Gold Above The $1400 Hurdle This Week?

Friday 'twas penned on the Prescient Commentary page that "...Gold's own Baby Blues at Market Trends are rising, meaning that the linreg uptrend is reinforcing, thus suggesting the 1400s are nigh..."

That was at 04:57 Pacific Time with Gold trading at the 1373 level. My sense then was, given the uptrend's reinforcement, we might crack the 1400s over the ensuing days, if not within a week or two, (for naturally nothing goes up in a straight line). But then seeing the price hit 1399.9 late in the day, (and indeed 1400.4 trade on the February contract), 'twas a reminder that Gold's renewed strength and vigor are the real deal. Recall from a week ago all that "fat" trading support Gold had built for itself in the trading profile chart? As a long time friend and trading colleague has been wont to say over the years: "Well, if it isn't gonna go down, then it's gonna go up ." Indeed.

Also last week, we put forth the notion of "...Gold working higher right up through the 1400s into the 1500s..." Again, 'twould be normal to first expect a modicum of profit taking by short- and near-term traders. However, such common market machinations notwithstanding, for you fellow technicians out there, not one, neither two, nary three, but four of our Market Rhythms for Gold all flipped from Short to Long on Friday.

The four were studies of the standard MACD (moving average convergence divergence) metrics, using price bars over the following time frames: 1-hour, 2-hour, 6-hour and 8-hour. 'Tis no wonder the yellow metal put in such a robust session Friday: when traders, independent of one another acting on differing time frames coincidentally, (or otherwise), all saw a Buy signal at about the same moment, Gold went nuts. Here's how it looked during real-time stock market hours:

Allow me this one additional technical note. Amidst all that Market Rhythm mania, I'm paying particular attention to the 6-hour bars. For in that time frame's MACD study, the past 10 "crossovers" (both up and down) have seen price follow-though on average, (i.e. not every time), by as much as 32 points, and in 5 of the 10 cases, by 47 or more points. The median duration of those 10 crossovers, (before crossing back in the other direction), was 3 days, 21 hours. I realize it seems we get quite precise around here, but the point is: we've a jolly good chance to see Gold rise well-clear of the 1400 hurdle in the new week.

Recently, Gold has taken on that inverse correlation, as we've charted in many-a-missive, to the sputtering S&P. As well, Gold has been ascending since mid-year with the long end of the yield curve. Still, Gold is oft viewed as a non-correlating asset: there are broad-based times when it moves in stride with the S&P, or against it. With respect to interest rates, 'tis pretty much the same, Gold having displayed broad-based periods of being in both positive or negative correlation with the trending of yields. Macro-economically, there's always "more the story", in rationalizing "the why". But at the end of the day, Gold is most proven to be positively correlated to the supply of money.

To be sure, the markets these days are all a-buzz about the FedSpeak of their potentially tapering quantitative easing ... and again at the long end, rates have well-been rising. Can that put the kibosh on the apparent recent economic growth, thus in turn keeping QE right on coming? Consider the following:

If from the Montgomery Street side you enter the San Francisco world headquarters of Wells Fargo & Co., you pass through a museum featuring the bank's iconic, genuine stagecoach as well as some tools, precious metal ore and dust, and other artifacts from California's Gold Rush era. And, (if you're old enough to remember it), that swooning tune behind decades of the company's advertisments comes to mind. Ah, those western days of the mighty Wells Fargo and Gold!

Are the two still mighty today? We calculate Wells Fargo (WFC) to be the 10th-highest capitalization-weighted constituent in the S&P 500 with a respectable price/earnings ratio (11.4x) and yield (2.825%), almost exactly that of the 10-year Treasury Note (2.818%). Likewise we've Gold now at 1396, some 18% higher than 'twas a mere 39 trading days ago from that 28 June low (1179). So yes, 'tis fairly impressive might displayed by these two, one might say.

Except for the bank, there's a problem: rising long-end interest rates since July of a year ago, and more adroitly so just since this past April, have so slowed the bank's mortgage refinancing business that they've just announced they're bidding adieu to 2,300 of their employees. As further evidence of economic debilitation by higher yields, 'twas reported Friday that July's new homes sales plunged by the most in more than three years, mortgage rates being on the rise.

Given that mortgages are priced off the long end of the yield curve, July 2012's yield on the 30-year Treasury Bond reached as low as 2.452%. Then just since April, 'tis leapt from as low as 2.810% to Friday's settle at 3.798%: up with the yield, down with the refis, out with the workers. A nominal rate of 3% may not seem like much on the long end; but it shows just how sharp a knife-edge upon which the economy is poised. This is why we've regularly emphasized that following any tapering or withdrawal of QE, 'twill be followed by more QE. Can you say "Gold Positive"?

