Dec 27 Implications for the Stock Market and Gold with a Yen Rally

Implications for the Stock Market and Gold with a Yen Rally

Summary

• The Yen has undergone a massive devaluation against the dollar in recent years
• US and Japan interest differentials suggests the Yen slide may reverse course
• A Yen rally could cause stocks to falter and gold to shine in 2015

Since late 2012, the Yen has fallen nearly 40% as the Bank of Japan (BOJ) has launched an all-out war to devalue its currency. The forces that would likely drive this push were no mystery. As outlined on Financial Sense in June 2012 (see Massive Japanese Debt Monetization Is Coming, Yen to be Devalued), Japan's ticking time bomb of debt was coming head to head with its demographic time bomb, which forced the BOJ to act. This can be seen in the handoff below as aging Japanese citizens began to sell their debt holdings while the BOJ ramped up.

Source: Bloomberg

The launch of quantitative easing (QE) in Japan late in 2012 opened the door for the yen-carry trade to be revived again as the following article from early 2013 highlights:

Remember the Yen Carry Trade? Well, It’s Back
As confidence returns to global markets, investors appear to be using the cheap yen once again to fund investments in risky assets — a trade that is likely to give the battered Japanese currency another boot lower in the months ahead, analysts said…
This backdrop coincides with a sentiment shift in financial markets, with investors increasingly moving into more risky assets.
"The yen is regaining its ground as a funding currency," said Jesper Bargmann, head of G11 currencies at Royal Bank of Scotland in Singapore. "Sentiment has changed in markets, pretty much since January 1. Risk appetite has returned, there's increased confidence and a search for yield, so the yen seems to be suffering as a result of that," he said…
A carry trade is when investors borrow in a low yielding currency, such as the yen, to fund investments in higher yielding assets somewhere else…
A weakening currency is central to the carry trade since it means that investors have less to repay when they cash out of the trade.

I don’t believe it is just coincidence that the USD surged relative to the Yen late in 2012 to early 2014 at the same time the U.S. stock market soared as shown below.

Source: Bloomberg

Given the rather dramatic decline in the Yen relative to the USD over the last two years, it makes sense to reevaluate how much more downside the Yen has and what the implications would be should the Yen rally in 2015. One way to analyze currency movements is based on interest rate parity (click for definition) in which currency exchange rates should move in line with the differential between country interest rates. As shown below, this theory more or less works in which the USD/JPY exchange rate tracks the difference between US 10-yr interest rates and Japanese 10-yr interest rates. However, there are times when the two diverge and these large divergences eventually get unwound rather sharply (see yellow shaded boxes below). We’ve seen three cases in recent years with one in 2010, 2011, and one in 2013. In all of these the JPY/USD exchange rate got the direction right and the interest rate differential played catch up. We are currently experiencing our fourth major divergence in recent years in which the USD has rapidly appreciated relative to the Yen and yet US long term interest rates have not risen relative to Japan; in fact, the interest rate differential has declined (see red shaded box).

Source: Bloomberg

This divergence can be unwound by the Yen rallying relative to the USD and the USD/JPY exchange rate falls, or US long-term interest rates can rise relative to Japanese to close the gap. Which event occurs in the months ahead (yen rally or US interest rates rally) will have very different outcomes for the market. If the Yen rallies and the USD/JPY exchange rate falls the Yen-carry trade will start to unwind and with it one element of market liquidity. As shown above, when the USD rallies relative to the Yen we tend to see strong U.S. stock market returns and so if the USD falls relative to the Yen we could see some market weakness ahead. In fact, if the Yen should decline we would be witnessing a backdrop that we haven’t seen since 2012: no QE from the U.S. Fed and a strong Yen—two major liquidity supports for U.S. financial markets for the last two years.
We’ve seen how QE has tended to float the U.S. stock market higher and when QE was turned off the stock market would stumble. However, the Fed embarked an open-ended QE late in 2012 such that QE was running for all of 2013 and the bulk of 2014 and coincident with this time frame was a massive devaluation of the Yen. The S&P 500 soared during these times in which both added liquidity to the system, which is shown by the green shaded regions below while the yellow regions show only an expansion in the Fed’s balance sheet. We’ve had a lot of stimulus over the past two years coming from Fed's QE and the Yen-carry trade. We know the Fed's QE is over and should we also lose the Yen-carry trade we could be in store for a bumpier ride than we’ve seen recently.

