Seeking Alpha

John Hampson's  Instablog

John Hampson
Send Message
John Hampson, UK, Self-Taught Global Macro Trader Since 2004, Website: www.solarcycles.net
  • Gold Secular Bull Phase 3 Mania 2011-2013
     
    I propose that the third and final phase of gold's secular bull since 2000 has begun in early 2011 and will end in 2013. I suggest that this third phase, a popular and parabolic mania, was announced by both silver's mega move January to April 2011 and the US Dollar's break beneath long term rising support, and will proceed to conclusion in a similar way to the last secular gold bull of the 1970s.
     

     

     

    Source: Zealllc

     
     
     
    Source: PFS Group 
     
    Gold will finally enter genuine bubble territory and conclude in a manner similar to previous asset manias.

     
    For a deeper understanding of forecasting the gold secular bull to end around 2013, please read my previous articles:
     
    End Of The Secular Commodities Bull (March 7th)
    Solar Activity And The Financial Markets, Parts I and II (March 30th, April 4th)
     

     
    Let's now look near term.
     
    Currently, gold open interest is at a level on par with late January 2011 and late July 2010, the last two significant lows for gold.
     
     
    Source: Biiwii
     
    And gold has just broken out from its recent consolidation range.
     

     
    The gold Hulbert sentiment indicator fell to just 7% in early May, a historic contrarian buy range, and excesively bullish sentiment has now truly washed out against silver. However, I believe silver needs more time to consolidate following its parabolic blow-off, so expect gold to outperform for a period.
     
     
    Source: Sentimentrader.com
     
    The PFS Group long term gold indicator is bullish as of early 2011.
     
     
    Underlying Source: PFS Group
     
    I previously noted that the 200EMA has supported the secular gold bull to date (see first chart above) and is currently at $1400, which I believe would offer ultimate support for any consolidation move down. However, I believe the COT and sentiment readings together with the recent range break out for gold mean that we may be looking at a new leg up in gold (even if stocks and commodities generally take a mid-year breather), which means the recent bounce at $1462 would be the low.
     
    This idea may also gain strength should the US Dollar stall soon at the backtest of its long term rising support break - around 77.5 on the USD index. Such a stalling may occur if the European debt issues are once again kicked further down the road whilst Euroland interest rate rises and increasing rate differential over the US return to the fore. But as shown in the third chart above, US Dollar weakness is not necessary for gold to advance, whilst real interest rates remain negative.
     
    If I am right that we have entered the final phase of the gold secular bull market then the dynamic of this phase means that there will be little opportunity to time the market. What appears to be potential headwinds for commodities currently (potential economic slowdown and debt issues re-emerging) may well be spun into tailwinds for gold (low rates and stimulus to extend and gold perceived as a safehaven).
     
    The biggest gains of the secular bull will be made in this final phase 3. Summarising the above, I believe the question needs to be asked now, not later: do I have enough money in gold?


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am long gold
    May 23 7:02 AM | Link | Comment!
  • Gold and the US Dollar
     
    On April 25th I stated that I would not be taking partial profits on silver as I anticipated gold had not yet peaked and would reach a daily RSI reading of over 80 before doing so, in line with historical peaks. Well, the latter proved correct as gold moved higher to print a daily RSI of 82 on April 28th, but by that time the relationship between the two precious metals had broken down and silver was already in retreat. So, opportunity missed on silver to part-sell higher and part-buy-back-in lower, but I am now turning my attention to the opportunity of adding more at lower prices in the precious metals complex as we press on towards the secular peak around 2013.
     
    In assessing the ultimate support levels for precious metals I look to gold rather than silver, due to the latter's volatile characteristic as a leveraged gold play, and gold has been supported throughout the secular bull to date by its 200 MA or 200 EMA. This is now approaching $1400, and I believe is the lowest likely level that gold would fall to:
     

     
    But are we likely to see a period of pullback and consolidation for precious metals that may take us down to such a level? Well, silver looks ripe for a period of consolidation following its parabolic spike, and the US dollar looks ripe for a sustained bounce, as it has done for some time:
     
     
    Source: Sentimentrader / Cobra's Market View
     
    If the US Dollar were to make a sustained bounce here, then the historical rhyme from the last secular commodities bull market suggests gold would indeed retreat some and consolidate, as shown in the highlighted area of the chart below. Note the similarities in the dollar's performance over the last several years with the 1970s, but perhaps accelerated by QE, and also note how the USD moved overall sideways in the final stages of gold's last secular peak, reminding us that we don't need a declining dollar for gold to advance, as long as real interest rates are negative.
     
     
     
    Underlying Source: PFS Group
     
    There is also a seasonally weak spot for precious metals from early May into the end of June, so I believe the balance of probability is that we have begun a period of trend reversal in precious metals and dollar, where gold and silver take a break from the limelight. I will therefore be looking for opporunities to add to precious metal long positions between now and the end of June, ideally in the $1400-1450 price zone for gold.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am long precious metals
    May 06 4:01 AM | Link | Comment!
  • Solar Activity and the Financial Markets
    In recent weeks we have seen surprisingly high solar activity, with sunspot readings over 100 on multiple days, shown below, red line.
     
