Morning Markets: Gold Dives and Recovers in Asia

Overnight

 

Stocks- sideways and higher

Markets are largely quiet in light trading. Asia rose overnight with the MSCI Asia Index up around 1%. Europe is sideways as reflected in the Stoxx 600 being flat. In the USA, S& P futures are up 0.2% All stock markets are near their highs, with Japan's Topix index at its highest since January

Precious Metals- lower, then a bounce

Gold possibly starts a lukewarm recovery from multi month lows made last night. Currently trading around the $1187 region, a  bout of profit taking slide in the US Dollar is the only factor supporting the precious metal's pull-back from near-term oversold conditions. Weaker greenback usually supports demand for dollar-denominated commodities - like gold. Expect Gold to track the USD blindly with occasional longs crying uncle and liquidating until an event changes perception. There is washout downside risk as perception of Indian Gold import restrictions persists. We'd buy into that if it happened. More on that possibility  later.

Further bounces, however, might be restricted given that Wednesday's FOMC meeting minutes reinforced market expectations of tighter Fed monetary policy stance going forward, which might continue to undermine non-yielding precious metal. 

Carol Harmer, Founder at charmertradingacademy.com, notes, " Gold is looking decidedly unloved and although oversold short term the weekly and especially the monthly charts are not..The monthly charts have actually only just turned negative so the scale of where we could go is quite frightening...."

For our part, we note that the market is indeed oversold on the daily charts, and that a bounce is in order. However, lacking a catalyst or event, we see the "unloved" concept as trending and like an infection, is likely to spread to the weekly and monthly charts before true value buyers step in. On the technical side, Ms. Farmer is a Fibonacci student like us and we note her comments:

"we know there is a mass of resistance at 1199 to 1205...and we look and see what happens there...Can we break 1207...Our first 23.6 Fib level is at 1211 which does coincide with our view that the market trades lower....spookily the 38.2 is at 1235...."

Prudent metals longs that use it as a hedge for their other investments should remember why they are long to begin with:

  1.  stocks are strong
  2. Bonds tell us inflation is on the way
  3. Gold to us is not a leading indicator of 1970's style inflation, but a lagging one after the base metals have rallied

All that said, Gold and Silver (to a slightly lesser extent), are sickly and unloved as other lower lying fruit is attracting investors who wish to hedge inflation. And lacking an exogenous event are to be sold from a speculators point of view. There are many events coming in December. We feel trapped long speculators should use any spikes from these events to lighten their loads if they feel duress being long. The rule of thumb is if it hurts to look at your statement, then cut your position in half and do another gut-check. Feel free to cut your statement in half too if it helps alleviate your anxiety!

 

Bonds- oversold, and hated more than Gold

Bonds have never fallen this far, this fast according to Bloomberg. When compared with the S&P 500 dividend stocks, bonds are a relative buy many say. We say, why can't companies just start increasing their dividends? And then we realize, companies have been spending all their free cash flow and borrowing for years to buy their own shares. They have no cash to buy their own shares nor to raise dividends. So how does a stock's dividend rate increase then? It goes up when the stock goes down. Therefore we see at some point the increased bond yields putting pressure on stocks as an alternative to investors seeking yield not only from a relative dividend POV, but because we envision those companies that most aggressively bought their own shares with borrowed money are going to feel the squeeze of higher rates. This could trigger them to issue more shares. higher Bond yields will affect stock prices as it always does. But in this centralized Fed backstop environment, who can stay solvent long enough to compete with a counterparty that rigs the game and prints money for its TBTF dependent corporate wards?

 

TiPs are influx as Pimco says they have more to run, while Morgan Stanley says they have peaked. Take it for what its worth. Pimco has been off in recent months. Morgan and other banks to us are always suspect in their prognostications, even when they are right.

 

Good Luck

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