Source: Bloomberg

As mentioned above, the divergence between the USD/JPY exchange rate and the interest rate spread between the US and Japan can be resolved in two ways and my inclination is that we see the USD weaken relative to the Yen in the weeks and months ahead. Why? One reason, as shown above, is that the USD/JPY exchange rate is bumping up to resistance at the ~$120 level, which is the 2005-2007 resistance zone. So, from a technical standpoint it’s hard to see the USD appreciate further without some digestion and consolidation.
Secondly, from a purchasing power parity perspective (click for definition) the Yen is at its cheapest valuations relative to the USD since the middle 1980s. Using Bloomberg’s purchasing power parity function with the Consumer Price Index (CPI), Producer Price Index (PPI), and the annual OECD estimates, the Yen is between 15% to 34% undervalued relative to the USD. Given the multi-decade lows in Yen valuations, a further depreciation of the Yen appears unlikely.

Source: Bloomberg

Source: Bloomberg

Source: Bloomberg

Assuming for the sake of argument that the Yen does cool off in early 2015, what can we come to expect? As mentioned above, the Yen-carry trade has been associated with positive stock market returns and so an unwinding of the Yen-carry trade in which the Yen appreciates relative to the USD could see a weaker stock market, particularly coupled with the removal of US QE. Secondly, we could also see a pick up in overall investor anxiety in which safe haven assets like gold benefit. Both the Yen and gold peaked in 2011 and accelerated their down falls late in 2012. Should we see stabilization in the Yen ahead we could see stronger gold prices in 2015.

Source: Bloomberg

Also associated with Yen strength is a pickup in volatility as the Yen-carry liquidity tide goes out. This is shown below with the USD/JPY exchange rate shown inverted along with the Volatility index (VIX) with periods of Yen appreciation shown by the yellow shaded regions.

Source: Bloomberg

Summary
In my last article (click for link) I made the case that the U.S. was not at risk of slipping into a recession and the hallmarks of a bull market top were missing and thus argued the weakness experienced in December was a buying opportunity. The market has since rebounded sharply in recent days and looks like it will experience the seasonal Santa Claus rally into year-end and we could see some strength spill over into 2015.
While I still do not see the signs of a recession or a bear market on the horizon that is not to say we can’t see a pickup in volatility or market gyrations in the year ahead. In fact, I think the most bullish theme one can be on in 2015 is a pickup in volatility with the removal of QE and a possible Yen-carry trade unwinding.
As highlighted in this article, there is a large divergence between the USD/Yen exchange rate and their associated interest rate differentials and my belief is this divergence will be resolved by the USD weakening relative to the Yen in the weeks and months ahead. Should this occur we could see a rough start to 2015 with stocks weakening while gold rallies. The biggest theme I see for 2015 is a pickup in volatility and the best advice for that kind of climate is to stay humble as the market whips around here and there and confuses bulls and bears alike, and to stay nimble as market volatility always creates opportunities.

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Dec 27 Oil Follows Gold’s Crash Pattern Tom McClellan

Oil Follows Gold’s Crash Pattern

McClellan Financial Publications, Inc
Posted Dec 27, 2014

December 24, 2014
With oil prices having been cut in half over the past 6 months, many analysts are forecasting what this means for the economy, for jobs, for consumer spending, etc. But what I find interesting is the exact nature of the decline itself, and its resemblance to another recent decline in gold prices.
We have to go back to 1986 to find a similar decline in oil prices. There admittedly was a huge decline in 2008, from $145 down to $37 in just 8 months, but it came as the result of the pricking of a huge commodities bubble. There was also a huge decline in 1990-91, when Saddam Hussein spiked oil prices up to $40/barrel after he annexed Kuwait, and then prices crashed back down to $18. Each of those declines was from a price top that was way above prior levels.

