#$sgol

Seasonally, there is a weak price period for gold from late-February until late June or early July. Entering a short position on or about February 20 and holding until March 15 has been a successful trade 27 times in the past 44 years for a success rate of 61.4% with a cumulative profit of $45,140 per futures contract. However, in recent years holding onto the short position established in February longer has been the more profitable trade.

This post first appeared at TheFelderReport.com.

Warren Buffett is famous for many things one of which is his general dislike for precious metals as an investment. But maybe you’re old enough to remember when, just over 20 years ago, he backed up the truck and bought a ton of silver – over 3,000 tons, to be more precise. From the 1997 Berkshire Hathaway letter to shareholders:

Our second non-traditional commitment is in silver. Last year, we purchased 111.2 million ounces. Marked to market, that position produced a pre-tax gain of $97.4 million for us in 1997. In a way, this is a return to the past for me: Thirty years ago, I bought silver because I anticipated its demonetization by the U.S. Government. Ever since, I have followed the metal’s fundamentals but not owned it. In recent years, bullion inventories have fallen materially, and last summer Charlie and I concluded that a higher price would be needed to establish equilibrium between supply and demand.

Maybe you’re even old enough to remember that earlier time, just about 50 years ago, when the Oracle of Omaha amassed a position in silver. Either way, it’s interesting to look back at why he did so. “Demonetization by the U.S. Government,” was his thesis back in 1967. Essentially, he made a bet on the devaluation of the dollar against the gold price and chose silver as his trade vehicle. And there are some interesting parallels between then and today.

The dollar is no longer convertible into gold as it was back then but the dynamics that forced the discontinuation of this convertibility are still at work. Wikipedia discusses the “Nixon shock” by explaining that, “from 1950 to 1969, as Germany and Japan recovered, the US share of the world’s economic output dropped significantly, from 35% to 27%.” The very same situation is happening again today, only it is China taking share of the world’s economic output even as the dollar remains the world’s reserve currency.

The story continues, “furthermore, a negative balance of payments, growing public debt incurred by the Vietnam War, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s.” The negative balance of payments is far greater today even when normalized for the relative size of the economy, again thanks to our relationship with China, as is the rapidly growing pile of public debt.

And if you haven’t noticed the monetary inflation created by the Fed over the past decade you must have been living under a rock. The currency component of M1 is currently growing at an annual rate of 7%, a growth rate it first hit in May of 1966. It’s no longer the president’s purview to demonetize the dollar; it’s the market’s. And I’ll leave you decide whether the market should do so today based upon the aforementioned dynamics.

But it’s also important to look at his later thesis for buying silver: “In recent years, bullion inventories have fallen materially, and last summer Charlie and I concluded that a higher price would be needed to establish equilibrium between supply and demand.” Currently, we have a very similar situation in gold. As my friend, Luke Gromen, recently pointed out on twitter, registered gold stocks are currently testing their lowest levels on record. Thus it appears that a higher price is, “needed to establish equilibrium between supply and demand.”

This post first appeared at TheFelderReport.com.

The gold price has risen about 20% since I wrote “It’s Time To Get Greedy In The Gold Market” but it looks to me like it could now get really exciting for gold bulls.

On the weekly chart there is now a clear head and shoulders bottom pattern in play. A break above the neckline would confirm the pattern and project an eventual target near $1,650. There is also a very interesting price analog from 2008-2009 (hat tip, @ECantoni) that suggests this breakout could be imminent.

Since it’s peak in late-2011 gold has acted very much like it did from 1996-2002 (hat tip, @NautilusCap) at least relative to the broad stock market. There is a 97% positive correlation between the past six years in the gold/SPX ratio and that earlier 6-year period. In fact, it now looks like the gold/stocks ratio could have some serious catching up to do to the upside.

Looking back to that 2001 low in gold it’s clear that, at the time, it was very cheap relative to the broad stock market. Today, you could argue it’s now even cheaper. Over the past 35 years or so, gold and the S&P 500 have essentially traded around parity. Should they see some sort of mean reversion now there are $1,300 points to be made up one way or the other.

And if the future for gold rhymes at all with the early-2000’s period it could have much more upside over the next several years than even that head and shoulders bottom pattern would suggest.

This post first appeared at TheFelderReport.com

While everyone pays such close attention to every tick of the stock market and the cryptocurrencies, gold has been quietly flying under the radar. Not many have noticed that it’s now outperforming the S&P 500 so far this year.

