of them being large cap. The Baltic Dry Index has been tracing out the moves of the S&P about 3 months in advance this year, and it foreshadows about 4 months of a mild retracing, then back up again.  So how much of a major turn the Russell is telegraphing now, if any, may be trumped by the market's dogged determination to follow these key leader groups. If all the leader groups, including the BDI, start to keel over, it may be time to get very defensive. If, for example, the BDI, now near a previous 52 week high, were to start to form a double top, that would be bad.

The fractal long range forecast for gold is basically a parabola. A long while back, before gold was anywhere near $1000, David Nichols of the Fractal Gold Report drew this result of his fractal analysis for gold's future: (click to enlarge)


I recently added the note about the resistance level we have since broken through that is smack dab centered on the parabola drawn by the fractal technicians clear back when gold was at $734.50!  This analysis is from pure fractal geometry and physics, which know nothing of idiots in Washington or fools on Wall Street. But they have their parabola too!

I suppose a lot of the debt increase of the 80s can be blamed on Reagan's cold war deficits. But the U.S. won the cold war, and in peace-time, debt could have come back to sensible levels, as the Reform Party of Ross Perot tried to accomplish in the early '90s. But instead, a new war developed, and off we went on another parabola. We were invaded by an army of congressional spendthrifts, credit card carriers, and wiz kids on Wall Street creating and slicing and dicing mortgage debt, and peddling and juggling these deadly missiles to no end. This cold war has, unfortunately, turned unto a shooting war with the first missiles launched in 2008. The debt traitors started their parabola in the early 90s. Gold started its parabola 10 years later in retaliation. Call me crazy, but I think these dueling parabolas could be related.

Disclosures: Long a gob of gold