But in 1986, there was a decline from a horizontal price structure, when the Saudis abandoned OPEC oil quotas. That decline was much like what we have just seen in 2014, also coming on Saudi action, and out of a flat price structure. And perhaps more interestingly, in 2013 there was another big decline from a flat structure, but not in oil prices. That 2013 decline was in gold prices, as shown in the top chart above.
The magnitude and the urgency of the price declines in gold and oil are similar, which made it reasonable for me to look at their patterns to see if there are other resemblances. Indeed there are, although the patterns do not really fall into step until around the July 2013 point in oil’s price history. That equates to the January 2012 price bottom for gold prices. Stating it more simply: Oil is now doing what gold was doing 18 months before.
The correlation has not always existed. The two patterns seem to have fallen into step together beginning around July 2013. Before then, the correlation was almost detectable, but not nearly as good as it came to be after that point. The implication of the current correlation is that if the recent pattern resemblance continues, then we should see a robust bounce in oil prices over the next 3 months. But while such a bounce would get everyone excited about a supposed new bull market in oil prices, that hope should be illusory.
As long as we are talking about the resemblance of oil’s late-2014 price slide to that of gold back in early 2013, it is also appropriate to once again make the comparison of gold’s current price pattern to what we saw before in the SP500. I showed this previously back on June 26, 2013.

Since then, gold has roughly followed the pattern laid down by the SP500, although the correlation has been imperfect. My sense is that if the Fed had not slathered the market with a whole bunch of quantitative easing (QE) to boost stock prices, we would have seen a better correlation. Still, the recent bottoming action in gold prices in 2014 matches the bottoming action of the SP500 in 2010, in the months following the May 2010 Flash Crash.
One important caveat is that these types of price pattern analogs tend to last for a while, and then they suddenly can stop working, usually at the moment when one is counting on them most to continue working.
So to summarize, the 2008-09 drop in stock prices saw an echo in the 2013 drop in gold prices, which has now had its further echo in 2014 for crude oil prices. There is a similarity in the way that investors panic out of their holdings in each, and that common physics/psychology shows up as a similar pattern in the price plot. More importantly for oil traders, we have now likely seen the climax point for the oil price decline, and up next is a robust but failing rebound which should get everyone excited about oil again in 2015, only to disappoint them all over again.
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Related Charts

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Dec 26 FYI Christmas week market schedule Ron Nicklas

Christmas week market schedule
PennTrade

Dear PennTrader:

Here's the holiday schedule for U.S. and Canadian exchanges.
Wednesday, Dec 24 -- Christmas Eve
US and Canadian markets are open only half-day. Both close at 1pm EST - that's 10am PST. PennTrade will close then also.

Thursday, Dec 25 -- Christmas Day
US and Canadian markets are closed for Christmas. So are we.

Friday, Dec 26 -- Boxing Day
US markets are open normal hours. Canadian markets stay closed for Boxing Day. PennTrade is open regular hours.

Monday, Dec 29
Things return to normal. US and Canadian markets are open regular hours, and so is PennTrade.

All of us at PennTrade wish you and yours a Very Merry Christmas.

As Tiny Tim said, "God bless us, every one!"

Ron Nicklas
President

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Dec 26 New African Gold Miner Scott Wright

