Gold: The Urgency To Buy

Per recent missives, gold – as it did twice more this past week – is putting in a sufficient number of "lift-offs" such that we'll stop enumerating them. The point is: gold is banking buying bursts on each broadly visible suggestion of central banks' eventually queuing up for Quantitative Easing, our own StateSide FedHeads, (behind the bravado of a looming raise in their Funds rate), we think awkwardly "feeling" QE, albeit clearly not "acknowledging" QE ... at least not yet.

What we're "feeling" and "acknowledging" across the recent rippling of the gold trade is a prudent urgency to buy, and to so do with gusto, (price then subtly drifting downward after each such instance), ... and then Bang: the Buy Button is hit yet again. 'Tis still another sign in determining "how we'll know when the bottom is in." And with gold today at but a lowly 1156, you regular readers know we've already established that price must work well up through the 1200s before declaring it indeed has reached as low as 'twill go (i.e. 1072 back on 24 July).

That said, the urgency to buy of late continues to be impressive, relative to many-a-failed attempt which we've witnessed during these past four years. To be sure, October's upside thus far may not appear to be worth jubilating about: gold's remains down 2.3% for 2015-to-date, (not that we need remind ourselves 'tis also down 40% from its All-Time High of 1923 on 06 September 2011).

Yet similar to the chart of gold we presented a week ago that depicted four distinct rocket "lift-offs" in price since the middle of last month, let's now take you "Inside the Gold Trade" with the following graphic of the trading track for these first seven days in October. But: rather than chart price by the passage of time, here we've gold by the passage of contracts traded. Specifically, each bar (or "candle") in this chart represents the trade of 10,000 gold contracts. Look at the beautiful, wavy surges of flow in the trade, countered by only wimpy wanings of ebb: "Now yer right in the thick of the trade, baby!" By stripping away time, replacing it with volume, therein is revealed the urgency to buy:

"That's a pretty cool way of looking at it mmb!"

Well, Squire, volume fuels price. 'Course, markets hardly move in a one-sided straight line, and as we next bring up gold year-over-year per its weekly bars, the progress from the aforementioned July low is thus far quite respectable, the parabolic trend confirming such by having flipped from Short to Long (blue dots) just three weeks ago. Again, a minimal "atta boy!" target to achieve during this trend is 1170, for 'twould take Gold above its August high (seventh "starred" bar from the right at 1169), the area from which price last stumbled. Then, oh to attack the purple-bounded 1240-1280 resistance zone: wouldn't that be lovely? So near and yet so far; let's first wish upon the 1170 star:

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Again as to the Federal Reserve Bank, we've implied that its Open Market Committee members, deep in the fertile crevices of their individual minds (rate rise or otherwise) must be sensing an ineludible return to QE, (short of the "bank" itself being shut down and its "notes" replaced with a hard asset-based currency ... now there's a thought!). As per Dow Jones' musing over the minutes released on Thursday that the "Fed saw increase in downside risks when it held off on September hike," clearly the FOMC, academicians though they may be, ought see the economy as do we...

...and indeed be wary of the S&P's spree. Moreover, with respect to the stock market, this next graphic converts "wary" to "scary." Amidst all the happy-talk and relief over the S&P 500's having risen 7% in just the last two weeks, we're sorry to have to point out that it so occurred on a foundation of fluff. (You website visitors are familiar with this one). Each day for the S&P 500 Index we calculate its moneyflow (the summation of every component's change x volume x cap-weight) and regress the result into S&P points. We then post an image of the difference between the S&P and its moneyflow, the latter to which the index generally shall directionally turn. (For you West Palm Beachers down there, that is what is termed a "leading indicator"). Our 63-trading day (one quarter) view through yesterday's (Friday's) S&P settle at 2014.89 generated the following result. The blue line is the difference between the S&P itself and its regressed moneyflow level. Now at -200 on the scale, the suggestion is the S&P "ought instead be" at 1814.76 ... and what do we know is oft a harrowing hallmark for the October stock market? Just sayin'...

As for Q3 Earnings Season that is just underway, and for which we'll compile bottom line comparisons for some 2000+ companies, with only 18 thus far recorded, eight of those (44%) did worse than in Q3 a year ago. (Probably just statistical noise that, for earnings don't matter anymore anyway in a zero percent interest world where 'tis requisite to keep buying equities ... right?)

Bringing the yellow metal back into the picture, a great friend and day-trading colleague remarked to me last week that gold trades inversely to the S&P. This is a phenomena that is oft noted amongst traders, however 'tis hardly perpetual. For example, broadly, both markets are markedly higher since Nixon nixed the Gold Standard back in '71. But as we've seen over the years, gold is actually rather finicky to the directional ways of the S&P, not to mention those of other commodities and currencies. Certainly we've shown gold and the S&P at times to be in almost perfect negative correlation, but at other times in seemingly unending stints of lovey-dovey togetherness. And of late, we've seen both. Here are the percentage tracks of gold vs. the S&P from one month ago-to-date. Note that we've trisected the graphic, wherein the outer thirds show the two markets in directional harmony, the center third being somewhat more in opposition. But any way one analytically slices it, at the end of the day, Gold as a rare, hard asset currency really doesn't give a derrière-du-rat about the (if you will) "asset-less" S&P:

Speaking of percentage tracks, we missed placing in last week's missive our usual month-end, year-over-year view of gold and its equities brethren. Thus, here 'tis, now spanning from 09 October 2014 through 09 October 2015. "HUI" is the Gold Bugs Index, "NEM" is Newmont Mining (NYSE:NEM), "NYSE:GG" is Goldcorp, and "NASDAQ:RGLD" is Royal Gold. Note the recent hard acceleration in the equities(!):

Finally, to the nearer-term, tradin' nitty-gritty in this dual-panel graphic featuring gold's "Baby Blues" on the left and the 10-day Market Profile on the right. For the baby blue dots that depict trend consistency, the rule, (rather than the exception of which there is one per the trough at right of center), is that they swing from below -80% to above +80%. Should that play out on this run, price would almost certainly trade up through the 1170 goal, as we've previously noted with regard to the weekly parabolic Long trend. And for the profile, one can't carp about there not being any trading support; it doesn't get much better than this, ('specially if it holds!):

In parting for this week, we'll leave you with these three quick hits:

■ At the outset, we used the plural possessive in alluding to central banks having to eventually queue up for QE. A brief global spin shows us the Bank of Japan not quite yet expanding stimulus despite slumping exports and oil prices; the Bank of England sees the UK economy as withstanding worldwide slowing, but having "the room" to maintain record low interest rates as inflation goes backward; and certainly the European Central Bank is not ignorant to Germany's factory orders "unexpectedly" having declined during August, as did their industrial production. (And Germany's largest financial institution, derivatives-laden Deutsche Bank (XETRA:DBKGn), just posted a €6.2bn loss for Q3: so much for "goodwill").

■ Did anyone notice this? The latest auction for the US Treasury's three-month Bills went off at a zero percent yield. That's a first, but more importantly, you know the old saying that "the Fed is always behind the curve?" Perhaps the FOMC will indeed vote to move rates afterall: down.

■ Lastly, Bill Gross is out to sue the firm which he co-founded and ran for decades, PIMCO, to the tune of, at minimum, $200 million. Guess that's the urgency which occurs when you try to make up for things on the backend and a Bond market that refuses to die.

Written By: Mark Mead Baillie