Is this the next key support price for Gold?

by Chris Kimble

CLICK ON CHART TO ENLARGE

Almost two years ago the Power of the Pattern shared that Gold looked to be forming a Bearish Eiffel Tower pattern (see Gold Eiffel here) and that the Swiss Franc was suggesting Gold will be flat to down for years to come (see Franc here)

The above chart reflects that the Eiffel Tower pattern is still putting downside pressure on Gold, as it freshly breaks below an 8-year support line.

Could one of the support lines drawn above become the next important support for Gold? Which is more important, price or sentiment? I hear people are shorting Gold right now, does that matter? Could one of these support lines match up with a Fibonacci support price?

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Stock’s Safety Net Disappearing?

By Attain Capital

Don’t look now, bond investors, but there may be a bit of a sea change happening in how bonds react to falling stock prices (or perhaps, more correctly – how stocks react to falling bond prices). Most investors have been taught that bonds are conservative, and that you want bonds in your portfolio as a diversifier which should provide a hedge to your stock holdings in a down market.

This has generally held true over the years, as can be seen in the following chart via Charles Schwab via SeekingAlpha:

(Disclaimer: past performance is not necessarily indicative of future results.)

But the last 5 weeks  has seen a dramatic difference in this long held market axiom that bonds should go up when stocks go down, with the S&P 500 and US 10  Yr Note futures down an almost identical -4.2% and -4.3% month to date in June. What’s more, the big down days (last Wed, Thurs., Fri) all saw bonds down big as well.

Chart Courtesy: Finviz.com

(Disclaimer: past performance is not necessarily indicative of future results.)

How rare is this in the current environment?  Well, the current 5 day rolling correlation of .974 is the highest when looking at moves over 1% up or down since July of 2011, and significantly higher than the average 5 day rolling correlation of -0.63 over the past 2 years (and -0.62 during the past 12 months). We plotted the rolling 5 day rolling correlation between the cash prices of the S&P 500 and 30 Year US Govt. Bonds over the past 2.5 years to get a better look:

(Disclaimer: past performance is not necessarily indicative of future results.)

You can see the spike up in correlation, but the question is what happens to the world (and to a lesser extent managed futures performance) if this chart flips and the average correlation between stocks and bonds is more like positive 0.5 over the next 2.5 years. That would surely cause some havoc in the portfolios of investors who rely on bonds for diversification and expect them to be a flight to safety in times of a market crisis. The thing is – if the rise in interest rates causes the market crisis – then what?

That’s exactly what the Boston Globe warned their readers of a couple months ago.

“That may mean troubling times ahead for investors who have come to rely on bonds as a reliable place to hide from the risks of the stock market. If bond portfolios get hit hard, that could mark a third major setback for investors since 2001, following two dramatic stock market plunges. A serious bond market decline would not take place all at once, like a bad session in the stock market. But bond investors could face a slow, steady bleed for years, with annual losses of about 1 to 2 percent.”

How managed futures perform in a rising interest rate environment is yet to be seen, but we like our chances being able to go short interest rate futures (rates up), even though there are likely to be headwinds in terms of negative roll yield (we’ll have more on that in an upcoming newsletter…stay tuned)

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The Federal Reserve – A Study In Fraud

By Monty Pelerin

In a previous article entitled “Government: ‘A Seedy Circus … Perpetually In Debt’,” government was likened to Larsen E. Whipsnade, the character played by the one-of-a-kind W. C. Fields in the 1939 movie “You Can’t Cheat An Honest Man.” Characterizing Leviathan government as an individual, even one as large as Whipsnade,  was a stretch. Fields’ fans objected because he was reasonably harmless, likeable and entertaining, certainly not adjectives one would apply to our modern-day State.

Ben Bernanke as Larsen E. Whipsnade

If comparing government to Fields’ character is improper, then why not compare individuals in that institution to Whipsnade. Surely there is no shortage of characters (clowns?) that could qualify as circus employees. The commonality between the Fields’ character and most high government officials is that both are out to dupe the people.

Barack Obama doesn’t make the cut, only because he is unlikeable and a genuine fool rather than pretending. Jay Carney is bumbling enough, but only haplessly acting on the orders of others. Eric Holder is too unlikeable and probably too devious to be a carnival barker. His aspirations could not be satisfied in small circus towns. Additionally he is too easy to see through. Timmy Geithner might have qualified, but he’s gone now.That leaves Ben Bernanke.

