Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

“Sell Gold, Buy Oil: The Numbers Are Clear” Oh Really? (by Gary)

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A website called Chart Facts
has an article on SeekingAlpha called Sell Gold, Buy Oil: The Numbers Are Clear.
While attempting to restrain some of the sarcastic tone I sometimes
exhibit, I would like to critique this article point for point.

"Gold has witnessed a meteoric rise over
the last 10 years. At $1,193 per troy ounce today, it is now up over
300% (15%/year) since the start of 2000. By comparison, the S&P 500
is down 24% over that same period. Oil is up over 170% (10%/year)."

A
secular change occurred in 2000. This new era has seen ever more
intense monetary policy being used as THE
primary economic fundamental underpinning; in other words, the age of
inflate-or-die is upon us as economies begin to wheeze and lock up in
the absence of liquidity that feeds them (as opposed to the productivity
traditional growth economies once used). As blog readers know, the
Copper-Gold ratio has been used to illustrate the inflate-or-die dynamic
as well as indicate a recent bearish divergence to asset markets.


Cgr1

"While gold may continue to trade up
for some period of time, history predicts that the when the gold run
ends, it will end badly. That is to say that the fall could be fast and
far. Since Nixon took the country off the gold standard in 1971, there
has been only one other gold rally on the order of the current one. It
began in Aug 1976 and peaked in Jan 1980. Gold increased over 700% in
less than three and one half years to $825. Unfortunately for those who
bought on the way up, gold proceeded to shed 64% of its value over the
next two and one half years. Worse, for those who thought “it will
come back,” it took almost 28 years for gold to eclipse its Jan 1980
high in Dec 2007. On an inflation adjusted basis, even the enormous
recent run has only brought gold back to just over half of its Jan 1980
peak."

Thank you
Paul Volcker. Anybody see any policy makers out there with Volcker's
combination of guts and available policy tools? Articles that implore
you to beware the 'gold bubble' (which has not even gotten started yet, I
might add) often highlight how badly gold underperformed in the 20 year
post-Volcker period during which Alan Greenspan, the financial services
leviathan, and an overall ethic of greed sucked the life out of the
wellspring of financial resources the former Fed chairman had injected
directly into the productive economy thanks to his stern monetary policy
and resulting rates of interest.

Yes gold under-performed as I
suppose, it should have. But the gold-bearish articles always seem to
ignore the other side of the coin; it has a lot of catching up to do,
still, at $1100+ an ounce.

"So,
how does one determine when the end of the current gold bull market is
near? No one knows. Many are buying gold as a hedge against
anticipated inflation. But, inflation is nowhere near where it was in
the late 1970s. Specifically, on an unadjusted basis, year-over-year
inflation in April was 2.2%. That was largely in line with an average
reading over the last 25 years and a long way below 8% to 14% readings
being registered during gold’s last spike. While future inflation may be
in the cards, it would have to increase an awful lot from current
levels to justify the recent run in gold. And, it likely has an uphill
battle against high unemployment and a Fed that is at least saying the
right things."

Here comes the convolution; if inflation
were busting out (our monthly EMA 100 'line in the sand' on inflation
fears remains intact) this would indeed signal the coming of an era to
consider the potential of oil, industrial metals, agricultural
commodities and many other resources to keep up with, and perhaps in
some cases outperform, gold. Although, depending on what said
inflationary spike does to economic growth, that is no given.

The
current system operates on a series of liquidity draw-downs, which pump
life into the primary economic funding system; namely, confidence in
the US treasury market. Here is the chart I did months ago to
illustrate. It is updated to current status and shows that the 'line in
the sand' has held and funding may continue.

Usb1

The monthly EMA 100 represents a continuum during which all crises have
been met with debt-fueled funding. The problem since 2000 has been
illustrated well by various ratio charts often posted here; things like
the Dow-Gold and Copper-Gold ratios have shown clearly that growth over
the last decade has been hugely dependent on monetary policy born of
debt creation (monetary policy to which gold is very sensitive) vs.
productivity.

