Gold, Interest Rates, and Inflation

Here is an interesting chart comparison.

The conventional wisdom seems to be that gold does poorly in an environment of rising interest rates. My contention has been that interest rates lag inflation. ie, that interest rates only go up grudgingly after some level of inflation pushes them up.

These pictures seem to show that gold started it's historic (at the time) rise in the late '70's at the same time that interest rates started to go up. It was as interest rates were declining, from the early '80's to about 2002, that corresponded to the bear market in gold. This was a period of disinflation that roughly corresponds to the surge in low priced imports from China/Asia and a general deflationary trend in consumer prices.

Can't we expect the deflationary trend from cheap imports to abate? As China converts from a purely export economy to a more mixed economy I expect more purchase power parity in the Chinese currency. This should result in a general rise in the prices of our consumer imports. And IF the rise of the middle class is able to be sustained in China and in India (to a lesser degree) I would expect to see renewed support for the basic materials as well as food around the world. Next year may be the start of these trends.
And I haven't even mentioned the massive "money printing" that remains to be consummated as banks renew lending as consumer confidence grows, and as the US energy advantage creates more jobs.

My point from this historical data is that inflation leads interest rates. And gold matches inflation.

And furthermore I don't expect our Federal Reserve to be proactive in the inflation vigilance.

Control risk,
gh

Best Trade 2013

The concept of buying new highs is a hard concept to get used to. We are raised all of our lives being told to buy low and sell high. But, in speculating, we are concerned with the probability of a price movement in the direction that benefits us, in the timeframe we are comfortable with.

Personally, I am comfortable buying at any price as long as I get a quick profit at the start of a trade and therefore have some "wiggle room". I suppose it could be said that I prefer to put on a trade at that point where the price makes a decisive move and momentum is building rapidly. It is sort of like getting a free lottery ticket. The downside can be easily limited and the upside is unlimited.

I have been trading the dry bulk shippers for most of the last half of 2013. This is because I noticed the unusual volume in some of them last summer. It appeared to be caused by accumulation of the stocks. High volume on the rallies and low volume on the declines. As if someone were buying in quantity and then letting the price settle back down before buying again. I later saw that George Soros had put on a small position in the dry bulk shippers. Small for him, a few millions of dollars.

My best trades of 2013 were in getting good position in some of the dry bulkers and riding the eventual trade from about $2 to $4 in DRYS. Some of the others did almost as well. This was not as easy as it looks in retrospect. There were several times that it looked like a breakout was imminent but then the price fell back to near the bottom of the range. This necessitated selling some of my stock to limit my risk. I did not KNOW that the stock would not fall further. My goal is to have a maximum, or near maximum position on when the move takes off. And I only know for sure that it is going to take off after it has taken off.
In the past I would get discouraged after two or three small losses in a stock and quit looking at it. And then miss the move. I have learned a sort of persistence in controlling my risk at the same time I try to maximize my gains on the charts that look promising.
Here are some charts of DRYS. This companies stock price, and the earnings of the dry bulkers in general have been seeing some improvement due to the prices they can charge for their services. Those prices can be monitored in the Baltic Dry Index, which is an average of different dry bulk rates updated daily and can be seen in chart form. Those prices form some of the same chart patterns as traded securities.
But the point of this missive is to point out that it doesn't matter what price you may pay for a speculative stock, only what you can sell it for at some point after it is purchased. No price is too high to buy, and no price is too low to sell. (If you haven't, read "Reminiscences of a Stock Operator"!)

My goal is to find those points where the price makes a shift in direction and sustains that direction for a period of time. The easiest place to find these points is at "new" highs. And all prices are relative in time.

control risk,
And Merry Christmas,
gh

Happy Christmas!

Here is Frank and the boys with some smooooth Christmas tunes...

gh

another imminent breakout?

Will Dryships (DRYS) break out to a new recent high and confirm a change in the long term trend?
It looks likely.
I would characterize the previous run up as short covering rally. From here a rally should represent a change in the outlook for this company, and the sector in general, to a more positive one.

The Baltic dry index has changed trend. So the earnings of the dry bulkers should have substantially improved.

This is a weekly chart and as such represents a longer term outlook.

control risk,
gh

Yes, Taper

Last Wednesday the US Fed came out with a masterful massage of expectations when they stated they would indeed start to taper their purchases of US Treasury bills and bonds BUT they expected to keep interest rates low for years to come. They changed the trigger events for raising rates again, from the unemployment rate, to the need for GDP to rise along with inflation. In all, it seemed a masterful manipulation of financial market expectations. There was an hour of very volatile price movement in interest rate sensitive securities as the market participants digested the news. And then the charts went back to looking more in tune with the trends they have established.