New African Gold Miner

Scott Wright


The 2000s gold bull has brought a lot of attention to West Africa. This attention has not always translated to success given the unstable geopolitical environment in this part of the world. But the diligent miners able to endure and overcome the challenges have been rewarded with some major discoveries that have been developed into profitable gold mines.
One country really thriving is Ghana. On the geopolitical front there's probably no safer country in Africa with its government acting under a stable long-standing constitutional democracy and its tax and mining laws fairly well-legislated. And on the geological front there's definitely no rival, with Ghana host to four massive underexplored gold-rich greenstone belts.
Ghana's gold-mining success has resulted in a 35% increase in output over the last decade. It has grown to become Africa's second-largest gold producer, and the 10th largest in the world. And when Asanko Gold's flagship mine commissions in 2016, this country will see another huge boost in production.
The Asanko Gold we see today is a new-look company via its early-2014 acquisition of PMI Gold. Old Asanko (formerly Keegan Resources) and PMI were both early movers into West Africa. And their marriage is a match made in heaven given their outstanding logistical and corporate synergies.
This deal ended up bringing together the former Esaase and Obotan projects to form the newly-dubbed Asanko Gold Mine (AGM). AGM is located in the emerging Asankrangwa gold belt, just to the west of the better-known Ashanti gold belt where Newmont, AngloGold, and Goldfields operate several prolific gold mines. And its complex of deposits combine to make it one of the most robust gold projects in Ghana.
Obotan and Esaase are located about 30km apart. And both projects are known to have long histories of smaller-scale artisanal mining. This mining was primarily alluvial in nature, though it pointed towards an accessible hard-rock source. And the larger mining companies indeed found this source when they applied modern exploration techniques.
Obotan's mineralization was the most intriguing early on. And large Australian miner Resolute Mining was able to delineate a multi-million-ounce deposit that it started mining via open-pit methods in the late 1990s. Unfortunately this operation was prematurely shut down as a result of bear-market-low gold prices around the turn of the century. And it ended up producing 730k ounces in this first go-around.
With gold prices heading higher in the subsequent years, Obotan and its large in-ground resource naturally attracted attention. And PMI Gold was the lucky winner of its prospecting license in 2006. That same year Asanko Gold took over the Esaase project located just northwest. And this kicked off an exploration cycle that would highlight the vast potential of the Asankrangwa gold belt.
Obotan and its flagship Nkran deposit was especially impressive. PMI's aggressive exploration had uncovered a large richly-mineralized gold zone much more robust than Resolute had defined. Per the latest resource estimate it was found to hold 4.5m ounces of gold, including 2.5m ounces in the proven-and-probable reserve categories. And it was this core reserve base that would feed a wildly positive feasibility study in 2012.
PMI was able to procure Obotan's mining lease shortly after completing the feasibility study. And in 2013 it continued to explore the project while performing pre-development work in preparation for a mine build. The critical component of this build was financing, which is no easy feat in these crummy gold markets. So PMI eventually decided its best bet would be to team up with neighbor and deeper-pocketed Asanko Gold.
Asanko's Esaase project was advancing nicely, but it was keenly aware that Obotan was the real treasure of this emerging gold belt. Provocatively AKG had tried to acquire PMI about a year earlier, but to no avail. Its diligence paid off though, with the second go-around closing in February 2014.
Within a few months of the acquisition Asanko Gold approved construction at Obotan. And this would be the first of two phases in building out the greater and newly-dubbed Asanko Gold Mine. Obotan's development would be followed by Esaase's. And at full commercial production AGM will be one of Africa's largest gold mines, producing in the neighborhood of 400k ounces per year.
Phase one's $295m price tag is fully funded with the new company's combined treasury and debt facility. And it is expected to pour its first gold in Q1 2016. And per a Definitive Project Plan just announced in November, this fantastic mine ought to be profitable even at lower gold prices.
Mining will occur via conventional open-pit methods. Since the ore is fresh/sulfide it'll require milling, employing crush/grind/gravity/carbon-in-leach circuits. And the operation will run at a life-of-mine mill-feed rate of 8.2k metric tons per day. With life-of-mine recoveries and average grades that exceed 92% and 2.0 g/t respectively, phase-one production will average 190k ounces annually over a 12-year mine life.
AGM's phase-one gold will be produced at all-in sustaining costs of only $781/ounce, easily in the lower quartile of industry average. And this will allow for a solid 20% after-tax internal rate of return at $1150 gold, and the IRR would obviously increase proportionally if AGM's gold is sold at higher prices.
Phase-two production will come from the nearby Esaase deposit. Esaase is a grassroots discovery made by Asanko Gold. And its extensive exploration has defined a massive 5.9m-ounce deposit. AKG has performed multiple economic assessments at Esaase over the years. And the latest, a 2013 prefeasibility study, showed this project to also hold great economic potential.
Mining would focus on Esaase's core 2.4m-ounce reserve base. The ore would need to be milled like Obotan's, but processing would require the extra step of running through a flotation circuit. Feed grades and recoveries are a little lower than Obotan's, but all-in sustaining costs would still be under $1000/ounce. And at a throughput rate of nearly 14k tpd, production from Esaase would average about 200k ounces per year over a 10-year mine life.
Interestingly since this PFS was performed prior to the PMI acquisition and was based on a standalone operation, it is essentially obsolete. Since Esaase will now be developed as the second phase of a larger mining operation, there are numerous synergies that ought to drastically improve the economics.
The biggest cost savings will come from not having to build standalone processing facilities. Esaase is close enough to Obotan that its ore can be trucked. The existing facility would need to be expanded and a flotation circuit would need to be added in order to accept Esaase's ore, but presumably this would be much cheaper than building a full onsite facility from the ground up at Esaase.
There will also likely be many operational synergies. And for this reason AKG is in the process of performing a scoping study that would incorporate Esaase into a larger phased mining operation. This study is expected to be completed in Q1 2015. And if it comes back positive as expected, it ought to lead to more feasibility work that would hopefully culminate in development shortly after phase one achieves commercial production and starts spinning out cash.
Overall Asanko Gold's AGM is one of the world's elite development-stage gold projects. Its first phase of operation is fully permitted and fully funded. And thanks to rough market conditions that have annihilated the gold-mining sector, investors have the opportunity to get onboard this emerging mid-tier producer at bargain-basement prices.

