Putting the pieces together...

Inflation Recess done?

RINF inflation expectations which I described in February as part of the "Powell Pivot" may be ending. The shorter term Edelson/Tarasov price model for copper is also suggesting that Dr Copper is soon going on a longer vacation.
So do US Treasury Notes and Bonds whose rates are dropping precipitously.

Data, Inflation/Deflation, and Economic Growth

It has been ages since I've posted here, not from lack of interest. I've had a period of world travel sandwiched between my four-seasonal home migration. The travel  has covered the globe excepting Africa south of the Sahara and South America. Due to improving wireless telephony and continued down-sizing of telephones and computers--virtually the same devices now--I was able to keep in touch with markets even on the high seas.

Recently I have been posting some at SiliconInvestor.com on pages called Humble1 and Swing Trading Friends. I've been a member at  SI since 1996 and may be grandfathered in for costs, but I don't think it costs anything or not much. It's a convenient place to post short messages and read some interesting people.

My by now ancient interest in inflation and deflation, gold and currencies, has been rounded due with dedication to macro-economics both in "'flation" and economic growth cycles about which more later.

The development of massive intervention by Central Banks over the past ten years, much larger than their previous interventions since 1913 in the US, has aborted, or at least interrupted, the normal historic alternation of 25-30 year cycles of inflation and deflation. It is what it is, and I and millions of other people have had to accept this as  a fact and move on.

I have found some good indicators of "flation" to add to commodity prices interest rates. Perquisite Capital's additions are very thorough. I'm going to show a chart from over a year ago which demonstrates the predictive power of one of their indicators:

The 2016 rebound inflation after five years of disinflation off the gold and later crude oil highs is clear, but also the turnover in 2017 indicating that re-inflationary power was subsiding once again.

The other most useful newer indicator I have is the 30 year inflations expectation chart. Perquisites' 10 year has data going back much earlier, but the 30 year Treasury Inflation Protected (TIP) bond interest rate minus the standard 30 Treasury bond yield is very helpful as the longer duration bonds are more leveraged to outcomes. RINF is the measure and has its own ETF which holds the actual bonds. IT is NOT an ETN. I use the RINF.iv or "indicated value" which is calculated live during each day and which is helpful since RINF itself doesn't trade heavily.

This RINF chart is a weekly chart through February 9, 2019. It shows there were three small pro-inflationary moves  from January 2016 to September 24, 2018.  RINF  expected inflation started down in that week nearly coincident with the October top in the stock markets and other asset classes. Note that it had a very small blip since the last week in December, and MAY have turned back down again this past week.

From reading a lot of Gary Shilling, whom I have talked about here before, and others, I have become more convinced that disinflation or outright deflation has been far more common in 19th to 21st century than inflation. I'll go more into this another time, but the progress of efficiency and new inventions over time is one clear reason why. Major wars appear to be the reasons for periodic major inflation periods, such as 1810-15, 1860- 66, 1913-19, 1939-1945, etc.

Thee are quite a few others who share this belief, and I'll discuss them also another time. The bottom line is that not only the US but world disinflationary times have begun their return in the second half of last year, particularly in Europe and China, and will likely continue for some time. Macroeconomic data nearly worldwide has been slowing on a rate of change basis, and although the US has been slower in starting down, it's underway. Even the US Federal Reserve has had some qualms lately about its dis-inflationary push back from the markets.

Since September I have been short US stocks in a conservative manner I'll share with you soon, and long US Treasurys of various durations and more than usual gold assets. I also hold a lot of cash in money market funds and short duration "near cash" funds earning nearly 2-3% in some cases. Each of these four assets has a good place in dis-inflating times and stock bear markets. If I'm correct and I prosper from this portfolio, as I have so far, I'm thinking of putting my assets in the hands of one of several managers I have identified. I'm not getting younger and value my time with my family and our interests.

Gold, Want, Shilling, Tarasov, Gann

This chart is about six weeks old, but isn't likely to have changed from Want's point of view here. It's very similar to Gary Shilling's view except that Gary never mentions gold but rather the dollar. Want's dollar view also is bullish, like Shilling's. He's not a dummy about the dollar EVENTUALLY, but he doesn't see it now.. Want lives in Australia where mining and gold are crucial parts of the economy, so he's not biased against gold. But his models are not intermediate term bullish.

I don't want to be bearish on gold either, but I don't want to give back the great profits I've made in gold(s) and silver(s) the past 18 months. To be stubborn is to be foolish. Keeping CEF is a buffer or volatility damper on a diverse portfolio.

Slashing down through that incredible support group of indicators at 1260 gold last week was a meaningful sign for me.

The second chart is Tarasov's PPI long term cycle forecast for crude goods, including gold. He nailed a low for 2003 and for 2016 but his final low isn't until 2023. Obviously the effect of Bernanke/Yellen/Keynes on markets has been to extend bottoming of rates and of crude goods and topping of equities.

 

Very important gold level at 1225.

Larry Edelson is Gone

Devastating news came yesterday that Larry Edelson, the greatest public gold analyst of our time, passed away over the weekend. I truly feel the pain of his large extended family in the US and Thailand. In the past decade I have lost four people I loved: my wife, my mother, and two brothers. I wish Larry's family healing and happiness in the passage of time. 