Of note, regarding the intent of the Fed to keep interest rates low for a LONG time, are the housing stocks. They had been in a pullback for the last few months and have seemed to be forming a bottom in that pullback. DHI looks to make a move from here.

In regard to that previous post about "NO Taper".   I spend my trading time looking at charts and price movement and trying to deduce what "the market" actually expects, by what has happened. Most changes occur over time. Rarely is there a single event or news item that changes the trends or the general outlook for any single security, or the markets or the economy in general. So I deduced "no taper" from the way the market was acting ahead of the Fed meeting. They did indeed announce a taper, but the way the market acted was the same as no taper. With the exception of gold and silver, although the charts and price action seems to suggest that those markets may be getting ready to change direction also. Low interest rates for an extended period, and a dedicated Fed with the intent to induce some inflation will eventually induce some inflation. The risk would be a Fed that loses the ability to take on more balance sheet debt, or a reduction in demand for risk in the economy in general. And those don't seem to be an immediate risk.

We'll see. Gotta go.

Control risk,
gh

phrase for 2014

I think the topic of the velocity of money is going to become an increasing subject of debate in the coming year. The time is ripe for baby boomers to start throwing in the towel and retiring and for the younger people to move out of their parents houses, take over the jobs of their grandparents and start families. Coupled with the energy boom this country is going to see over the next few years or decade this should increase the demand for basic materials. This phenomenon will not be confined to just the U.S., but China and particularly Japan will see the same demographic shift. Emerging markets in general will resume their growth.

These developments, should they come to pass, will increase the lending that the banks do and the wall of money parked on the bank balance sheets will be brought into the general economy. The Fed will finally win this one.....

Here is an treatise on "The Velocity of Money"

The Velocity of Money For more information on this and other related topics, please contact: Patrick Barron President PMG Consulting, LLC West Chester, PA (610) 793-3605 PatrickBarron@msn.com The velocity of money is the one of the factors that determines GDP. The well-known formula is GDP = M x V; that is, Gross Domestic Product equals the quantity of Money times its Velocity. Velocity refers to how many times a given quantity of money is spent during the period under consideration, usually one year. Less understood is how changes to money’s velocity come about. The formula makes clear that a decrease in velocity can adversely affect GDP and vice versa. But, that just begs the question, what causes changes in monetary velocity? The primary determinant of how often a given quantity of money is spent is the desire of the public to hold money; that is, the public’s demand for money. When demand for money is high, meaning that the public wishes to hold more money in the form of cash balances, the velocity of money decreases. Likewise, when the public’s demand for money is low, velocity accelerates. Therefore, we have entered the realm of perception, which is not an exact science in the sense that one can establish a formula of the magnitude and time frame for changes in perception. Nevertheless, it is possible to establish the factors that eventually will change perception and, therefore, will cause the demand for money to increase or decrease. The demand for money is influenced primarily by the quantity of money. This simple statement reveals something very important—that if the quantity of money changes very little, then the demand for money will change very little and the economy will experience stable conditions. Commodity money—that is, gold and silver—experiences very small changes in its quantity; therefore, one would expect that commodity money velocity would change very little. But even in the days of the gold standard, the demand for money varied. The reason was that the money supply was not backed one hundred percent by gold but, rather, only a fraction of the money supply was backed by gold. The rest of the money supply was anchored in bank loans instead. As banks increased lending during temporary boom times, the quantity of the fiduciary media, as Ludwig von Mises called this money not backed by gold, increased, which caused the demand for money to decrease and money’s velocity to rise. This is the very definition of a boom. However, eventually this increase in the money supply causes prices to rise, among other evils, revealing that the boom is unsustainable. There does not exist any new, real capital to fund it. When bank loans become uncollectable, the quantity of fiduciary media decreases. Now the demand for money increases dramatically, as the public scrambles to convert their fiduciary media—bank checking accounts now of questionable value—into currency. This increase in the demand for money causes a decrease in money’s velocity, exacerbating the bust. The only way out of this predicament is for prices to fall, so that the remaining, smaller supply of money will be sufficient to allow the market of goods and services to clear. All this can take quite some time. In today’s fiat money, central bank monetary system the bust phase can be papered over for quite some time with increases in fiduciary media. But the demand for money detects subtle changes, thusly precipitating changes in money’s velocity. For instance, rising prices are a signal to money holders to reduce their demand for money. A reduction in money demand causes its velocity to increase, putting further upward pressure on prices. If there exist other assets in which the public can easily invest, then one would expect to see upward price movements. Stock market and commodity price increases are symptoms of such movements out of money, reflecting reduced demand for money, furthering an increase in money’s velocity. It is typical of such boom periods that credit is readily available. Businesses, then, are more prone to reduce cash holdings in the certainty that bank loans can be used as a substitute for ready cash to meet business needs. This drop in business demand for holding money is a further spur to an increase in money’s velocity. Furthermore, since central bank manipulation of the interest rate in a downward direction was the precipitous cause of the temporary boom, business has even less incentive to moderate its borrowing in lieu of holding cash. Better to invest in inventories that may rise in value than hold cash, especially when loans not only are easy to obtain but are cheap, too. Therefore, what economists see as an increase in money’s velocity is actually a rational decision by market participants to reduce their demand for money following central bank intervention to lower the interest rate and ignite a temporary boom. But, when the boom turns to bust, the reverse happens. Now the market demands more cash at a time when fiduciary media is being wiped out by bank loan losses. Prices fall, making it wise to hold cash in the expectation of even further price reductions. Businesses begin to hoard cash when bank lending dries up in the face of falling bank capital ratios due to loan losses. And they stop investing in inventories that become less valuable each day. Finally, the public bails out of a falling stock and commodity market in favor of the comfort of cash holdings. Money velocity drops even more. In a free market, capitalist economy marked by little government intervention and the existence of sound—that is, commodity—money, the demand for money and its inverse, the velocity of money, are of little interest to economists let alone the public. The demand for money reflects real choices based upon market forces rather than opportunistic or defensive choices based upon wild, temporary swings in economic fortunes based upon government and central bank intervention. Prices change very slowly. Banks are institutions of probity and practice good asset-liability management; that is, they match loan maturities to deposit maturities. This may sound dull to some, but it beats the wild boom/bust cycles that create millionaires one day and paupers the next.

