Even after the blow off in silver and gold's euro hysteria-induced blow off I did not expect a repeat of the 2008 crash in the HUI Gold Bugs index to happen given the state of the real price of gold (RPG) today as compared to the run up to 2008. Wrong sir, the black boxes are apparently in control; or are they? Maybe someone is controlling the black boxes.
Ben Bernanke has stated that he would control Treasury yield curves. This is not tin foil hat analysis seeking to rationalize, it is merely stating what the world's most powerful monetary policy maker said he would do.
He said he would buy long-term Treasury bonds and sell short-term bonds. You want to manipulate gold? It is simple for an academic scholar with a big brain. Gold reliably follows the 30 year / 2 year yield spread. Right now it is painted to give the impression that 30 year yields are naturally declining vs. short term yields, which in turn tells a story of easy money (on the long end) and fiscal prudence (on the short end) all at once. What a nice little painting.
Gold does not like 'nice' and gold does not like Goldilocks. Here is the humorous graph once again from the St. Louis Fed that shows the smooth horizontal line from 2009/2010 (the Fed stopped monetizing debt) and the jagged one of today as the Fed apparently frantically day trades Treasury bonds of various maturities to paint the desired picture.
Gold originally got harpooned by its own greed/fear inspired momentum blowout in the euro crisis last summer, but is now being manipulated by this measure and I suppose it comes down to whether you want to submit to Dear (monetary) Leader and his ability to control the picture indefinitely (or at least through the election?).
"There is nothing wrong with your television set. Do not attempt to adjust the picture. We are controlling transmission. If we wish to make it louder, we will bring up the volume. If we wish to make it softer, we will tune it to a whisper. We will control the horizontal. We will control the vertical. We can roll the image, make it flutter. We can change the focus to a soft blur or sharpen it to crystal clarity. For the next hour, sit quietly and we will control all that you see and hear. We repeat: there is nothing wrong with your television set. You are about to participate in a great adventure. You are about to experience the awe and mystery which reaches from the inner mind to -- The Outer Limits."
I could not resist pulling that one out again. Who says financial analysis cannot be fun?
The situation in gold is that technically, it should not make a lower low to the December low without incurring further technical damage, bringing 1400 into the picture as the next support. Further, it is probably not going to do much of anything bullish until people stop believing (or wanting to believe) that the Treasury yield curve above is a picture of anything real.
Gold is very over sold and the sentiment backdrop is extremely (contrarian) bullish. I noted on the blog yesterday that I sat and talked with a local bullion dealer who informed me that people (the public) are absolutely puking gold up whereas last summer the situation was the opposite. Further, he told me that he has never seen anything like last spring when people were falling all over themselves to buy silver on the way up to 50 bucks (he is too young to remember the Hunt Brothers). Dear readers, contrarian sentiment analysis should eventually pay off because The Outer Limits was just a TV show and the current Fed operation is just a magic show.
That is the situation in gold. Like it or leave it, but it is what it is. A warning was given here, although as stated, I did not then perceive the scope of the oncoming damage in the gold stock sector. So on that note let's move on to the gold stocks, with a focus on the gold-oil ratio (GOR).
The GOR is one of the most important sub-components of gold's 'real' price (RPG). In NFTRH we noted in Q4 of 2011 that there could be cost pressure coming to gold miner bottom lines due to the state of the GOR, which had been in correction mode for several weeks. Given that it (and gold's ratio to other commodities and markets) appeared then (and still does today) to be in a bullish consolidation rather than the multi year 'sideways to down' trend it had been in during the run up to 2008's impulsive upside, I expected only 'pressure' on the miners, not Armageddon 2012.
We adjusted after HUI lost the neckline at 475 and a target range by cold, uncaring technical analysis was measured down to 315. This was the measurement of the top of the pattern to major support, which doubled as a neckline. 315 is not a prediction. It is a measurement and I respect it.
So where are we now? We are in the midst of agony is where we are. Sentiment? It is contrarian mega bullish. Fundamentals? Well, are the GOR above, the Au-CCI and Au-CRB ratios, Au-Cu going to break down or are they going to finish their consolidation and rise again? That is a critical question with regard to gold miners. Are we on a counter cycle or is the smart man at the Federal Reserve really able to manage the financial markets at will?
The GOR weekly chart above has just crossed to MACD up trigger for the first time since it began consolidating out of the euro crisis. The ADX line is totally washed of momentum and is at least supportive of a new trend. We will know soon, but my impression remains that this chart, and gold miner macro fundamentals, remain in bullish consolidation. Therefore, the savaging of the black boxes in the gold mining sector remains viewed as an opportunity; one which I worked very hard to have myself and my newsletter prepared for.
Could I be wrong? Hey, I just interpret the markets; unlike Dear (monetary) Leader, I do not control them. He apparently wants this picture to break down in Charlie Munger's favor.
It is an intimidating thought to know that the forces of Bernanke and Munger are arrayed against the view of little old me. But that is why we do this my friends. No one said it would be easy and you have got to know what you believe, manage risk ALWAYS, and be prepared to be brave in the face of seemingly insurmountable odds.
If the picture above breaks down, along with various measures of the RPG, then America truly may feel like a scary place to me as the likely interpretation would be that the financial markets have been completely merged with the Federal Reserve, because I do not see any real fundamental policy change in effect or on the horizon. What I see is a man with a really big brain buying and selling Treasury bonds; i.e. buying and selling the massive debt load of the United States in favor of desired outcomes.
We are in Wonderland, but that story - after which my newsletter is named - had a happy ending in spite of some really weird goings on in the meantime. We had a normal correction in precious metals out of the over hyped euro hysterics of last summer. Now it is just plain weird. 'Curiouser and curiouser' you might say.