     
    Underlying Source: Jan Alvestad
     
    To understand how high these readings are, the chart below forecasts average sunspots to peak under 100 at the height of the current solar cycle (which is named solar cycle 24).
     
     
    Source: NOAA
     
    So what are the implications of this sharp rise in sunspots? Well, I have annotated the first chart with two recent macro events.
     
    Firstly, the Japanese Earthquake occured at a peak of solar activity. There is some historic correlation between solar activity and earthquakes, as shown below. Sunspots are the red line, earthquakes the black line.
     
    As we are climbing up towards the peak of solar cycle 24, we may therefore see more incidences of earthquakes (also, note the longer term rising trend in quakes). In terms of impacts on the markets, much depends on how severe quakes are and whether they occur near centres of commerce or in remote areas. It is common though to experience multiple quakes in the same area once an initial event has increased the tectonic stress, so it may be prudent to hold back on seeing Japan as a current investment opportunity, in case further events follow. Otherwise, a little extra general caution in trading may be appropriate, if we should expect further earthquakes globally in the climb to the solar cycle peak but cannot predict where or when they might occur.
     
    Secondly, esclation and spread of turmoil in the Middle East and North Africa also conicided with a peak in solar activity. Human mass excitability has been shown to correlate with peaks in solar activity, with A.L. Tchijevsky finding that 80% of the most siginificant historical human events occured within the years around the solar maximums, specifically "mass demonstration, riots, revolution, wars and resolution of most pressing demands". Again, as we approach the current cycle 24 peak we may therefore see more such activity, and in trading it may pay to be a little more cautious or to be a little more invested in a safe haven such as gold.
     
    But rising sunspot implications don't stop there. Let's dive in a bit deeper.
     

     
    Cyclical planetary movement around the sun brings about cyclical swings in solar activity, with one solar cycle lasting an average of 11 years, sometimes as short as 9 years or as long as 13. Solar activity causes geomagnetic activity on Earth. There is a correlation between geomagnetism and depression and suicide in humans, and an increase in psychotic episodes in individuals who already suffer from unstable psychological states. Solar activity is also shown to make people more excitable, irritable and aggressive, and can affect melatonin synthesis, blood pressure, heart disease and light sensitivity.

    Translated to the stock market, we see poorer average returns on days of significant geomagnetism. Increasing solar activity may therefore represent a headwind for the stocks bull.


    Source: Robotti / Krivelyova  
     
    Translated to economics, we see a correlation of peaks in inflation with solar activity peaks and a correlation in recessions following solar cycle maximums, as shown in the next 2 charts.
     
     
     
     
     
    Source both: Amanita.at
     
    Combining these last two charts with the solar cycle 24 forecast chart, we arrive at a prediction of inflation increasing into a peak around 2013 followed by a recession. Note that the 2013 peak is only a forecast and as solar cycles vary in length around an average it it possible that the recent escalation in sunspots in recent weeks could make for a steeper trend to peak a little earlier, we shall see. Either way, it might be prudent to be now invested in assets that do well in an inflationary environment as we trend up to the peak, such as precious metals and energy.
     
    In fact, if we look back historically at the secular swings between hard assets and paper (or stocks) then we find that the last 3 peaks in commodities relative to stocks occured at solar cycle peaks, around 1918, 1948 and 1980. I have labelled these 1, 2 and 3 in the two charts below.
     
     
     
    Source: Carl Moore
     
     
    Source: Nowandthefuture
     
    Every third solar cycle peak corresponded to a secular peak in tangible assets (such as gold and oil) in relation to paper assets, and the peak of solar cycle 24 will be the third since 1980, putting us on track for another relative peak in hard assets at the currently forecast cycle peak of 2013. Going further still, we can estimate the next commodities peak after that to be 3 further solar cycle peaks away at around 2046. Using secular averages, we could therefore estimate a secular commodities bull to occur from around 2030 to the mid 2040s, and working back, a secular stocks bull from around 2014 to 2030.
     

     
    In summary, the recent escalation in solar activity and the predicted trend to a solar cycle peak currently around 2013 suggests increased earthquakes, increased human excitability in the form of action and conflict, increasing inflation and rising relative returns in hard assets until a relative peak at the solar maximum, giving way to a new economic recession.
     
    Specifically, the solar peak around 2013 should coincide with extremes for the Dow-gold and Dow-oil ratios and consumer price inflation, before a recession emerges in which commodities fall harder than stocks and in so doing the two asset classes begin their relative secular inversion.

    John Hampson / www.amalgamator.co.uk


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Mar 30 7:33 AM | Link | 2 Comments
Full index of posts »
Latest Followers

Latest Comments


Most Commented
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.