It's always darkest
before the bottom falls out - JP McGoran
I have a conversation with a geologist
friend of mine that usually sounds somewhat the same on days when
the gold markets move against us, or our hypothesis. Do not underestimate
the power of the government (or its allies) is his wise message.
We've been having this conversation for years. However, over the
past three years, the "house" has in fact been losing. In other
words, whatever this power was it is probably less today. A bold
statement maybe, but I think true in light of the evidence.
It isn't necessary to frown on the
use of the word manipulation because it is inextricably inferred
in any discussion of public
policy objectives alone, many of which are so broad in scope we
consider them as evidence of the bureaucracy subjugating capitalism.
Keynes might well have said capitalism itself was a barbarous relic
in this day where governments manage the free market system or the
invisible hand, without apparent retribution. For pete's
sake, even highly regarded journalists no less than frequently praise
the US government for the management of its economy and currency.
How can the word manipulation be frowned upon when governments engage
in so much blatant economic management it borders on central planning?
Commentators and analysts infer it all the time but never say it.
My friend and I continue to have
this conversation nevertheless at higher and higher gold prices,
and I expect we'll have them at higher prices still.
At some point, however, I think market
participants will become convinced of the opposite argument - that
the government has little control or perhaps even that it is impossible
to control markets and sterilize that activity with any degree of
ultimate success, at least in terms of the objectives a given policy
sets out to accomplish. Why, it's true, and recorded throughout
history. But wouldn't it be a coup for rational expectations theory
if people actually believed it?
They will eventually I suspect though
by that time the smart money, whoever they'll be, will be on the
other side of the market because that'll probably be a sign the
bull market is nearing an end, or such is the axiom of contrarian
In reality I'd say the smart money
will probably be promoting gold stock deals worth nothing at a huge
premium. At least that's how society defines smart money
Whether or not there exists a clandestine
group of bankers conspiring to suppress the price of gold in order
to support the value of the dollar and their own dollar denominated
investments, as is logical to presume there would be, how can we
describe what has been happening with the price of gold and key
economic structures (such as the stock market) since 2000 as anything
but a failure of policy implementations, whatever they may be? Obviously,
the rout in stock prices and corporate profits can't be the aim
of policy, at least not any kind of policy we've ever witnessed.
And I don't know that bankers with
large quantities of dollar investments would have agreed to allow
a rally in gold prices and gold shares over the past year and a
half, if they had any say in it. Whether they did or didn't, the
rising price of gold probably makes them uncomfortable, particularly
if it has been rising due to the reasons we gold bulls claim it
Dollar Bounce Hits Gold Hard
Despite the unexpected correction in gold prices on a falling dollar
since early June, we contend that the rally which began more than
a year ago essentially predicted today's dollar rout, and we also
contend that the activity in dollar and stock markets itself telegraphs
further problems for the dollar. A meaningful correction in the
price of gold would require a meaningful comeback in the value of
the US dollar in our opinion.
Tuesday's $10 drop is simply another buying opportunity that will
prove itself at that point when investors perceive increasingly
significant downside to the currency. It's as simple as that.
On Tuesday, the US dollar jumped
2% against the Euro while simultaneously crashing the Canadian dollar
and Australian dollar both today and yesterday. Both currencies
were down more than 1.5%, after similar drops Monday. The Canadian
dollar sent us an intermediate bear market signal yesterday, and
confirmed it today. The CRB fell 1.7% on declines copper, oil, and
gold. Copper prices sent us an intermediate bear market signal also.
The chalk marks suggest a short term
comeback for the dollar, coupled with a rise in bogus deflation
sentiment, unless the bounce is combined with a recovery on Wall
Street, in which case it'll be recovery sentiment. Those are the
main factors that are driving the bearish gold market sentiment
this week, in our opinion, and over and above the aura of manipulation
in the air as a result of the coincidental crash in bank shares
yesterday and today.
any rate, if the selling in gold were coming from any of the known
bullion banks it would surprise us in this day when off-balance
sheet accounting abuses attract the scrutiny of angry regulators
like bees to honey. That wouldn't mean they're not selling, just
not necessarily from their own accounts. I don't doubt their resourcefulness
on that technical issue. But maybe it shouldn't surprise us if they
were selling right from their own accounts. After all, the overvalued
dollar is one reason we're in this mess in the first place, and
if their selling of bullion had anything to do with that (a logical
supposition) yet they continue to sustain the same policy then who
knows what they could possibly be thinking.
On the ethics and validity of the
said policy, we have to ask, what kind of organization of anything
continues to do the same thing after it brings negative consequences?