I agree with 'Chart Facts' that inflation has been
muted, at least its effects
(that's important) have thus far been so. But this is an era of
'deflation impulse always met by inflation policy'. Look at how poorly
oil performed vs. gold during the first real deflationary episode of the
'inflate-or-die' era. So yes, I am in agreement that inflation is
muted (from the perspective of its 'effects'), which is precisely the
environment for gold as policy makers will feel ever-more empowered to
meet economic contraction with new inflationary policies after being
given the green light by the Treasury market; you see?

Gold1

"Maybe the better question to ask
about gold is whether, given its performance, there are better
investments at the moment. On the corporate side, an ounce of gold will
again buy the S&P 500. Before the recent run, that had not been
the case since Feb 1991. And, with corporate earnings after tax (also
plotted on the chart below) showing recent traction, there are good
reasons to believe that the S&P is not overvalued. Addressing the
inflation concern, stocks generally provide a good inflation hedge over
the long-term. The risk right now, however, is that the European
issues could put pressure on the corporate earnings which support the
S&P."

I saw this advice at gold 350, gold 420, gold
600 and so on and so forth. Here's the SPX-Gold ratio from well before
stocks topped out in secular fashion in ratio to gold. The nominal
price of gold is shown as well. All the way up we have seen this type
of analysis by gold bears. Gold has made up a significant portion of
the value gap, but in light of the inflation policy baked into the
system (and reflected by $Trillions in unpayable – save for devaluation –
debt) and considering that secular trends often run around 20 years
(just like the previous one in paper assets), there is a long way
further to go in gold's outperformance vs. the broad stock market.

Spx-gold1

As for corporate earnings "showing recent traction", I think it is
better to be forward-looking, don't you? Copper, oil, China… the
tools of the inflationary growth trade beg to differ with this analysis.

"Taking it all the way down to the consumer
level, an ounce of gold will currently buy you about one year’s worth
of gasoline here in the US. Specifically, it will purchase almost 430
gallons at Monday's $2.86/gallon. With data available back to the early
1990s, that had not happened prior to the last two years. A very
quick, very informal survey of non-money managers who live near me
failed to turn up any people who found an ounce of gold more valuable
than one year’s worth of gas for their cars."

The very
same money managers who did not see the 2008 crash coming despite at
least four years of clues. Next…

"Translating that to oil, a commodity easier to invest in than
retail gasoline, an ounce of gold will currently purchase 17.1 barrels
of crude oil (Cushing, OK). Since the start of 2000, that number has
averaged 10.8. (Interestingly, it average 18.6 from 1983 to 2000, but
that was before China and others made themselves felt as growing global
consumers of oil.) More importantly, oil is a key consumable of the
growing global economy. Unlike gold, it is easy to point to fundamental
economic activities that are likely to continue to drive demand and
price for oil up regardless of market vagaries."

If there is real and
sustained economic growth you are right sir, gold will underperform; as
it should. Is there real and sustained economic growth? Again, see
China, see copper, see oil (all of which will rebound and decline within
an overall deceleration of economic activity before the next
inflationary growth spurt.

"One
strange correlation that has crept up in the last 15 years that might
continue to support gold prices is the relationship between the
direction of gold prices and the direction of US debt to GDP. US debt
to GDP peaked in 1995-1996. When it began to turn down after that, gold
prices headed down as well. When debt to GDP bottomed in 2001 and
began to trend back up, gold turned as well. Both have been on a steady
march up since then. Unfortunately, the Obama 2011 budget has debt to
GDP steadily increasing over each of the next 10 years.

Nonetheless, with a growing global economy
and current relative prices, oil is likely to be a better returning
investment over the medium to long-term."

A lucid and
sane paragraph is followed by more convolution. A "growing global
economy" owing to $Trillions in unpayable – short of default/devaluation
– debt will contribute to the sustainable economic growth that things
like oil, industrial metals and the stock market will need to outperform
gold?

I have heard this all before; at 350, 420, 600…

biiwii.com
biiwii.blogspot.com
Notes From the
Rabbit Hole

Gold to S/T Target, Now What?

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Now nothing… because a target is just a target.

We have been
here before; those of us who have been around the precious metals
markets throughout the current, ongoing secular bull. We have been
through the extended periods of questioning by 'the faithful' as to why
the ancient monetary relic does not keep up with more heavily gamed
assets, which are not coincidentally positively correlated to the
inflated economy.

