Gary Tanashian's  Instablog

As the Cyprus drama and other macro events play out and distort normal macro economic signals to varying degrees in the short-term, let's review the 'real price' of counter-cyclical gold vs. the cyclical industrial metals:

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Au-GYX Ratio, daily chart

Au-GYX bottomed hard in February, MACD sported a positive divergence and now the ratio has turned up hard, despite the economic growth signs in the US. Global growth, especially in materials-intensive China has decelerated.

Regardless, the Cyprus hysteria has driven the ratio up to an over bought level at the SMA 200, which is a logical area for a pullback. Support is noted (green). The target off the bottoming pattern is 4.60 or so.

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Au-WTIC Ratio, daily chart

Au-Crude Oil is also in a bottoming pattern, but has not broken above the neckline. A break above that area would target the SMA 200 in the low-mid 18′s. The two charts above are constructive to the fundamental case of the beleaguered gold mining sector as gold simply must begin to out pace miner cost-input commodities for any kind of fundamental case to be engaged. That is why gold stocks are counter-cyclical.

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Au-SPX Ratio, weekly chart

Turning to the weekly chart of gold vs. the S&P 500, there is a bounce in progress at a last-ditch support level. A failure for counter-cyclical gold to gain traction vs. the great market of happy hopes and dreams would bring on more sweet dreams for US stock market players and a nightmare scenario for hard core gold bugs. The red arrow measures the pleasure and pain, respectively. Support needs to hold here for a near term bull case in gold and especially the gold mining stocks because after all, if it is as easy as throwing a dart at the S&P 500, why on earth would one suffer the agony and ignominy of the gold mining sector?

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Au-Euro Ratio, weekly chart

Above is a weekly chart of gold vs. the Euro, first published in a post from December: What's Wrong With Gold?

As you can see a few months on, gold continued its breakdown in Euros but has held our "Gold would be broken below here" parameter. This is an important parameter and it is holding.

The precious metals are making strides here. As tedious as it sounds, any investment case - such as it is - on the gold stock sector depends on the counter cycle, not on the 'everything's going up because inflation fears are breaking out!!!' cycle.

The gold stocks have been miserable, and this is more a reflection of the challenges facing the sector aside from recently depressed gold-to-commodity ratios. These challenges include the S&P 500 out performing gold, geopolitical issues, management execution issues, etc. Through repeated execution failures and questionable decision making we realize that as a group, the sector holds many poorly managed companies, which is why only the quality ones should ever be considered. Mining by its very nature is a difficult and problematic industry.

So disclaimers aside, the real price of gold is a slow and steady indicator of the counter-cycle, which is the time for the gold sector to be thought of as unique. Another chart exhibits proof of the counter-cycle, the Au-CCI ratio AKA the 'real' (commodity adjusted) price of gold:

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Au-CCI Ratio, monthly chart

Au-CCI is on a long-term up trend but periodically spikes down when people (and mainstream economists) get giddy about economic growth. Today they are giddy. But a chart is in an uptrend until it no longer is. This one would have to impulsively violate the top shaded support level to reverse the trend.

In a way similar to how the AMAT-SOX ratio (or semi equipment stocks to broad semiconductor sector ratio) that we noted yesterday can be a Canary to a Canary in a coal mine, so too can the gold-silver ratio (GSR) be a more sensitive indicator to coming liquidity problems that would eventually be more broadly seen across the spectrum of gold's ratios to things positively correlated to the economy. Here's the GSR, shown by monthly chart approaching an important decision point.

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Gold-Silver Ratio, monthly chart

A break upward and liquidity is going to come screaming out of the markets, with a deflationary backdrop the likely play. A break downward and rising inflation fears would be likely.

I realize that posts like this can be confusing and certainly are no fun, but there is a reason that so many market participants are confused right now. Looking under the hood at some of the mechanics going on in the macro markets (i.e. reviewing gold's ratios) can bring clarity.

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The noise of the day includes much hand-wringing about gold manipulation, gold's precarious technical situation, the end of gold as a useful tool for protection against inflation and even the end of its bull market. But maybe a simple look at the facts works better.

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Central Banks' Balance Sheets vs. Gold. Source: DoubleLine Funds

There was a reason that rational people needed to be guarded during the Euro Jerk (knee jerk reaction into gold on a global scale) influx in 2011. By the measure of global Central Bank inflation activity at least, gold has simply remained on trend.

But never let the facts get in the way of a good story.

Bull Camp: They are manipulating gold to hide their evil intentions!

Bear Camp: The bull market is over! See? The charts have broken down (200 day moving average has been lost! Oh my).

Fact: Gold is on trend with global inflation efforts by this measure.

Fact: Gold is above the lows of last summer.

Fact: If gold loses those lows, it would be technically broken, but not until.

