The Perverse Focus on the FOMC and Jobs Data
This week will bring the types of news that are generally considered to be among the most important for gold – the FOMC statement, as well as the July payrolls report (which in turn derives its perceived importance from its effect on central bank policy). It should be pointed out here that it actually makes very little sense for the market to focus on these data points (even though it is clear that the focus exists and cannot be ignored).
Let us consider the payrolls report first: what does it actually tell us? In reality it is a fairly meaningless datum. Not only is it merely an account of the past, it is not even a particularly precise account of the past. The report gets revised several times (at least thrice if memory serves, with the final revisions being done a full year after the report's first publication, when the BLS does its annual revisions). Even the thrice revised version of the report isn't really all that meaningful. After all, the employment statistics are collated in such a manner that all those who are long-term unemployed and considered 'discouraged' are simply no longer counted as unemployed, even though that is what they are. Lastly, even if there were some way of obtaining a perfect payrolls report, it would not really mean much or tell us anything about the future. Employment is a lagging economic indicator. The economy could well be in recession already, even in the face of employment data that still 'look good'.
That is in fact what happened in late 2007: in hindsight it was determined that the economy entered a recession in late 2007, even though most of the real time economic data releases at the time – including payrolls data - appeared to still look fine. In fact, the Fed, whose reaction to economic data is what the market really cares about, still proclaimed in summer of 2008 that the US economy was likely to 'avoid a recession'. At the time, the recession had been in train for more than half a year already. In short, the Fed is not only incapable of forecasting an economic downturn, it is not even able to recognize a recession that is staring it right into the face.
Now let us consider the FOMC statement, which this month may contain news about the planned 'tapering' of 'QE' as well as refined 'forward guidance' regarding the Fed's interest rate manipulations. Fresh Hilsenblather to that effect has been published late last week, entitled: “Up for Debate at Fed: A Sharper Easy-Money Message”. Apparently we need a more forceful reminder that there will be easy money for as far as they eye can see, or for however long it takes for easy money to bring the economy to utter ruin, whichever comes first.
A pertinent excerpt:
“At their July 30-31 meeting, Fed officials are likely to discuss whether to refine or revise "forward guidance," the words they use to describe their intentions for the next few years.
With short-term interest rates near zero, the Fed sees such guidance as an important part of its monetary-policy arsenal. For instance, telling investors that short-term rates will stay low for a long time, Fed officials believe, helps hold down long-term rates, and that encourages borrowing, spending, investing and growth.
The Fed has said that it intends to keep short-term interest rates near zero at least until the jobless rate drops to 6.5% or unless inflation rises to a 2.5% annualized rate. Mr. Bernanke suggested at his June press conference that the Fed might lower that 6.5% threshold for unemployment, which was set in September. Such a move would drive home to markets that short-term interest rates will be low for a long time.
Some Fed officials argue it would be too soon to raise short-term rates even after joblessness drops below 6.5%. In part, they see inflation as unthreatening, which means rates can stay low longer. They fear the jobless rate, now 7.6%, doesn't reflect other weaknesses in the labor market, such as people leaving the workforce or working part time when they want full-time work.
"There are a number of problems with the labor market," Mr. Bernanke told lawmakers earlier this month. He pointed to "underemployment," people who work fewer hours than they would like or at jobs below their skill level.
There are other rhetorical steps the Fed might take in its forward guidance. One would be to match its publicly set upper bound for inflation with a new lower bound. The central bank has said it will raise short-term rates if inflation is seen as rising above the 2.5% target. It hasn't said what it would do if inflation drops much below the Fed's 2% medium-term objective. One option is to say that short-term rates won't rise if inflation falls below some threshold, perhaps 1.5%. Mr. Bernanke has already suggested as much.
"The [Fed] would be unlikely to raise the funds rate if inflation remained persistently below our longer-run objective," Mr. Bernanke said at congressional hearings this month. A formal assurance might amplify the Fed's message that rates are staying low and address the concern of some officials—notably St. Louis Fed President James Bullard—that the Fed needs to show resolve in preventing inflation from falling too low.
One issue likely to be on the table next week: Whether changing its words will clarify its intentions or further confuse investors and stir market volatility”
(emphasis added)
What hubris to think that tinkering with the price of credit can alter conditions for people who are 'employed below their skill level'. Anyway, to the above we can only say: you heard it here first. We already pointed out many months ago that the Fed would eventually lower its '6.5% unemployment rate target'. We also emphasized the importance of Mr. Bullard's dovish dissent (which the markets ignored at the time) on the grounds that 'inflation' is allegedly 'too low'.