Mr. Bernanke fits the role quite nicely. He is bumbling, likeable and reasonably harmless, at least as a person. He seems a victim of circumstances, a man out of his comfort zone. But his clinching qualification is his modus operandi which is identical to that of a “carnie.” [For those unfamiliar with the term "carnie," Wikipedia defines it as follows: "Carny or carnie is a slang term used in North America and, with showie, in Australia for a carnival (funfair) employee, and the language they use, who runs a "joint" (booth), "grab joint" (food stand), game, or ride at a carnival, boardwalk or amusement park."]

Like a carnie, everything Mr. Bernanke says and does is aimed at deception. A modern day Federal Reserve Chairman must be like a carnie. The primary difference between a carnie and a Fed Chairman is the veneer of sophistication and false omniscience. Gary Dorsch contrasts what the Fed used to do with what it has become:

It all seems so surreal. After being mesmerized by the Fed’s hallucinogenic “Quantitative Easing,” (QE) drug, and seduced by the Fed’s Zero Interest Rate Policy (ZIRP), and rescued by the Fed’s clandestine intervention in the stock index futures market, for the past 4-½-years, it’s easy to forget that there was once a time when the Fed’s main policy tool was simply adjusting the federal funds rate. It’s even harder to recall that two decades ago, the Fed’s raison d’être was combating inflation, whereas today, the Fed’s main mission is rigging the stock market, and inflating the fortunes of the wealthiest 10% of Americans.

To be Fed Chairman these days, you must be adept at charlatanism.

Like the Wizard of Oz, you must pretend you are in control of things that no one possibly can control. You must, as the Platters sung, be “The Great Pretender.” You must pretend that you know the future and can overcome it if it is not promising.

An entire industry has developed devoted to interpreting Fedspeak. Nothing the Fed says is definitive, despite being said in serious tone. The reason for that is the Fed has no better idea of what is happening in the economy than you or me. All of their messages contain wiggle-words so that they can backtrack without being declared in error. When you don’t know what to say, you say nothing but in a way that it can mean anything.

The pretense of confidence and control are your primary strategic tools, as is the ability to maintain these pretensions despite a series of embarrassing forecasts. Your operating tools — quantitative easing, ZIRP and various market interventions — are all carnie tools, designed to deceive people into doing things they otherwise wouldn’t and shouldn’t.

The Great Coordinating Mechanism

The Fed’s role today is to distort prices, a fraud on the grandest scale. Free markets and free prices are the guidance system that produce the marvelous results that Adam Smith described as an “invisible hand.” Prices encourage cooperation and harmony. They provide guides for tens of millions of economic actors. They signal when to conserve and when to splurge. Prices direct scarce resources to their best uses. They influence career choices. Prices literally provide the signals by which we lead every aspect of our lives. Every decision we make, including the emotional ones such as children, love and marriage, are influenced by prices (see Gary Becker among others).

The modern-day role of the Fed is to distort these prices, effectively to disrupt the economy’s guidance system. The purpose is to fool you into making improper decisions. This deception threatens social harmony and individual well-being. Distorting prices, especially systematically, is the equivalent of drugging a person and then having him make major life or financial decisions. Drugs and price distortions have the same effect on decision-making — the mind is unable to properly receive and process information.

Ben Bernanke is on record hoping to manipulate the following three prices:

• Interest Rates
• Housing Prices
• Financial Assets

Blatant Fraud

Mr. Bernanke deliberately suppresses interest rates in order to raise home prices and stock prices. His stated purpose is to create a “wealth effect.” When people feel wealthier, it is thought they borrow and spend more. Mr. Bernanke’s program is pure deception. It is designed to produce a false and fictitious sense of security (wealth). His policies are the same as those that caused the original bubbles. They will produce another dramatic collapse. Deliberate fraud is being imposed on the American public. The fraud will ultimately end in tragedy and great personal suffering.

The rest of the government supports Bernanke’s scheme by issuing false economic statistics and claims of economic recovery. There is no recovery; nor will there be one until the massive misallocations of resources resulting from the price manipulations are corrected. That cannot happen without a massive recession/depression. As expressed by Zerohedge:

…the American economy faces a long twilight of no growth, rising taxes, and brutally intensifying fiscal conflict. These are the wages of five decades of Keynesian sin – the price of abandoning financial discipline.