Fact: Sentiment is now opposite its hyper over bullish state from the summer of 2011. Gold newsletters and the public are near limit-down bearish.

Fact: The herd is always wrong at important junctures.

Being a contrarian is hard. Gold was going to the moon in 2011 because after all, price was rapidly accelerating upward and everybody knew that the Euro crisis was ending the world as we know it. Today we have ridiculous articles showing up in the MSM about how the Dow is the new safe haven.

The world turns folks and people never seem to change. Gold bugs get damaged by unrealistic expectations and the herd is well… the herd. Always wrong in the end. The graph above is just one of several developing pictures that says "gold is fine", just as I have been saying since I started this website in 2004. All the other noise, whether over bullish or over bearish is just casino patrons, self-promoters and assorted other wise guys and market geniuses throwing their hats into the ring.

Understand value and don't stress about price. Gold is not about price. It is about keeping up with things like the blue line on the graph above. Furthermore, should the market impose austerity on these inflating pigs one day, gold may go down right along with the tale of their inflationary tape. Deal with it.

If you are a speculator, the extreme situations currently in play in the broad stock market (95% of the way to a potential 'triple top' scenario price-wise, and 80+% of the way time-wise) and the gold market (impulsive price drops amid growing concerns that the bull is dead despite rising money supply data) as of March 1, 2013 are the situations that you wait for.

In short, pivot points are the place to deploy capital (either to the short or long side) for big gains. The stock market has been on a cyclical trend for 4 years and a secular, mostly sideways trend for 12 years. Gold has been in cyclical downtrend for 1.5 years and a secular uptrend for 12 years. That is all well and good but trends can be a grind, filled with ups and downs, stops and starts.

A big macro pivot point on the other hand can be a career maker - if you can catch it at the right time after correctly gauging its potential. This is no easy task. If it were we would all be mega rich due to our amazing ability to call the markets. Unfortunately, the markets have a great way of throwing curve balls that not only have a wicked spin on them, but also burrow down hard and in. Maybe it is heavy sliders that the market continually throws, maybe it is sinkers. Whatever it is, our bats are often sawed off just when we think we are dialed in to a grand slam.

So moderation and risk management are what we should practice most of the time. It sounds boring, but when a big pivot comes, you will be glad to be in position to capitalize on these rare events. As an example, people who had cash in 2008 and 2009 were afforded the opportunity to buy all sorts of assets on the cheap, beginning with the precious metals, then key commodities and finally extending out to the stock market.

2008′s deflationary destruction was a contrarian macro pivot point as this Time Magazine cover with its depression-era bread line photo said all anyone needed to know about what the play would be.

And then came Tony Robbins sometime in 2009 warning the public about the dire consequences of the new depression and the rest is history. A cyclical bull market was born of too much doom, gloom and certainty by the public that the world as we knew it was over.

Dial ahead to today and we find the estimable Time Magazine asking…

Are We Watching a Great Rotation Into Stocks?

What does this tell you? Does Time know what it is talking about this time or is it just reflecting the public's view of the world back from mirror into which it dimly gazes?

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S&P 500 monthly chart

Time Magazine published photos of breadlines and headlines reading "Depression 2.0″ at the very beginning of the current cycle, at exactly the time people should have been buying. Today, just below a potentially profound macro pivot point Time seriously ponders a "great rotation" into stocks. Sure, they could get it right this time. But what do you think are the odds of that?

You see, you have got to think for yourself if you are going to effectively practice what is necessary to succeed over the long-term in the markets. No analyst, guru or newsletter writer should be followed in a passive manner. How do you know they are not just trend followers, doing what is comfortable; doing what seems to feel the best and make the most sense at any given time?

It seemed to make the most sense to be bearish in early 2009. It was time to be very bullish. It seems to make sense now to be bullish now because it feels good and the apparent dangers are dissipating as policy makers assure us that they remain benevolent and in control. They are not in control, but it has been a long, hard battle for the formerly embattled Ben Bernanke to be given the respect of his predecessors. He now has it.

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Dear (monetary) Leader, our Hero

Just look at his smug self-satisfaction. The benevolent hero in full control. We will continue to work on a macro pivot for sometime in 2013 until given reason not to. In 2008 I became bullish on the gold sector first, then in early 2009 there was crude oil, copper and soon a Pandora's box of asset markets giving contrarian bull signals. That was a macro pivot.

Today we should look out ahead to gauge the possibility of its opposite becoming engaged before too long. I believe the bloodbath in the precious metals may be a precursor to something profound. The PM's did after all, lead the great cyclical bull market dubbed here as "Hope 09″.

For profound events to work for you in any sort of a good way you must be prepared for it. Being prepared means opposing psychologically powerful forces like the will of the herd, which probably comprises 90-something percent of the people. It is harder than it sounds.