Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
U.S. GDP Sucking Spoilt Milk From A Bloated Dead Sow - 3rd May 15
Stocks, Gold and Oil Markets Chopsville - 3rd May 15
UK Election 2015 Forecast - The Most Probable Outcome is... - 3rd May 15
Kate Gives Birth to Coalition Government - 2nd May 15
Stock Market Correction Time? - 2nd May 15
Gold And Silver - Thieving Bankers Operate In Open; Public Have Eyes Wide Shut - 2nd May 15
U.S.A. Caught In Enormous Policy Vise - ZIRP & QE Destructive Influence - 2nd May 15
Crude Oil Price Bear Market Is Over - 2nd May 15
Gold and Silver Bear Squeeze Comes and Goes - 2nd May 15
UK Election Forecast 2015 - Who Will Win? - 1st May 15
Gold Developments Say New Mine Supply Is Peaking - 1st May 15
Emerging Mexican Silver - 1st May 15
Investigating The U.S. GDP Deflator: Wildly Differing Results Depending on Your Choice - 1st May 15
JP Morgan Cornering Silver Bullion Market? - 1st May 15
Baltimore Riots Whose Fault? - 1st May 15
Monetary And Economic Insights From Incrementum’s Advisory Board - 1st May 15
Your Best Stock Investment in the "Cloud" Is Right Here - 1st May 15
Stock Market Kondratieff Waves and the Greater Depression 2013- 2020 update - 1st May 15
How One Chart Is Changing My Outlook on Crude Oil Prices - 1st May 15
The Real Reason Why Obama Wants to Lift Sanctions on Iran - 30th Apr 15
Gold and the New U.S. and UK Recession - ZIRP to Continue - 30th Apr 15
Uranium Price Is About to Rocket - 30th Apr 15
Immigration Crisis Drives a Deep Wedge Between E.U. States - 30th Apr 15
Labour Leads in Nick Clegg's Sheffield Hallam Seat, Latest Ashcroft Opinion Poll - 30th Apr 15
Is the Fed about to Ignite the Stock Market Sell in May and Go Away Trade? - 30th Apr 15
Bill Gross on Pimco Hiring Bernanke and Fed Interest Rate Hike 2015 - 30th Apr 15
The European Stock Markets Trend Is Up. We're In. Are You? - 29th Apr 15
Putin: Czar Of Natural Gas, Crude Oil, Uranium & GOLD - 29th Apr 15
BEA Reports Weak U.S. 1st Quarter 2015 GDP Growth at 0.25% - 29th Apr 15
Why Labour Cannot Win Sheffield Hallam and other Lib-Dem / Conservative Key Marginal Seats - 29th Apr 15
Stocks, Bonds and Real Estate Financial Hurricanes Headed Our Way - No Where to Hide! - 28th Apr 15
Bitcoin Price Counterintuitive Signs - 28th Apr 15
Stock Market Valuations - Maybe I am Crazy - 28th Apr 15
Gold Price Rises, Silver Surges – Physical Demand and Greece, Ukraine, Russia Risks - 28th Apr 15
The Insurance "Game" Has Changed – and Investors Can Profit - 28th Apr 15
Prelude to a Japanese Revival - 28th Apr 15
Why You Could Make ANOTHER 100% in China Stock Market Starting Now - 28th Apr 15
CIA Prefab State Terror for Human Bondage - 28th Apr 15
Greece: Down and Probably Out - 27th Apr 15
Biotech Stocks and the Power of Context - 27th Apr 15
Strawberry Picking Undervalued Gold Stocks - 27th Apr 15
Rock-Paper-Silver - 27th Apr 15
Gold Flows East - China, India Import Massive Quantities of Gold from Switzerland - 27th Apr 15
Conservatives Start to Pull Away from Labour in Opinion Polls, But is it too Late? Election Forecast 2015 - 27th Apr 15
Gold and Silver - It's ALL about The Big Picture After All - 27th Apr 15
Sheffield School Places Election Crisis - Affluent Schools Demand Increase in Funding - 27th Apr 15
Labour Bribes Voters With Housing Market Stamp Duty Cut and Rent Controls - 27th Apr 15
Stock Market SPX Index at Resistance - 27th Apr 15
Society's Leaders Have Been Digging a Bottomless Economic Pit - 27th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The War on Cash!

Gold $XAU Death Cross

Commodities / Gold and Silver 2012 Dec 14, 2012 - 07:09 AM GMT

By: Brian_Bloom

Commodities

Summary and conclusion

The behaviour of the gold share index may be an early warning sign that Quantitative Easing is about to take a back seat and be replaced by an emphasis on balancing the US budget. Should this turn out to be the case it will place a lid on “growth” of the US economy and will shift the focus of the authorities towards the desire to maintain the economy’s equilibrium. This will allow for a slow (multi year) deflation of the debt bubble but will be hostile to the mainstream investment world. Wealth Creation activities will offer (high business risk) investment opportunities.


**********

To the irritation of many in the gold world, this analyst continues to monitor the gold price looking for signs of an emerging pullback from its technically overbought situation. It is his contention that such a pullback would be a healthy development from the perspective of the Global Economy.

Sometimes the signs are subtle, and the following two charts reflect such subtleties:

Chart #1 – Death Cross of the XAU

(Courtesy DecisionPoint.com)

XAU Daily at Dec 13 2012.jpg

Note how the 50 day MA has fallen below the 200 day MA. This is referred to by some in the charting world as a “Death Cross” – which is a melodramatic way of saying that the previously entrenched short term trend is no longer entrenched and may be reversing.

This is not necessary a sign that the gold price will fall because mining profits might fall for other reasons – eg rising costs (for example, if interest rates should rise, then highly geared gold mines might experience downward pressure on profits).

