Best of the Week
Most Popular
1.Oil Wars 2016 - US vs Russia vs Saudi Arabia vs Iran - Nadeem_Walayat
2.Crude Oil Price Crash Triggering Global Instability, Trend Forecast 2016 - Nadeem_Walayat
3.Stock Market Crash - Last Week was The 2nd and Final Warning... - Clive_Maund
4.Stock Market Crash Apocalypse or Bull Market Severe Correction? - Nadeem_Walayat
5.TShipping Said to Have Ceased… Is the Worldwide Economy Grinding to a Halt? - Jeff_Berwick
6.Crude Oil Price Crash Catastrophe, Independant Scotland Literally Begging to Rejoin the UK - Nadeem_Walayat
7.Summers: Global Economy Can't Withstand Four 2016 Fed Hikes - Bloomberg
8.Gold And Silver: New World Order: Public Be Damned, Preferably Dead - Michael_Noonan
9.Rigged U.S. Ttreasury Bond Market Double Barreled Hidden Q.E. To Infinity - Jim_Willie_CB
10.Major Stocks Bear Market Awakening - Zeal_LLC
Last 5 days
The War on Cash is About to Go into Hyperdrive - 11th Feb 16
More Bankruptcy For Your Retirement Portfolio - 11th Feb 16
2016 - Gold & Silver Rising: A Gold And Silver Bottom May Be In - 11th Feb 16
Gain Trading Confidence by Improving Your Elliott Wave Analysis Skills - Video - 11th Feb 16
With A Gloomy Start To 2016, A Bust Seems Just Around The Corner - 11th Feb 16
UK Interest Rates, Economy Forecasts 2016 and 2017 - Video - 10th Feb 16
World Markets Are in Sync - 10th Feb 16
If You Miss Buying Gold – You Will Regret, it Later - 10th Feb 16
The Fed Doesn't have a Clue! - 10th Feb 16
How Far Can Gold Price Go? - 10th Feb 16
It's Stock Market Panic Time! - 9th Feb 16
Gold Stocks Picks for Patient Pickers - 9th Feb 16
Oil Price Collapse U.S. Recession Odds 2016 - 9th Feb 16
Preparing for Crisis - It's About Risk Mitigation and Capital Preservation - 9th Feb 16
Top Silver Mining CEO: Don't Laugh, We Could See Silver $100+ - 8th Feb 16
Gold, Investment Leadership Changes Permanent? - 8th Feb 16
Stock Market Panic Decline Begins... - 8th Feb 16
How to Save Money By Growing Your Own Homegrown Tomatoes Indoors From Seeds - 8th Feb 16
US Economy Slides One Step Further Towards A Recession - 8th Feb 16
Gold Bear Market Bottom : Mr. Bear has left the PM Sector for Greener Pastures - 8th Feb 16
Stock Market At Important Support - 8th Feb 16
David Cameron Humiliated in Poland Over Refusal to Stop Taking UK Benefits, BrExit or Super State? - 8th Feb 16
Why Crude Oil Prices Could Continue FALLING From Here - 7th Feb 16
Stock Market S&P, NAS Best, Most Reliable Answers Come From The Market And You - 7th Feb 16
Stocks Bear Market Continues - 7th Feb 16
Silver COT Paving Way for Sustained Upside Breakout Sharp Rally - 7th Feb 16
US Dollar Double Top, Gold Prospects Brightening Rapidly - 7th Feb 16
Gold And Silver - Is A Bottom In? Nothing Confirmed - 7th Feb 16
Gold Stocks Something has Changed - 6th Feb 16
UK Interest Rates, Economy GDP Forecasts 2016 and 2017 - 6th Feb 16
Gold Price, Mining Stocks Rocket Higher - 5th Feb 16
Crude Oil Price Bottoms and Blues - 5th Feb 16
Gold and Silver: Ripe for a Recovery! China May well Change the Game - 5th Feb 16
How Pension Plans are Responding to Financial Repression - 5th Feb 16
Senior Gold Producer Goldcorp Takes Large Stake in Nevada's Gold Standard Ventures - 5th Feb 16
Tips for Smart Oil and Natural Gas Investing 2016 - 5th Feb 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Financial Crisis 2016

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

© 2005-2016 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

Biggest Debt Bomb in History