That is the most optimistic case. A depression is both necessary, and probably inevitable, to break the legacy of decline that Keynesian economics has created. All government agencies act in concert to postpone this event, ensuring greater calamity when it eventually occurs.

The use of the term “fraud” is no overstatement. Fraud, in a legal sense, is defined in strict terms:

Fraud must be proved by showing that the defendant’s actions involved five separate elements: (1) a false statement of a material fact, (2) knowledge on the part of the defendant that the statement is untrue, (3) intent on the part of the defendant to deceive the alleged victim, (4) justifiable reliance by the alleged victim on the statement, and (5) injury to the alleged victim as a result.

Which one of these conditions does not fit Fed behavior? My opinion is that they meet every condition.

If a private company or individual engaged in similar actions regarding the price or misrepresentation of a single product, fines and jail sentences would be sought. The Fed, however, engages in fraud with impunity. They are encouraged to do so by the political class. Bernie Madoff appears ethical in comparison with government and its agencies. The Fed gets to call their deliberate fraud “economic policy.”  Government supports the fraud by claiming that an economic recovery is underway.

Markets are arguably the greatest “invention” of mankind. They enable social cooperation and harmony while allowing maximum increases in living standards. Markets are the very foundation of modern civilization, allowing many billions of people to survive on our planet. Distorting markets is no small matter. Doing so literally threatens peace and economic well-being.

The Fed’s behavior of distorting prices is deliberate dishonesty calculated for government advantage. The policy is designed to deceive others to behave in a manner which is ultimately harmful to these individuals. It is outright fraud!

Concluding Remarks

In hindsight, apologies are in order. There was no need to insult “carnies” by comparing them to government. Bernie Madoff’s crimes should not be compared to those of the government. He was a small fry and he could not force people to participate in his Ponzi scheme. Government is in a class by itself. The Mafia, in comparison, looks like Mother Theresa.

A government that can only survive via fraud has reached the desperate stage. It can create great harm in its death throes but its survival is unlikely.

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Kress Cycle Market Deflation Pressure Increases

By: Clif_Droke

To many observers, deflation was a thing of the past in the wake of the QE3. The Fed’s asset purchases, which drove down bond yields to record lows, were thought to have tamed the global deflationary problem once and for all. What they didn’t count on was the floodtide of deflation breaking through the dikes and barriers carefully constructed by the world’s central banks.
The increasing deflationary pressure is most visible in Europe and Asia but will soon wash up on U.S. shores in the near future. A general deflationary trend is already visible in equity markets in several major countries, a consequence of the final descent of the 120-year Kress cycle. As that cycle approaches its final bottom in late 2014 we can expect to see an increase in some of the problems we’re just starting to see right now in the global economy.

One of the most conspicuous victims of the deflationary Kress cycle is China. China has in fact led the recent malaise in global markets starting with an 11% surge in short-term interest rates in China. China’s overnight repo rate increased by an incredible 25%.
As analyst Bert Dohmen commented, “China is extremely important for all business leaders and investors….Because whatever happens to China will tremendously influence the world economy and your investments. Many large U.S. and European companies depend on China for a significant portion of their sales and profits….A crisis in China will have global repercussions.”
China’s Shanghai Composite Index has been in a bear market since peaking in mid-2009. It’s remarkable when you consider that as the rest of the world has experienced a measure of recovery for the last four years, China’s stock market has been in decline. In fact the Shanghia index is on the verge of testing its 2008 credit crisis lows, as you can see here.

One of the most fundamental pillars of market analysis is that the stock market always predicts future business conditions. What is this telling us about China’s business and economic future? The message can’t be interpreted as anything but negative for the nations of the world that depend on China’s manufacturing sector.
Then there is Russia. Not that Russia is of any great importance to the global economy by itself, but Russia has long been a benchmark for deflationary pressures. Since much of Russia’s economy is tied to oil and natural resources, any sustained decline in the price of oil will automatically exert a negative impact on the country. Remember back in 1998 when oil prices collapsed to $10/barrel? Russia’s financial sector went into collapse and its economy was in shambles. It took an oil price recovery in the last decade to allow Russia’s economy to bounce back and grow for nine straight years. Without the artificial oil price inflation, thanks in large part to the Fed and other central banks, Kress cycle deflationary forces would have long since wiped out Russia.
Here’s what the Market Vectors Russia ETF (RSX) looks like over the last four years. Note the bear market pattern visible in this chart since 2011. Any further decrease in the price (and demand for) oil won’t bode well for Russia and will only hasten the country’s economic demise.