Chart #2 – Ratio of Gold Share index divided by Gold Price

(Courtesy Stockcharts.com)

XAU ratio Gold at Dec 13th 2012.jpg

This weekly chart is showing a break-UP of the 20 week MA above the 40 week MA but, more relevant, the ratio gave a sell signal in April 2011 when the 20 week MA crossed below the 40 week MA.

To get some context of a possible implication of that sell signal, below is a chart of the gold price on its own:

Chart #3 – Weekly Gold Price

Gold Price at Dec 13th 2012.jpg

What seems to have happened – to cause the breakdown in Chart #2 – is that the gold price shot up and the gold shares did not confirm. It took a further 6 months before the gold price finally peaked. From this, one might conclude that the gold shares are a leading indicator but that the lead time is measured in months rather than days.

Note from Chart #2 that the ratio took another dive in April 2012 and note also how the gold price peaked yet again in October 2012. Once again, even though the gold price “appeared” to break up from that notorious descending right angled triangle, that was the object of some attention by this analyst at the time, it is arguable that the break up in question may have been a  false break.

And this begs the question as to whether the gold price will resume its upward trend or continue to dither – perhaps retrace all the way back to $1109 an ounce (time indeterminate) – before resuming its bull trend?

Ultimately, this will be a function of how governments address their debt levels and, in particular, how the US addresses the fiscal cliff issue. There is a dogmatic view by some gold-philes that QE Infinity is inevitable and that, therefore, inflation is inevitable and that, therefore a rising gold price is inevitable.

To my way of thinking, whilst this logic is sound, it is based on an unspoken assumption that the financial markets will merely stand and watch. Inevitably, if inflation rears its head then real interests rates will turn sharply negative – unless the interest rates rise to compensate. In turn, this will beg the question: What will the impact be of rising interest rates in an environment where the US sovereign debt is $17 trillion and the ratio of Debt:GDP is over 100%?

Chart #4 – Ratio of Interest on Government Debt to GDP

Source: http://www.usgovernmentspending.com/debt_deficit_brief.php

Ratio of US Govt Interest to GDP.jpg

Chart 4.05: Federal Deficit 1900-2016

The real risk from government debt is the burden of interest payments. Experts say that when interest payments reach about 12% of GDP then a government will likely default on its debt. Chart 4.05 shows that the US is a long way from that risk. The peak period for government interest payments, including federal, state, and local governments, was in the 1980s, when interest rates were still high after the inflationary 1970s. Of course, the numbers don’t show the burden of interest payments from Government Sponsored Enterprises like Fannie Mae and Freddie Mac.

 

Clearly, from the above chart, the main reason that the US economy has managed to survive that country’s recession is that interest rates have been kept low by the Federal Reserve. This has enabled the ratio of interest to debt to remain at below 1990s levels. Equally clearly, if interest rates start to rise against a background of high Sovereign Debt:GDP, the fiscal cliff will turn out to be just that – a cliff from which the economy will fall into the canyon below. Not only will the US deficit blow out, but the living standards highly indebted consumers will be savaged.

Below is a chart showing the ratio of consumer income to consumer debt and the debt service ratio – of household interest as a percentage of income – Source: http://www.creditwritedowns.com/2012/10/us-household-debt-to-income-debt-servicing-cost-ratios.html

Chart #5 – Consumer debt affordability ratios

Debt affordability - Dec 2012.jpg

If interest rates rise then you can kiss goodbye the concept of consumer spending continuing to drive the US economy.

So, against this background, what is the probability that QE Infinity will turn out to be real? Does anyone possessed of the above information really believe that the US Federal Reserve has the power to simultaneously dump trillions of dollars cash into the financial markets AND keep the interest rates down? If so, then the assumptions must be that the economy and the financial markets are no longer operating in the same universe and that all this cash will go into the financial markets and yet somehow leave consumer prices unaffected. Mind you, I have noticed on TV recently that there is more than one “adult” series that is based on a resurrection of fairy stories. Perhaps there are still some people who believe in fairy stories.

Well, let’s look at what the bond yield charts are showing us:

Chart 6 – Weekly Chart of 10 year US Treasury Yield

10 year yield at Dec 13th 2012.jpg

Note how the PMO oscillator has been rising, as the rate of fall of the yield on the ten year note has been slowing. Clearly, the Fed is running out of wriggle room here. If the PMO rises above zero then this will be warning signal of impending rises in yields. From the perspective of the Fed, that absolutely cannot be allowed to happen.

Conclusion

In the rhetoric surrounding the fiscal cliff and whether taxes are going to be raised for the rich or whether greater emphasis should be placed on cutting government expenditure,  the point that seems to have been missed by the media commentators is that QE has not featured in the discussion at all. It has been all about “How are we going to balance the budget?” Clearly, if the emphasis – of both political parties’ thinking – is on budget balancing, then the fairy story of Quantitative Easing must now be history.  Ultimately, that is what the death cross of the XAU “may” be signalling

Brian Bloom

Author, Beyond Neanderthal and The Last Finesse

www.beyondneanderthal.com

Beyond Neanderthal and The Last Finesse are now available to purchase in e-book format, at under US$10 a copy, via almost 60 web based book retailers across the globe. In addition to Kindle, the entertaining, easy-to-read fact based adventure novels may also be downloaded on Kindle for PC, iPhone, iPod Touch, Blackberry, Nook, iPad and Adobe Digital Editions. Together, these two books offer a holistic right brain/left brain view of the current human condition, and of possibilities for a more positive future for humanity.

Copyright © 2012 Brian Bloom - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Brian Bloom Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014