Even fewer are probably aware of the fact that it has dramatically outperformed the stock market so far this century. We can thank the recent four-year bear market for that. It’s been very effective in cultivating investor antipathy toward the precious metal.

But the recent bullish action in gold prices hasn’t escaped everyone’s notice.

Personally, I see it as more of a head and shoulders bottom pattern developing.

Either way, as my friend Toddo notes, the recent technical consolidation is constructive.

And in the short-term investors might soon find reason to rethink their aversion to gold.

As Mr. Dalio has said in the past, “If you don’t own gold… you don’t know history or you don’t know the economics of it.” Longer-term both history and economics suggest it’s probably a good time to be accumulating gold.

Yesterday’s post identified June as gold’s (continuously-linked, non-adjusted, front-month futures contract) second worst performing month of the year based upon average performance. Today’s preliminary settle price from the CME Group has the shiny stuff down $21.30 per ounce (–1.67%) today, in line with June’s history of weakness. Based upon the chart above of gold’s past performance, presented on a trading day basis, gold is likely to continue to trade in a choppy sideways to lower pattern for the balance of the month. If gold follows the path of past post-election years, it could finish June with losses approaching 3% and near the lows of the month.

Just as widely anticipated, the Fed did raise rates today by 0.25% to a new range of 1-1.25%. The market’s response was mixed with DJIA finishing the day modestly higher while S&P 500 and NASDAQ finished modestly lower. Gold’s reaction was less favorable, finishing down nearly 0.5% after starting the day well into positive territory. Generally, the higher interest rates go, the less desirable gold can become. Gold does not have a yield and typically storage of physical gold has a cost. However, today’s weakness (or anytime throughout the remainder of the month) might just turn out to be a good buying opportunity for gold.

In the above chart, gold’s monthly performance from 1975 to 2016 is displayed. Historically, October has been gold’s worst month and June is a close second. However, after weakness in June, gold has, on average, enjoyed solid gains in July, August and September. Some of this strength in gold is likely due to safe haven demand during the stock markets worst two months, August and September.

I’ve been following gold pretty closely since I first proclaimed, ‘it’s time to get greedy in the gold market,’ when the precious metal fell below $1,100 a couple of years ago. Since then it appears to me that gold has been trying to form a bottom. One major technical obstacle, however, has stood in its way and that was the downtrend line that dates back to the 2011 top.

This week that downtrend line was broken.

I’ll let StockCharts.com explain what this means:

A downtrend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope. Downtrend lines act as resistance, and indicate that net-supply (supply less demand) is increasing even as the price declines. A declining price combined with increasing supply is very bearish, and shows the strong resolve of the sellers. As long as prices remain below the downtrend line, the downtrend is solid and intact. A break above the downtrend line indicates that net-supply is decreasing and that a change of trend could be imminent.

In short, the break of the downtrend line is confirmation of the idea that a “change of trend could be imminent.” To confirm the trend change from down to up I would simply like to see prices overcome their highs from last summer. On the weekly chart, this would give us a higher low and a higher high, the definition of an uptrend.

In addition to the improving technical picture for gold, I think it’s pretty easy to make the case that gold is cheap. In the past, I have referenced a chart showing real assets have never been cheaper relative to financial assets. Another way to look at this, though, is to compare commodities to equities. This ratio also suggests that real assets like gold are priced to generate far better returns than financial assets like stocks over the coming years.

Finally, from a macro perspective there has probably not been a better time to be a buyer of gold in our lifetimes. Whether you want to think of it as a store of value amid unprecedented money printing, an inflation hedge as fiscal authorities start to join monetary authorities in becoming more aggressive, a simple diversification tool or as a way to find value in an era of unprecedented overvaluation, gold ticks all of the boxes. But don’t take my word for it. Take the word of the greatest investors in the world.

One of today’s few bright spots was gold, up better than $20 per ounce. Gold is now trading right around the same level it was at just before Election Day last year. But, before jumping onto the bullish gold bandwagon consider the following excerpted from the Commodity Trader’s Almanac: 

“Gold has a tendency to continue the seasonal decline that often begins in January, leaving April vulnerable to price declines. April tends to see tax related selling pressure on gold prices along with other financial markets, specifically the U.S. stock markets and more predominantly in the technology sector as represented by the NASDAQ 100. It seems that some investors raise capital to pay the IRS by liquidating portions of assets such as gold and stocks (see Stock Traders Almanac 2017, page 38). 

Generally speaking, April is also a weak month from a demand perspective. The two forces of increased sales (supply) and no major demand cause the downside price pressure on gold during April.”