Fool's Gold – II

The last time we covered GOLD was when it was ranging between dollar 920-950 levels (FOOL’S GOLD). Well we have had a financial crisis and so much activity since then. But the crisis commodity is still sub 900. And as anticipated it did push lower back to sub 800 levels till 730. What happened? Why though the world talked about GOLD, the final hedge, the capitulations and the panic, there were historical volatilities, the destruction of real money, implosion of capitalism, the crisis commodity just did not move up? Why is it sleeping? This is another question which we may not understand.
Though we all have an opinion, it’s the time forecast which traps most of us. Gold is forever, but when to BUY is the only question that matters. 21 Apr 2008 was not a good time to be in Gold and it’s been six months since we said that, saving you the heartless wait and prayers of rises and hope that the crisis would push up gold. But Gold remains there, stay put, doing its own thing, keeping us on tenterhooks.
So what now? Now that crisis is here and Gold has not budged. What is the opinion on Gold? When is it maturing? Assets just like everything in nature have a prime and decay. Assets have a larger life than humans, as they are generational. This is why understanding the asset cycles need generational knowledge, also known as history. We at Orpheus call these generational knowledge as cycles. They work generation to generation, rarely eliminating themselves as along with generational wisdom there are generational mistakes, which we repeat as an aging or growing society. Gold symbolizes this generational knowledge and mistakes very well.
Gold is one of the oldest assets and has many short term and long term growth and decay time cycles affecting it. Understanding the gold cycle can tell us about the society as a whole and about the metal itself. The Gold cycle answers the question of WHEN very well. The current gold decay is of a shorter time. The asset is in an ongoing multiyear growth cycle, which we have highlighted prior could extend well into 2012-2015 time window. The Gold 30 year cycle (THE GOLD CYCLE) has been documented since 1869, with 75% of the Gold mined after 1910. The cycle sequence goes from 1869, 1907, 1934, 1973, 2000 and 2030. The 30 year up cycle started in 2000 and should continue for three decades. Even the most conservative estimates pitch gold near dollar 3,000 levels.
Before we see how low can GOLD go before it starts the big move up, let’s see what does Gold 3,000 mean, how valid the number is, and how this number defines the economic cycles ahead. First and foremost. Gold leads the commodity group. The CRB vs. GOLD relationship suggest that GOLD might continue to outperform the rest of the commodities. And the way we see things, the gold outperformance might continue till the cycle high in 2015. This seems more reasonable when you see the last time gold underperformed commodity complex was starting 1980. Second. Just like Oct is not just a calendar year, 1980 commodity top is very significant to understand generational cycles. 1980 was also a 60 year interest rate peak. And after the coinciding interest rate and commodity peak, 1980 also marked the half of the 1970 and 2000 Gold Cycle. This is why 1980 is much more significant than the 2008 top on Gold. 2008 is barely 1/3 of the 30 year cycle. Third: We all know what the Gold top of 1980 did. It ushered in a secular fall in gold and commodity prices and created a boom in equity markets. This is why connecting GOLD drop with equity crash is a lot different now. And means much more than deflation. Fourth: Market Cycles are crisscrossing across assets and we are in a period of excess hot leverage credit. A contagion can catch the markets by surprise, and that’s what happened, an energy gap. After which markets start searching for a balance. ‘Energy gaps’ are a much used jargon among cyclists. Fifth: The reason deflation may not happen is because not all Strauss and Howe lows coincide with a Kondratieff low. Strauss and Howe crisis alternate between deflation and accelerating inflation. This is why the previous Strauss and Howe metacycle deflationary low of 1946 should alternate with an inflationary cycle that should push until 2030 marked by a world war (every Strauss and Howe lows have witnessed a war). Sixth: In terms of actual price performance gold has been an outperformer against most cross assets till now. Seventh: The commodity fall was expected. The oil rocket we highlighted in MAY seemed ridiculous then, not now that Oil has collapsed by half. Alternative energy is not yet here and neither have we stopped consuming. To expect OIL journey up over also seems too easy an explanation. Above this, interest rates have not peaked yet, food is starting the next leg up and sentiment is at an extreme. This all suggests that even if the commodity revival may take a few months more, equity should start moving up in its last reprieve for the decade soon.
All these reason suggest that even if may get the jigsaw right, we might have muddled the timing again. And then there is the psychology aspect. The Dow psychology aspect we discuss last time, might still look a strange reading, but ask a trader who traded NIFTY futures after 12% historical up move on DOW (15 Oct). He lost money buying NIFTY Futures on the way up. And then ask the trader who sold NIFTY Futures the next day (16 Oct) with a 10% down day on DOW. He too will accept that his shorts hit stop loss. You cannot change mindsets, till the time you lose money. Maybe even losses might not teach us. But then still we have a higher chance to learn when we fail and lose. News and psychology are linked. If Ronald Reagan, President Hoover and Paulson talked about strong fundamentals and strong banks before the collapse of 1929, 1987 and 2008 than what use is information and news anyway. And who are we in the information chain?
When fear takes over, fundamentals are thrown out of the window. And messes start to unravel. Markets don’t know balance and are are all about extremes and extremity by very nature is unsustainable. This is why cycles work. We will not value nature and alternative energy till OIL goes to dollar 500. We will not balance the current credit expansion till Gold trashes paper money. The Gold inflation has just started. We won’t value nature till water becomes more expensive than OIL. Markets are the best teacher and equilibrium creator because we humans can’t balance between ethics and greed.
In conclusion the Gold corrective still points lower and we will not be surprised if it retests 700 levels. If it did not crack up with all the crisis behind it, the cycle could still be bottoming and may take a few more months. Meanwhile OIL below 70 brings it 50% down exactly from the point where we were crying for 200 dollars per barrel (THE OIL ROCKET). DOW cracked 10,000 as expected, but surprised us with the sharpness of the move down till low probability lows at 8,000. Well! we could not see that, but at least we were not long.