December 21, 2012 - buy gold

What drives the price of gold? Inflation and inflation expectations would respond most people interested. In fact, some are  obsessed by more than inflation - hyperinflation is just around the corner and it is going to make the price of gold shoot through the roof! They cannot explain why gold has risen despite the rather deflationary environment since 2008, but they have made money and that's all that matters.

But there is another view, which is not known to many. Gold is priced just like bonds are. That means that gold is sensitive to the expected fluctuations of the real interest rate. Here are some blog post by Paul Krugman explaining this:

http://krugman.blogs.nytimes.com/2011/09/06/treasuries-tips-and-gold-wonkish/?smid=pl-share

http://krugman.blogs.nytimes.com/2011/09/10/golden-spikes/?smid=pl-share

http://krugman.blogs.nytimes.com/2012/08/26/golden-instability/?smid=pl-share


In short, what this means for gold now is that it should rise whenever the economy is expected to slowdown, because this would imply a lower real interest rate as long as the Fed keeps inflation expectations relatively high.

As I said in my previous post, a slowdown in the economy, and mostly in employment, can be anticipated starting in January. If retail sales continue lower, the direction will be confirmed. Meanwhile, Gold has come to a very nice, low-risk buy point - committing below its 200 DMA and hitting monthly support.

I think this point will represent the low for the multi-month correction in gold and that a move to new highs will start soon. Generally, gold is ending its corrections as the market approaches a bigger correction. With yesterday's developments regarding the fiscal negotiations, a more important top for the stock market may have been pulled closer.

December 17, 2012 - target 1522

The market seems to have tipped its hand since I last wrote. It has strengthened up after reaching intermediate term oversold levels, as shown in my previous post.

Here is a monthly chart of the SPX.

The bull market has a tendency to correct at long term resistance levels. The next one to the upside is 1522.

A move to this level would also represent a break out of a rising wedge - not uncommon for this chart pattern.


The economic picture has  some points of weakness, but consumption, as a consequence of a continuing recovery in employment, is doing ok.

But this is a symptom of an ending recovery. Businesses have expanded their profits first, then they added equipment & software and then they started adding more workers, which led to higher consumption. Now, they are cutting back on investment and they will soon slow down on hiring. Here is a chart showing the correlation between capital expenditures and employment. Capex leads employment.

So, during the first half of 2013, employment reports will most probably get worse and worse. The market will ignore this for a while, since this means the Fed will stay easy, but the Wile E. Coyote moment will come, just in time for the upside break out of the wedge to fail, as it many times does.