Further consider that the average yield on the Bond from 1994-to-date (monthly settles) is 5.036%. What if rates regress back up to that mean? Savings accounts might come back into vogue. But what then happens to the corporate cost of money? Earnings per share, which on balance continue to terribly lag equity prices, are calculated after interest expense. Can you say "S&P Negative"?

Then there is our average Joe with his 401k and all that variable-rate consumer debt. But perhaps he's not really that worried, having benefited from the S&P's more than doubling since the Black Swan Event of 2008...

As for that 5% long-end interest rate mean, 'tis just that. It can get meaner: the Bond's yield in November 1994 practically tapped 8%; in September 1981 it exceeded 15%, (the Prime Rate beginning that year above 21%!)

So again, from the historical perspective of nominal levels, having moved from the lowly 2%s up into the 3%s doesn't appear like much of a big deal; but 'tis a 50% increase, and entire capitalization structures and lives have been built, and are dependent upon, such seemingly low nominal rates.

Interest rates are nothing more than the cost of money, and with the Fed, ECB, BOE, BOJ and even the PBC having in recent years printed trillions of faux dough currency units, you know the old saying: "When there's a lot of something, 'tis probably worth nothing." But then taper the creation of money, some deem it worth a bit more, and thus its cost rises. Nonetheless, "taper" is not "withdrawal" and regardless as to whether the Fed has the attachments large enough to tamper quantitative easing with a little taper, it still remains QE, and in turn, ought further increase the price of Gold.

Now finally, let us get to some charts. Regular readers know we'd been on the watch for the yield in the 10-Year T-Note to surpass the yield of the S&P 500, which of course, commenced back in June. As noted above, the 10-year yield today is 2.818%, whilst that of the S&P is 2.124%. Obviously the inverse arithmetic effect of rising yields is falling debt prices, and now with an inferior yield on equities, money too is departing the stock market. For both the Bond and S&P, here are their respective daily bars for the last 21 trading days, (one month), incorporating their linear regression trend lines, the consistency of such trends becoming more negatively firm per their declining "Baby Blues":

Enough on the losers. Now let us turn to the winners. Here are the same 21 days for this COMEX metals triumvirate:

And next, here specifically is Gold itself, the fresh parabolic Long trend having completed week No. 2:

A week ago, we compared the above parabolics study with that of the Dollar, expectedly showing that they're hardly in perfect negative correlation, (and as herein pointed out on occasion, Gold and the Dollar both rose by better than 10% during the first six months of 2010). But to further exemplify just how oversold Gold became relative to the rising Dollar in recent months, below we've these two markets' daily closes from one year ago to-date. The keys are the "R-squared" calculations, (which are the foundation for building the Baby Blues' measurements of trend consistency).

Given that "R-squared" cannot mathematically exceed 1.0000, Gold's reading of 0.8664 is far more consistently negative than is the Dollar's 0.4454 positive consistency:

Of course, Gold's negative consistency is now clearly waning, and as was pointed out last week, if you look across the breadth of the chart, the Dollar is essentially right where 'twas one year ago ... at which time Gold was at 1673, (almost 300 points above today's level).

Therefore, with Gold having so much more ground to make to the upside, let's remind ourselves of the structural road ahead:

Meanwhile not surprisingly over these last two weeks, Gold has worked to the highest level, since 21 September, some 11 months ago, above its smooth, pearly valuation line, (established from price changes relative to those in the BEGOS markets complex that comprises the Bond/Euro/Gold/Oil/S&P). Here are the last 63 daily closes, (or three months; you can see back a full year at our Market Values and/or Gold page):

Now per the oscillator (price less value) at the foot of the above chart, ought being 89 points above valuation be considered extreme? Generally when the reading gets to 50 points either side of valuation, we anticipate some reversal of direction; however when Gold gets on the move as currently 'tis, why on 22 August 2011 at its All-Time Closing High of 1900, 'twas 311 points above valuation! (Gold's worst downside deviation from valuation in the last 12 years was -248 points this past 15 April in the midst of the Great Gold Selling 'n Shorting Spree). Regardless of normal market ebb and flow, we remain mindful of Gold's having produced those four MACD positive crossovers on Friday as mentioned, and thus the uptrend being our friend, we look for price to further ascend.

As we glide into this week's close with a look at Gold's updated trading profile, how curious it all is out there. Again as knife-edge fragile as they may be, western economies are purportedly improving, our own Economic Barometer having been a testament to StateSide growth since May.

And thus in this 180°-out-of-phase world, rising economies have become stock market negatives due to talk of QE tapering and now rising interest rates. In the background, Gold is taking it all in, ultimately toward scoring the biggest win.

Here's the profile, the Golden Swath therein representative of Friday's trade alone:

Now that's the sign of a happy, healthy, positive market!

Tuesday brings U.S. Consumer Confidence. Are you as confident as we saw Joe to be up there? Then Thursday we get the first revision to Q2 GDP, which is expected to be higher. Don't tell the Wells Fargo departees that...