Technically, gold has come to NFTRH's near term
target, recently revised from 1225 to 1240. But what is that but a
number? There is a higher target of 1300 off of the 1.5 year long
consolidation pattern beginning in early 2008. Then there is the longer
term target of 2200. These are all just technical mumbo jumbo my
friends because gold is only ever about value in a monetary world gone
insane. Gold is anti-casino, anti-speculation and anti-risk no matter
what the mainstream media would have you believe. I always get a laugh
out of MSM headlines along the lines of 'Gold Declines in a Flight From Risky Assets'.

Gold

In phases where the global printing press is on auto-pump and hope, if
not economic activity, gains traction gold can underperform the gamed
mainstream plays like copper, oil, high yield bonds and the stock market
in the short term. But few plays are at new all-time highs. Gold
remains so, even after spending the last year in downward consolidation
vs. the stock market, many commodities and the assets of positive
economic correlation.

'Armageddon 08' saw the real price of gold
explode to unsustainable highs and 'Hope 09' has simply been a
corrective measure. Gold investors who know the value proposition of
real money in a time of scarcity of same, just yawned while gold stock
investors and traders – those who know the play – look forward to the
next leg up in gold mining fundamentals, which grow by leaps and bounds
as the real price of gold increases; in other words as gold resumes its
outperformance mode vs. the things of hope, of positive correlation.
The gold-oil, gold-industrial metals and gold-stock market ratios all
factor in as gold miner costs decline in relation to their product.

I
have been using this chart to gauge the coming of the next phase of the
rise in gold's real price. It
is a simple chart noting a similar consolidation structure to the one
that held sway in 2006-2007 as the gold sector was cleaned out in
preparation for the coming events of the outwardly obvious credit
contraction and resulting market crash.

Gold-spx

Gold as measured in the S&P 500 has much higher to go now that the
consolidation appears to be ending right at the uptrend line drawn on
this weekly chart weeks before it was finally hit. Blog readers may
recall the original post showing this chart from March 18th, Anything
Look Familiar?

As signs of frothy sentiment that the gold
sector is noted for get whooped up again, remember that if you trade the
sector, you generally sell the euphoria and buy its polar opposite
condition, despair. I am more of an investor due to current fundamental
views, so I will probably continue to hold many or most positions
indefinitely (likely with the protection of broad market short
positions, which the above chart says is a good strategy).

With
the none-too-subtle degradation of the global monetary system and gold
bullish or rising in all major currencies, there is also a chance for a
major spike here. In the markets in general, noise levels have
increased markedly off of the dull rise to a likely top in prices and
positive sentiment in April. We will keep a filter on this noise and
keep an eye on a real bull
market's progress. This would be the bull market in gold's real as well
as nominal prices.

Meanwhile, in the background the struggles
between the inflation and deflation stories play out short term. We are
on the way to an inflationary future, but gold alone is proving itself
of value during both conditions. The system is trying to deflate; this
is being fought tooth and nail as currency is burned in the battle.
Regardless of further upside or a sharp correction to support around
1000, gold is front and center and value will be retained until such
time as the system is overhauled.

Some people bemoan that I do
not make predictions. This is not the blog for them. A target has been
hit; there are several more targets higher and one lower. These are
the markets and you need to be ready for anything, including the
possibility that things are becoming unhinged here and now. Years ago I
started my simple web presence with a simple thought; be prepared. It
still applies.

10 Year Yield Inverted H&S (by Gary Tanashian)

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Excerpted from the March 28th edition of Notes From the Rabbit
Hole, NFTRH78:

When viewing the current market situation through a lens of
inflationary policy vs. natural deflationary forces seeking to correct
sublime levels of excess, a geek like me looks at the chart of the TNX
and is absolutely transfixed.

Tnx

Pictures like this, rather than the likes of the nominal Dow above are a
big reason for the ongoing ‘risk is high’ droning in NFTRH. It is no
coincidence that the risk profile was raised from the previous bullish
stance as the TNX spiked to form the neck line at 4% in late
spring/early summer, 2009.

The crux of the issue is that a
breakout from the Inverted Head & Shoulders targets 6%. A
correlated rate on the 30 year bond that we usually watch is close to 7%
off of a potential H&S of its own. The problem is that these
levels trigger our biggest picture monthly ‘line in the sand’, the 100
month exponential moving average, which changes something that has been
assumed for decades (the US government’s ability to use its treasury
bonds, its confidence, to inflate at will by selling debt and printing
money). The implication is that the change would be a secular thing,
possibly introducing a hyperinflationary spiral.