Maybe the kind we really need to
worry about. Maybe it's the
kind that resulted in Enron or WorldCom, and I don't mean that coyingly
(if there's such a word). The comparison will become increasingly
valid as one policy after another fails to rig the markets profitably,
and the alleged economic managers lose credibility altogether.
It's the mentality of the operating
modus operandi of the bankers that amazes us and is being revealed
today, not just in front of the Congress, but also in the market.
Their desperation is conspicuous and destructive. It's reminiscent
of the kind of mentality that ruins companies, organizations, and
in the end we could argue nations as well. We've been observing
it for years, to the point that we labeled dollar policy the Machiavellian
dollar. There appears to be an outright refusal to accept
the idea that the
free market is sufficient to heal a dislocated economy, and that
any policy interference would only ultimately put off any such healing
How does one suppress the price of
gold when it comes time that the market chooses to value it higher
than the price at which it is "being stabilized" today? Markets
tend to do this with or without approval when competing currencies
are in trouble, but in those instances they fail to lift prices
due to artificial forces they don't fail to drain supply.
Any commodity would just become scarcer,
as was the case in the seventies when the government used price
caps to try and control prices. Of course, the hope is that the
apparent scarcity dissipates once financial assets are able to inflate
again, demand for the US dollar rises again, and corporate profitability
returns to support such valuations.
Wall Street Bulls Fail to Ignite
What bulls will do never seizes to amaze me. The sparkle in her
eye when Consuelo Mack discovered an indicator that never fails
wasn't spared for CNBC's audience, neither were any of the other
host's glitter after applauding her interview with Laszlo Birinyi
of Deutsche Bank.
Basically he came on and said nothing
works! No indicators work all the time. What a performance. Consuelo
looked utterly disappointed at the fact that she had to go public
with the news that this man of experience and depth said there were
no reliable leading indicators to a bull market.
Thank you, we've been saying that
all along. There aren't really. All of them have caveats. Even the
fact that the advance/decline line topped out two years before the
major market averages did is a very early leading indicator. Too
early for practical implementation. Traders following that lead
turned bearish far too early, which is not always bad, unless the
objective is to go short right away.
With disappointment in her expression
Consuelo asked one more time, isn't there even one indicator that
works consistently as a lead? Birinyi bashfully admitted there might
be. "What is it," she asked with anticipation? Birinyi said it was
when the public's short position exceeded the professional short
The interview came to an end with
a brief display of excitement from her and her colleagues at CNBC
immediately followed by about a 10-point bounce in the Dow when
she admitted that Mr. Birinyi phoned Tuesday morning with the great
news, that the indicator was predicting a bottom (ostensibly the
interview wasn't recorded today) because the public's short position
had just exceeded the professional position.
So it seemed as though they agreed
not to air it until the indicator flashed a buy signal. How convenient.
To be fair, I'm sure he didn't want everyone in the world watching
the same indicator at the same time before it had a chance to work.
That settles it then. Birinyi and
his clients must be making so much money if they've got the only
market indicator that works. Or does it? I'm just wondering because
I know a bridge in Brooklyn that's for sale. If Birinyi's indicator
does indeed work as claimed it's a new discovery. I'd found a few
quotes from an article in Business Week from back in December 2001
titled "Why Laszlo Birinyi's Compass Points Up."
The Dow was struggling with 10000
then, and the tech sector Birinyi was particularly fond of was at
2000 measured by the Nasdaq Composite. The former is down 25%, and
the latter is down almost by half since then. Here's some of what
This savvy market strategist says
money flows into stocks are signaling a change for the better
in investor confidence (12 Dec 01):
His expertise is mainly in being able to pinpoint where the
big cash in the market is going and which areas of the market
it's having an impact on. So it's not surprising that Birinyi's
market opinion is highly valued.
"POSITIVE SIGN." With 2001 near
the end, is he now bullish or bearish? "He who has the gold makes
the rules," says Birinyi, quoting an old market cliché. "Our view
going forward is that the stock market will continue higher in
the long term as money flows on the Dow Jones industrial average
are constructive," declares Birinyi. It shows that investors have
taken advantage of price dips -- which is a very positive sign,
he says. "People are becoming more confident," Birinyi says, and
this is supported, by the "classical technical approaches" that
he sees in the market today.
Among these technical factors:
The advance/decline line on the New York Stock Exchange is "confirming"
the move - December 12, 2001 - Business Week.
Oh Ok, I guess he didn't know back
then that the advance/decline line has always stopped going down
on the last day of a bear market, as he revealed for us in the interview
today. Nice try Consuelo.
