Gold, Silver Charts and the Fed's New Idea

Gold

UPDATE: Stocks Drop, Curve Steepens on Fed Balance Sheet talk

HARKER: WHEN RATES AT 1%, NEED TO LOOK AT UNWINDING BAL SHEET
BULLARD: BAL SHEET ROLLOFF MAY BE BETTER THAN AGGRESSIVE HIKING

These 2 statement made today by Fed officials may have been the catalyst for the stock market swoon. Although they were red herrings intended to feel out how the market would react... the market indeed reacted. Stocks sold off and the Yield curve steepened. If the fed decided to unwind its long bond position form its QE events that is trade speak for basically saying: New debt will be issued.

In the nutshell:

QE was "sterilized printing" wherein the Fed printed money adn the Treasury used that money to buy its own bonds. An unwind of such a position is basically an issuance of debt. Simultaneously it implies a raising of rates (UN-printing of money). But there is no way that will happen/ in that scenario we will get a steeper yield curve from the rise in long yields. To counter that, the Fed might actually go Negative on rates (NIRP) to keep the stock market afloat. Indeed, if one were to look at the USD versus 5 Year real interest rates you'd see that there is no opportunity cost to owning Gold.

But that also may have been the culprit in Gold's pullback today, in Bizarro world terms. Bonds down, Gold down is at least consistent with Bonds up, Gold up yesterday. Remember, Gold was sold limit down during the stock market crash of 1987. As stated yesterday: Gold is not a safe haven for hot money. It is money. Adn as long as the USD is the reserve currency, Gold will be sold in a liquidity crisis or a margin call.

Gold Hits $1200, and You Shouldn’t Care

We do not care that Gold has broken $1200, but apparently a lot of people do. So that makes us care, if only because the interest in $1200 makes it an inflection point. Our focus is on whether $1200 is a springboard to higher prices or a brick wall, where deep pocketed investors sell to momentum funds borrowing on their visa cards.

Summary

Gold OI and Spreads say more investment money is coming in. But Gold closing under $1200 with fresh buying is the first stamina test for late-to- the-party momentum/headline buyers. An analytics model we use (charts below) says Gold likely has a couple more days of upside in it. Option Expiry, Feb/April roll, and today's close argue that we are due for a retracement. Trump's access to twitter and the inauguration are wild cards.

Silver looks better in model terms and the fact that it does not have a major Roll-Over this month.

Macro Turning Points

One of the tools we like when we think an inflection point is at hand is called Extreme Hurst. As attractive as Elliot Wave counting is, we have yet to master its subjective qualities. This tool however is more to our own liking. Part of its charm is in handicapping moves with amplitude, frequency, and period. In simpler terms, it looks at a move and assesses how long and in what fashion a market will recover from the event.

Think of an earthquake and possible aftershocks before the ground regains dynamic equilibrium. That’s how we see it. There are many other tools in the suite. We just like being able to look at a market in the extreme and handicapping if the move was a “major quake” or a “warning tremor”.

Gold

Showed a bottom around Dec 15th. What followed was to our eyes a bear market rally that we did not participate in. The Extreme Hurst indicator below implies the setup has a couple more days on the upside as probable. But it does not consider $1200 an inflection point (our term, not theirs) like it did on December 15th. It may give a top signal in a couple days if we are here. We'll watch this tool closely as option's expiry and first notice day approach for signs of market weakness before going long on a spec trade.

-Extreme Hurst on a Bloomberg Terminal

Silver

Does show a higher chance of “lift-off” or follow through from today. The “inflection point” was missed by us but the chart below says odds are the rally has legs. This is consistent with our mantra that Silver is the Goldilocks of metals now.

-Extreme Hurst on Trade Station. Colors depict probabilities

If you want to learn more about Extreme Hurst:

follow ParallaxFinResearch on twitter
or go to their site pfr.com

The Trade:

Right now if we were forced to put something on it would be a Long Silver/ Short Gold position based on our bias, the Hurst indications, the lack of Silver Roll, and the fact that for once, Silver was stronger in the down swing than Gold was.

About $1200, $1700 and Other Round Numbers

Back in the day, Solly made its first score in bonds by shorting the new 30 year and buying the 29 year bonds. Why? Because people are programmed to think in 10s and the 30 year enjoyed an illogical premium the yield curve compared to the 30 year existing bond with 29, 28, 27 years left. So $1200 matters psychologically.

Gold could easily continue far above $1200 because of the fresh money attracted piling in. But woe to the long fund at $1200 who puts his stop-loss at $1198. The thin market Spoofers will take that stop out for you, even while their marketing side is recommending long gold at $1200 with a tight stop. Just be careful.

Gero's A.M. Notes

Gold up again, finally over 1200 but traders looking for a close over that for US asset allocators to join the international investment allocators.
Jobless claims up 10,000 to 247,000 and FED’s Harker joins call for 3 hikes this year.
So far gold has added 50 dollars since Dec 31 and gold open interest is now 448764 and growing each day up 20,000 just this month.
Silver 169166 follows gold, copper 240910
Options now 1,024438, spread 320 bid for Feb-April
prices reflect political uncertainty in Brexit, France,Germany and now support from China is helping also.
President Elect Trump had first press conference which resulted in see-saw stocks, also adding to uncertainty, all of which means with many bears in the woods gold may pause here for profit taking and resume up later if we close here.