What about the other BRIC countries? India’s stock market is currently probing a 4-year low and the country’s debt market had to be shut recently as yields increased beyond trading bands. Brazil, which was the rising star of the emerging markets not long ago, is slowing economically and has been described recently as “dysfunctional.” Not surprisingly, the natives are growing restless. As Reuters reported on June 24, “More than a million Brazilians have taken to the streets this past week in the largest mass demonstrations since the impeachment of President Fernando Collor de Mello in 1992.”
Brazil’s stock market, as reflected in the MSCI Brazil Capped Index Fund (EWZ), has broken down from a bearish triangle pattern – a pattern much similar to the one visible in the Russia ETF shown above. This could be a preview of what’s to come for other emerging markets in the not-too-distant future as we draw closer to the 120-year cycle bottom.

Gold
After jumping 17.48 percent the previous week, net non-commercial positions in gold declined 7.13 percent during the week of June 11 to 60,227 contracts. Non-commercial long positions in gold have declined 56 percent, its lowest level in 12 months, as investors continue to the exodus from global bonds and commodities.
According to Barclays, net redemptions of gold-backed ETFs have slowed, with an outflow of 15 tons in the first half of June compared to 48 tons in the first half of May. Cash-negative gold positions have also fallen to fewer than 70 tons, according to Sharps Pixley. Most of the “smart money” capitulation selling by hedge funds and institutional investors has likely been completed; the latest decline in gold therefore likely represents the final “dumb money” capitulation phase of the bear market where smaller investors unload their holdings.

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Sugar is Not Sweet!

by Greg Harmon

Roses are red,
Violets are blue,
Sugar is sweet,
And so are you

There is something wrong with this poem. It is late June and the Roses are Red and the Violets Blue. But Sugar is not sweet. It has been in the toilet for over a year. The price of Sugar that is. Take a look at the chart for the Sugar ETF, $SGG, below. A straight downtrending channel bounded by falling trend support and the 50 day Simple Moving Average (SMA) since September 2012. Yes it has tried to break the channel a couple of time only to have the 100 day SMA there to kill any rally. So what about this time? Is it different? Not really, but the same characteristics that would get you excited

about Sugar on the last two breaks over the 50 day SMA are present again. Maybe the third time is the charm. The Relative Strength Index (RSI) is rising and making a new higher high with a Moving Average Convergence Divergence indicator (MACD) that is also rising. These support further upside price action. I would wait until a sustained hold over the 100 day SMA before entering long. If you are short, congratulations and don’t take it off until the 100 day SMA is breached.

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Great Graphic: Another Look at Japanese Stocks

by Marc to Market

The US and Japanese equity markets have been among the best performing equity markets this year. The gains in US equities seem to be largely a function of domestic accounts.

Foreign investors appear to have played a larger role in the advance of Japanese shares. Weekly Ministry of Finance data shows foreign investors have bought $79 bln worth of Japanese equities this year (through mid-June).

Typically foreign investors focus on the big blue chip names. However, many of these companies have sophisticated currency hedging programs and had bought protection from their traditional nemesis, a stronger yen. Smaller companies are more flexible and are, arguably, better positioned to benefit from the weaker yen.

This Great Graphic,. created on Bloomberg, shows the performance of the Nikkei (white line) and the Japanese over-the-counter (JASDAQ)index (yellow line). The Nikkei is price weighted, while the JASDAQ is cap-weighted. It is difficult to see it on the chart which is not normalized, but the JASDAQ has performed twice as well as the Nikkei this year. Through today's session, the Nikkei has gained about 23.4%, while the JASDAQ is up 51.6%. Admittedly most of the rise was seen in the first three months of the year, but even here in Q2, the general out-performance has held. The Nikkei is up 3.5%, while the JASDAQ is up 7.1%.

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