On Wednesday the FOMC minutes (pdf) for the October meeting were released, and they essentially contained the same notes on the ‘taper’ debate they always seem to contain (the relevant discussion begins on page 8, under ‘Committee Policy Action’). We know that several district presidents are uneasy about ‘QE’ and have been so since at least 2009 (!). It doesn’t mean anything, because even when they do have a vote, they simply get outvoted after lodging one or two token dissents. Fred Hickey remarked in a recent missive that he wishes they would finally get on with it, and we agree.
We would then see whether the echo bubble is as resilient as its supporters seem to believe. Incidentally, the percentage of stock market bears in the II survey has been stuck at the lowest level since 1987 for three weeks running (we’re sure it means nothing, we just thought we’d mention it as a curiosity). We really find it quite amazing that advisors have on average been far more bullish on the stock market since 2000 than they were during the 1990s. The crash of 1987 really shocked people into becoming cautious – mutual funds held cash-to-asset ratios in double digit percentages for a number of years, and advisors remained wary through most of the bull market, with the exception of the final blow-off stage.
Anyway, the Fed minutes received some added significance when James Bullard told an audience that the ‘taper’ could come as early as at the next FOMC meeting. Mind, this is the same Bullard who once dissented this year because he wanted the FOMC to include a hint that it was as worried as he is about ‘inflation being too low’. Just as Bullard was taper-talking, headline CPI was reported to have turned negative in October (when Bullard references inflation, he means CPI). So frankly, why anyone would take what he says seriously is beyond us, but we nevertheless say: bring it on.
Note that the Fed’s activities account for virtually all the money supply growth in the US over the past year, and for most of it over the past five.
Bank credit inflation is as dead as a doornail. In short, once they stop printing, money supply growth will very likely slow down sharply and may even turn negative. We doubt that the various currently extant bubbles will survive such an development unscathed. In fact, the mere hint of tapering sent bonds into a tizzy on Wednesday as well – and it looks like a move that could get legs:
10 year treasury note yield – looks bullish (i.e., bearish for bonds and notes) – click to enlarge.
We do think though that the Fed might try a small ‘taper’ merely to test the waters, especially if the November jobs data are strong, a condition mentioned by Bullard. We can then probably look forward to the fastest u-turn in Fed history if the action in t-notes is any indication of what to expect from the markets. After all, Ben Bernanke recently mentioned once again that he thinks the current level of long-term interest rates is ‘inappropriate’ (read: too high).
US money supply TMS-2 – closing in on $10 trillion. the Fed’s ‘QE’ activities account for the bulk of the growth since 2008 – click to enlarge.
Unfortunately for gold investors, gold is joined at the hip with treasury bonds these days (with slight short term leads and lags) and it naturally got bombed again on the ‘taper’ talk – which never seems to go beyond the talk stage, and probably will remain there in view of Ms. Yellen taking over next year (with the exception of perhaps a small ‘trial balloon’ as noted above).
In the process, gold finally gave up a lateral support level that has held for quite some time and it did so on big volume (this normally indicates that more downside is in store, unless the level is regained very quickly):
December gold daily, a short term support level gives way – click to enlarge.
As one of our readers has pointed out, gold has acted badly throughout its normally seasonally strong period, which is unlikely to be good sign. He may well prove to be correct, as previous instances of gold weakness in the seasonally strong period were very often indicative of even more weakness to come. A fairly recent exception was 2008, when gold fell along with every other financial asset on the planet. The break of support suggest a retest of the June low has become likely, unless the decline from the late August peak turns out to be a wave 2 correction, which cannot be ruled out yet.
Is there anything positive to say? Not a lot actually, but a small short term divergence between gold and gold stocks has been recorded and gold stocks have been more resilient relative to gold in the current decline than in the preceding downturn. One must not forget though that a number of recent bright spots in terms of relative performance in the short term have turned out not to mean much in the end, so take this with a grain of salt.
The HUI index and the gold price (green line) diverge relative to the October low – click to enlarge.
The HUI-gold ratio has been somewhat more reluctant to decline sharply this time around. Then again, it is at an extremely low level anyway – click to enlarge.
Since we have mentioned 2008 above, here is what happened in 2008 at around the same time of the year:
HUI-daily, mid October to late December 2008. The index actually started taking off on November 21 – click to enlarge.
Of course this is mainly an interesting pattern comparison, the situation is otherwise quite different. For instance, in 2008, the broad money supply was at $5.3 trillion, not at $9.8 trillion (not a typo, see chart further above).
Also, the stock market had not even found its bear market low yet, whereas it is close to new highs at the moment. However, as W.D. Gann has pointed out, anniversaries are sometimes of technical significance. No-one really seems to know why that should be so, but Gann has shown the idea to have some empirical support.
The most recent commitments of traders (CoT) report published on Friday (and reflecting the situation of the preceding Tuesday) showed a near 30,000 contract swing in the big speculator position, with about 5K longs liquidated and 25K shorts added. That was certainly fortuitous timing, but it means also that there is now some potential for short covering should upcoming economic data prove not to be consistent with the ‘taper’ idea or some other surprising development occur. We’d prefer it actually if there were no easily identifiable ‘reason’ or trigger at all.
Generally though, we don’t like to see the big speculator group turn more bearish. These traders are correct more often than not (except at market extremes, and even then the more astute ones tend to get out of Dodge in time). What bulls want to see therefore is that they change their opinion and add to to their long positions. As it happens, gold isn’t going to rise otherwise anyway.
Commitments of traders in gold – a 30,000 contract swing in one week – click to enlarge.
Finally, the discounts to NAV of the closed end bullion funds CEF and GTU are as of Wednesday at the second highest level since the beginning of the bear market. Unfortunately that does not per se mean that a turnaround in the market is imminent – it is only telling us that bearish sentiment remains very pronounced. Eventually this surfeit of bearish sentiment should help propel the market in an upward direction (once it has made a technically convincing turn higher), but for now we can only state that it continues to look quite extreme.
GTU’s discount to NAV is only almost at a new record – click to enlarge.
CEF’s discount (the fund holds both gold and silver bullion) is also the second highest since the beginning of the bear market – click to enlarge.
The gold market continues to be afraid of the ‘taper’ ghost, although we should add here that bear markets do not really need specific reasons for declining. After all, ‘QE Inf.’ has done nothing for gold ever since it was instituted, in spite of the fact that the US money supply has increased by nearly another 10% (from an already very high level) since then. We are actually beginning to think that the actual ‘taper’ may be the best thing that could possibly happen, because it will likely produce results that will lead to the anticipation of even more reckless policy than has been seen hitherto (don’t get us wrong – we are not wishing for reckless policy, we are merely forecasting it).
In any case, the recent action obviously means that gold bulls will continue to have to exercise patience. Note that even if a short term rally begins, it needs to fulfill certain technical conditions in order to indicate that a turnaround has finally occurred (i.e., a number of resistance levels will need to be overcome). One point that may be worth keeping in mind though is that both price action and sentiment look like perfect mirror images of what could be observed near the highs of 2011.
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