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Enjoy,
gh 　

No Fed Taper

This just in. No Taper. No Taper.
No taper in the Federal reserve bond buying program until well into next year.

gh

Silver

Here is a busy, busy chart of SLV as representative of silver.

For various technical reasons I expect a bounce in silver here.

A few months back I predicted a bottom in silver off of support at the breakout from August of  2010 at about $19. We have had that and have retraced back to where we started. The character of that retracement leads me to believe we are in a range and can expect to go  back to the top of that range. If we return to the top of this range the price will break another downtrend line as time goes by with sideways price movement. Time is an important element in trading.
I notice that silver and most commodity prices backfill price gaps. We still haven't filled the price gap down from $25.....

This qualifies as bottom picking. Always an exercise fraught with frustration and risk.

Control risk,
gh

Pan American SLV

Here is another example of a bottom trying to form.

gh

No Bounce in the Buck

Heavy day down on the stock averages. Usually there is some buying in the USD in these situations.
Not today. Weak UUP. Strong FXE. (Euro)
Are they buying the Euro as a safe haven?
Odd.
gh

Dollar Trend on the Farthest Horizon

Here are a couple of charts of long term USD and Euro. The Euro looks set to resume the long term trend. And by inference the USD should commence another leg down in it's long term decline.
USD weakness has probably been overshadowed by the recent weakness in the JPY as that country tries to get the advantage in the export markets.
The demise of the USD may be more related to the rise of China as a world power and the decline of the USD as a medium of exchange for oil.

The BDI

The Baltic Dry index is in an uptrend with a recent break above the prior high a couple months ago.

Baltic Dry Index Chart

gh

More Wishful Thinking?

Silver, and gold have been quiet lately as they drift down in price. I noticed one of the silver producers in an interesting technical pattern.
Coeur d'Alene is a city in Idaho. It is also a mining company in the area. It is pronounced Kor' de Lane.
The ticker for this chart and stock is CDE.

Of interest is the declining price on quieter volume forming a declining wedge. In an uptrend a rising wedge pattern on declining volume means the buying is running out of momentum and is usually punctuated by a sharp drop.

I wonder if the reverse is true regarding this silver company and silver and precious metals in general. Isn't it about time we started seriously considering the prospect of inflation again? What would be the trigger? The Fed? The CPI? I don't know!
But here is that chart:

OOPs, looks like I ended up with a SLV chart in that screenshot.

Don't get greedy now!

gh

Glass Ceiling?

Another stock chart:

Use discretion and judgment.

But above all, for God's sake, DONT LOSE MONEY!!

LOL
gh

The BDI redux

I am keeping an anticipatory eye one the BDI.
The price of dry bulk shipping has had a recent upturn. Look for a breakout above the recent highs that caused such a storm in the shippers stocks.

BDI

control risk,
gh