That such nonsense sees print without the entire economics profession up in arms over the futility and dangers of such misguided interventionism reflects very badly on the economics profession. No wonder many people today no longer even believe economics to be a science or say things like 'the laws of economics don't exist', as was recently asserted in an article in the Atlantic. This is the end result of the quackery promoted above. Essentially, the functional equivalent of a coven of witch doctors is in charge of the economy. Their organization should not even exist: the economy does not require meddling to 'function better'. It works best when it is left to its own devices.
As to the gold market, the main reason why it would do best to ignore the FOMC, is that the damage has already been done. It is clear that at some point the 'QE' program will have to be curtailed or stopped, because not doing so would be playing with fire. However, the negative effects of the policies already implemented have yet to play out. It takes time for these effects to become manifest. In terms of broad and noticeable effects on consumer prices, the lag between too loose monetary policy and the outbreak of 'inflation' as measured by CPI and similar attempts to discern the mythical 'general price level', can amount to many years.
Consolidation Period Ahead of the Data
In any case, both gold itself as well as the gold stocks are consolidating ahead of these data releases, which are presumably going to serve as the 'trigger' for the next major move. Once again, the data themselves are actually irrelevant. Whether or not the FOMC statement is considered 'dovish' or 'slightly less dovish' (we can rule out 'hawkish' a priori) and whether or not the payrolls report is held to be 'strong' or 'weak', it is the market's reaction to the data that will be important, not the data themselves.
In order to better show where things stand, we have taken a closer look at the lows of 2000/2001 in gold stocks. In a previous update on July 17 we pointed out the following with regard to the HUI index:
“From the point of view of bulls, an ideal progression would therefore be: closing of the gap, followed by penetration of the 50 day moving average, followed by a successful test of the moving average as new support on the first pullback, followed by a flattening and upturn of the moving average.”
Here is what this process looked like when the 2000-2001 bottom was put in after a relentless decline into the final low; as you can see, all the conditions listed above were fulfilled, step by step:
The HUI index 2000-2001. A detailed view of how the turn from bear market to bull market progressed at the time – click to enlarge.
Now let us take a look at the current situation and compare it to the turn shown above:
The HUI today: the 50 day ma has been overcome, there was an RSI/price divergence at the low, and so far, the tests of the 50 day moving average have held. In addition, the moving average is beginning to flatten out – click to enlarge.
All in all, this looks quite constructive so far: several of the preconditions for a durable turn are in place. There is however still one caveat, namely that the time spent above the 50 day moving average is still quite short. As can be seen in the year 2000 example, there have been several attempts at the time to cross above this moving average that ultimately ended with a rejection. These occasions were marked by the market spending at most a few trading days above this demarcation. Therefore it remains possible that the index will be rejected once again at this point. However, once the 50 day ma actually turns up, one can probably give the all clear. This week's data releases will likely provide the decisive impetus one way or the other.
Gold itself has been mired in a corrective looking formation, oscillating around its 50 day moving average over the past week. It is currently consolidating just below the important $1,350 level. Once again, this is an area where the market is may be rejected again, but if a breakout occurs, it will be quite convincing. In the former case, we would have confirmation that the bearish phase is not over yet, in the latter case we would have confirmation that at least a medium term rebound is now underway.
Gold, August contract, 30 minute chart. This looks like some sort of corrective formation – click to enlarge.
Zooming out to the daily chart of spot gold, it is now oscillating around the 50 day moving average, just below the important $1,350 resistance level – click to enlarge.
In short, both from a fundamental and technical perspective, this week is likely to be quite important for the market's short to medium term direction.
There was one event late last week that is worth mentioning. After Newmont Mining (NEM) delivered its earnings report on Thursday after the close – which was as bad as widely expected – the stock opened with a gap down on Friday, but soon found a low and spent the remainder of the day recovering. It ultimately closed in positive territory. Since NEM is a 'bellwether' stock for the sector, this has to be taken as a positive sign:
NEM recovers after opening 'gap down' following its earnings report – click to enlarge.
And finally, here is a long term chart of the BGMI from our friend Bernard that further illustrates the previously discussed long term 'A-B-C flat correction' idea:
The BGMI from the 1940s to today: the action since the 2008 high is likely a 3-3-5 flat correction – see the stylized form to the right – click to enlarge.
Of course there remains one fly in the ointment, namely the fact that flat corrections in which wave C ends above the low point of wave A are very rare. Normally one would therefore expect a low below the 2008 low to be eventually made. However, there is one point worth considering in this case, namely the fact that what happened in 2008 was a crash wave. That may well have skewed the correction toward producing a lower A wave low. One reason why this appears increasingly likely is that the wave counts of a number of individual shares look complete.
Nevertheless, one should not dismiss the possibility that wave C could still become bigger. Ironically, although it would then be among the very worst bear markets in gold stocks in history, it would still be technically regarded as part of a secular bull market.
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