I never met Larry nor even spoke with him directly, but I have known of him for decades and read his work intermittently over those decades. He was always of great interest to me in that he had had some of the same influences I did and used many of the same analytical techniques: Nikolai Kondratieff, Martin Armstrong, Sergey Tarasov, Alan Andrews, and on and on. Neural network analysis and artificial intelligence to draw conclusions was another such area I have used, but I did not have the facilities to do it in depth, so Larry was my source in recent years. I hope his successor at Weiss Research has a command of those technical processes.

Larry was a great mentor and comfort to me in my own work, and I was never happier when we reached the same conclusions, and never more nervous than we didn't see eye to eye. 

May he rest in peace.

 

 

Possibly next to the midline (bisect) or upper line.

Follow-up to Gold at the Crossroads

Doctor Silver?

Copper is used in so many industries that its long term price is said to parallel economic activity,  so Doctor Copper is a common title for copper itself.

I was playing around with various charts the other day, and was surprised to see a relationship of silver and gold to the Dow Jones INDU which I had never noticed, although the gold to silver ratio is often talked about as having historical significance. I turned the ratio upside down the other day on a StockCharts monthly line chart which shows only each month's ratio of the closing price of the constant forward silver price divided by gold's monthly close.

To my amazement, major lows in this monthly silver to gold price ratio were closely aligned with major lows in the Dow Jones INDU.

I've put arrows on the obvious major spike lows of the silver to gold ratio, but other lows in the ratio, as in 1985, 1995, 1997, and 1999 also were followed by meaningful Dow advances.

The current issue is the very low level spike in the silver to gold ratio in 2016 which was accompanied by the recovery of the Dow from the second 14% drop of 2015-16 "mini-bear market". Also the 2016 election low on the daily chart seems associated with the Dow up spike. 

If this 2016 low results in Dow bull markets like those from 1982, 1990, 2003, and 2008, that would be a big surprise to the bears!

 

Fifteen Year Returns

Stocks, bonds, and gold have all put in gains over the past 15 years. The Morningstar chart (I am a subscriber) includes all dividend or coupon payments as reinvested as received, so these are total returns except for taxes and commissions.  

The US Treasury long term bond fund of Vanguard has had the least volatile upward trend, and for this 15 year period the Vanguard bond fund (VUSTX) and the Vanguard Standard and Poors 500 fund (VFINX) had virtually identical returns of approximately 6.4% annualized.

Surprisingly, the Central Fund of Canada (CEF), investing only in gold and silver bullion, stored in an allocated sector of a bank vault in Canada, with precise auditing, did much better. For US income taxpayers, Central Fund qualifies as a Passive Foreign Investment Company (PFIC) which has IRS reporting requirenents and as a precious metals PFIC trust fund has some tax advantages over standard precious metals deposits and funds. Also it pays virtually zero dividends, generally a penny per share annually, so the PFIC dividend/interest issues are non-existent.

CEF is completely unleveraged. In addition to its other attributes, it is classified as a closed-end fund. It can issue new shares to buy more gold and silver bullion. As a closed end fund it typically prices at a discount to its net asset value, so you get more for your money when the discount is in effect. 

CEF, consisting of gold and silver bullion in a Canadian vault, outperformed both US stocks and US Treasury long term bonds by 2.4% annually over the past 15 years. You didn't have to pay a penny in tax....well maybe a penny a year...or make any changes in investment to make annualized gains of 8.6% per year in a very difficult market period. 

If, as I suspect, we are resuming the more inflationary part of the long wave cycle, interrupted by 8 years of FED madness,  CEF should do well. In the similar inflationary era from 1968 to 1980, the best investments were gold and TBills. Most US brokerage money market funds now are effectively TBills. So CEF and a money market fund might be the best places for long term money. TBill rates increase and precious metals increase in value during such a period. 

For active traders, one could short term trade around these bases, or one could just sit back and enjoy life.

Charts, Technical Analysis, and "Funnymentals"

From Ed Seykota's remarks in Jack Schwager's Market Wizards: "Fundamentals that you read about are typically useless as the market has already discounted the price, and I call them "funnymentals". However, if you catch on early, before others believe, then you might have valuable "surprise-a-mentals". 

Political "funnymentals", as in elections or edicts, do matter, in the the US as well as in Italy or the Congo. nevertheless, tech analysis shows that some methods of Mr Gann and Mr Elliott still work, not to forget Mr Andrews and "Sir G9".

The chart above demonstrates some of the techniques of all four of those gentlemen, as well as some simple moving averages. If December gold doesn't hold 1225-1218 odds increase to fall to 1190-1178, or lower.

Times are changing, whether we like it or not, and as traders or investors we must adapt.

The rest of the charts demonstrate some other indicators and methods I use.

 

Gold At The Crossroads

There are a number of factors currently affecting gold after a splendid performance earlier this year and a pullback or consolidation since early summer. I won't list the ones you'll recognize on this chart. There are also timing issues. If gold can break above 1275-77 and stay there for a week or so, a bull market will likely proceed like the others of the past 70 years.

These two excellent companies in Australia and Canada are merging.

Albert Edwards: Shilling on Steroids

Just to remind me that the real return of bonds has beat that of stocks for the past 20 years, Edwards, of Societe Generale, points out that if a recession were to recur due to FED raising rates, US Treasury long rates could drop from over 2% to zero or lower. That could give 100%+ gains. This what's happened to UK bonds (gilts) this year and to Japanese bonds too. 

Of course this is what has happened for long Treasurys and SP500 stocks for 20 years, and not what will necessarily happen in future.