I must admit to
being confused by Captain Bernanke’s ‘damn the torpedoes’ inflationary
approach in the face of a bond market on the verge of rebellion while
certain Fed members sound increasingly hawkish tones. The wizard’s
‘backbone’ is that line – the monthly EMA 100 – under which treasury
yields have remained for all those decades of confidence. The neck line
shown above, if broken, triggers a level that busts the backbone.

We
are at an extremely high risk juncture for both hyperinflation and
deflation, because we are right on the line between the two with no
confirmation yet as to which way this thing is going to break. Some Fed
officials have expressed concerns that relate to the picture above, but
thus far, the one who matters most, Bernanke remains unconvinced that
inflation will become a problem.

US Stocks & Bonds (by Gary)

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I received a bit of criticism yesterday about a segment in NFTRH74 with
regard to personalizing the motives of the Fed and policy makers or
more specifically, with regard to writing as if I know what
'Gentle Ben' is thinking with regard to inflation/reflation (or lack
thereof).  This criticism came from a subscriber who has many decades
of experience running some pretty big trading desks going all the way
back to Paul Volcker.  So of course, I listen… as I do with any and
all constructive criticism.

The intent of the segment is to illustrate the myopic nature of the general financial services industry as it tends to err, forget to highlight the reasons
we may have projected economic rebound and buoyant markets; namely,
inflation of money supplies in various aggregates and through various
means.  The premise is that if you want to under-perform, you just buy
the S&P 500 and if you want to out-perform, you buy the most
intense beneficiaries of the inflationary regime.  Of course, this
assumes that reflation will be successful – no given.

So really, Bernanke/Geithner/Summers hyperbole aside, I am focused on what IS, and what IS is represented in this chart.

Now, cases for deflation and inflation can be argued (are argued by
some very smart people) with regard to interim swings, but the big
picture monthly chart – correlating the US long bond to the S&P 500
– cannot be argued.  So let's forget the name Beranke, tune out the
media and avoid the inflation/deflation debate for a moment.  Let's
just look at the chart.

Spxmo

It is striking to me that during a secular bull market US stocks and
bonds rose together, as capital was sucked in to a still-productive
enterprise as it headed for its secular top, conveniently right to the
round number of 2000.  Now, when I spout about 'inflators in high
places' I am really just trying to illustrate the meaning of this chart
while expressing myself as a human.  That is because as a human, it
pisses me off that the country has resorted to such a bald-faced method
of funding its ventures.  As a human it pisses me off to see the
financial media not reporting the whole story.  A headline I would like
to see on Bloomberg:

US Sells More T-Bonds as China Blinks, GDP to Benefit By Direct Infusion of Proceeds

But as a cold chart and market watcher, I simply go about what I do. 
The chart does not lie and its message is that the conclusion of the
major bull market, beginning at the secular top (2000) and leading into
the cyclical bull (2003-2007) ushered in an era of ever more intense
inversion of the relationship between US stocks and US bonds (debt).

It is no secret that the US funds itself through its ability to pile on
more debt to the $Trillions high dung pile.  So, again as a human, it
scares me to see a bearish looking pattern in the nominal $USB chart (potential
head & shoulders) and the proximity to the monthly EMA 100 that I
often write about.  That is because that moving average represents a
secular (many decades long) thing and while I am not sure what will
happen if it breaks, I am not eager to find out.

In summary – and depersonalizing the players in the macro drama – the
chart implies that a continued stock (and commodity) rise could bring
about its own destruction as inflation fears break down the barn door. 
The secular containment of interest rates below the monthly EMA 100
(bond above its own EMA 100) has been vital to funding in an era
(post-2000) where such funding is ever more vital to the pretense of
economic rebound.

We will have continued economic rebound, which will be attended by the
thing that birthed it (inflation) or we will have a double dip (or
worse) as the system attempts to purify itself through natural,
deflationary means.  Conventional financial media obsessions like
'consumer spending' and 'GDP' are just ephemera overlaid on top of the
macro big picture.–Gary (Biiwii)