Many bulls have been gradually throwing
in the towel on the capitulation sell off idea for Wall Street that
just happens to be underway right now. Maybe they got long a wee
That's a bad sign. Bulls continue
to bravely call bottoms, and mainstreet continues to put out the
stopped clocks. I wonder what it means? When will it end?
At the bottom! - as usual.
By the way, does the alleged pro
position in this new indicator take into account the government's
position - through the ESF or otherwise? Or would that just count
as the public position?
I wouldn't know; I've never tested
or looked at the indicator. It sounds sensible, but it's the calculation
that would interest us, and the "implied" claim that there are no
caveats to this one. I hope Laszlo tells us when the market has
topped, and I sincerely would love his interpretation of the activity
of the market immediately following the buy signal.
Fall, Gold Gets Cheaper
In the same way we question why gold prices continue to follow the
downturn in the fundamentals supporting the value of the dollar
we could also ask why the long bond has been trending up so weakly
in light of a 3000-point drop in the Dow since March?
price of gold should soar if it has any monetary value and the value
of the dollar is in question. But if the value of the dollar is
not in question, the 30-year bond price should have gained more.
In the prior 3300 point slide in the Dow (May to Sep 2001) the long
bond gained nearly 14% in value. In the current climate it is only
up about 9% from a lower intermediate bottom. That said the shorter-term
maturity's have matched their 2001 gains.
But none of the Treasuries are at
new primary highs, as we might argue they should be, considering
the fact this down leg in stock prices is at new primary lows itself.
This hesitation, particularly evident in the long bond, leads us
to believe the Treasury markets continue to factor some dollar weakness,
rather than recovery. It's important because Treasury yields are
invariably a policy tool, and they're still relatively sticky.
Historically, the 3 factors supporting
the majority of the weight in the government's calculation of its
leading index are Money Supply growth, changes in the interest rate
spread, and changes in average weekly manufacturing hours, in that
order. So as the yield curve steepens and buffers the index it is
widely interpreted to imply a recovery in GDP.
We won't dispute that concept but
the question is how much of the rate spread between the long and
short end discounts a real recovery and how much of it discounts
a nominal recovery? That's the conundrum that persistently plagues
monetary policy makers in an environment of rampant inflation. Arguably,
confidence in the leading indicator's ability to forecast recovery
itself could influence that balance to an extent.
But on a day like today (Tue, Jul
23), with stock prices failing to find support again - though not
for a lack of trying - and with a near 2 percent rebound in the
dollar index, bond prices could've done better. The long bond gained
0.09% in price, and the 10-year gained 0.28%. Both have signaled
an intermediate bull leg and they've both confirmed it with fresh
highs on Tuesday, but only marginal ones.
Arguably it's not over, and a bounce
in the dollar combined with falling commodity prices, as well as
ongoing equity weakness is just what the doctor ordered for a buying
spike in the long bond. We're not so sure about a material bounce
in the US dollar, and thus a material decline in commodity prices,
while stock prices continue to fall and weigh on the currency, however.
As for stocks, the call is increasingly tough in the short term.
I hate to ruin a good roll, but outside of the bull raid we're on
the look out for this week, the market has barely hinted at halting
the accelerated selling we've been witness to in July.
NYSE volumes grew over Monday and
breadth was just as bearish.
The Nasdaq composite resumed a treacherous
slide on Tuesday falling by more than 4%. The Dow held up better,
and was even up almost 100 points a few times throughout the day,
but ended down 82 points, or 1%, to close at nearly new four year
lows. The S&P 500 finished at new five year lows. The S&P 600 small
cap index landed only two points above the neckline of a large 30-month
broadening speculative top, or so it will be if the index falls
through 180. JP Morgan and Citigroup were off 18% and 15% respectively
in the Dow and the former took out its 1998 low to make a fresh
six-year low. AT&T, Microsoft, and Alcoa followed suit. Trading
in MSFT after the bell was furious. The stock ended down more than
7% on huge after-hours volume, and even after a $4 pop that only
drew more sellers out in droves.
It's the kind of stuff that dreams
are made of for gold bulls. So what's the problem?
Policymakers are probably in full
swing to stabilize financial markets and raiding gold prices is
a strategy that has yielded variable success in the past in this
regard. It is not very likely that it will work, but it is likely
that the resolute attempts will continue until the very last round.
Dollar bulls are acting like cornered animals unaware of the consequences
of their potentially irrational actions, but committed to their
There's a lot at stake and Laszlo
does indeed say it best when he says that "He who
has the gold makes the rules…" The
question is who owns the gold today?
After accounting for our medium to
long range outlook for dollar assets perhaps the better question
is what is that gold going to go for when they come back for it?