As you can see in this four-year chart, Asanko Gold's stock has fallen sharply since its 2011 all-time high. And the primary driver for this decline is the price action of AKG's underlying metal. Since gold's own 2011 all-time high, it has fallen into a deep dark cyclical bear market that has taken it to levels not seen since 2009. And this has been none too kind to highly-leveraged gold stocks like AKG.
AKG's descent into bear-market mode got a kick start in September 2011 upon the release of Esaase's first PFS. Unfortunately this PFS wasn't well-received by the markets as a result of much higher costs than what was outlined in the previous assessment. Couple this with gold's major September beat down, and AKG would see its stock price nearly cut in half in short order.
AKG finally caught its breath when gold bounced the following month, but it would be rough sailing over the next several years as gold gave up its ghost and entered into bear-market territory. With such an ugly downtrend there aren't many positives to analyze from a technical perspective. So the true test of AKG's resolve is how it performs on the rare occasions when gold gets legs.
Since its 2011 high gold has forged four meaningful uplegs. And it should be expected that gold stocks outperform their underlying metal amidst such uplegs. If they don't, there's really no reason to own them given their outsized risks compared to gold itself. And as you can see, AKG has been a consistent outperformer.
In the first two uplegs in 2012 AKG positively leveraged gold 3.0x, rising an average of 47% to gold's 15%. AKG performed even better in 2013's Q3 snapback upleg, soaring 67% to gold's 18% (3.7x leverage). And then in early 2014 AKG again performed well, rising 51% to gold's 16% (3.2x leverage).
This stock has already shown the ability to pop when gold shows signs of life. And since it is in better fundamental shape now than it was in these past uplegs, it really ought to fly when gold runs higher. The new-look Asanko Gold's 10m+ ounce resource base really ought to attract investors when they return to this space. And with mine development now underway, institutional investors and the larger mining companies will take AKG a lot more seriously.
Overall AKG ranks as one of only a handful of quality junior gold stocks poised to thrive when gold turns the corner. The carnage of the last few years has really taken its toll on this sector, but this group is ready to roll when interest returns. And now is the time to load up on these stocks while they're trading at such crazy-low levels.
At Zeal we perform exhaustive research in a quest to identify the best of the best in a given sector. And we recently scrubbed the universe of junior gold stocks trading in the US and Canada in order to identify those that are best-fundamentally-equipped to lead the way. Our brand-new hot-off-the-presses research report profiles our favorite dozen, including Asanko Gold. Buy your report today to learn about which junior golds we believe will most thrive!
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The bottom line is new-look Asanko Gold controls the heart of one of Ghana's most-exciting new gold belts. AKG's flagship AGM project is host to over 10m ounces of gold resources. And a series of positive feasibility studies shows that its core reserves are amenable to profitable mining.
Asanko Gold will develop this exciting new mine in two phases, with fully-permitted and fully-funded phase one construction now underway. AGM is expected to pour its first gold in Q1 2016. And investors are able to take advantage of bargain-basement prices today to get in on one of the world's premier gold-mine-development projects.

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Dec 26 The Fed is heading for another catastrophe MW

The Fed is heading for another catastrophe

In these days of froth, the persistence of extraordinary policy accommodation in a financial system flooded with liquidity poses a great danger. Indeed, that could well be the lesson of recent equity- and currency-market volatility and, of course, plummeting oil prices.

With so much dry kindling, it will not take much to spark the next conflagration.
Central banking has lost its way. Trapped in a post-crisis quagmire of zero interest rates and swollen balance sheets, the world’s major central banks do not have an effective strategy for regaining control over financial markets or the real economies that they are supposed to manage. Policy levers — both benchmark interest rates and central banks’ balance sheets — remain at their emergency settings, even though the emergency ended long ago.
While this approach has succeeded in boosting financial markets, it has failed to cure bruised and battered developed economies, which remain mired in subpar recoveries and plagued with deflationary risks. Moreover, the longer central banks promote financial-market froth, the more dependent their economies become on these precarious markets and the weaker the incentives for politicians and fiscal authorities to address the need for balance-sheet repair and structural reform.
A new approach is needed. Central banks should normalize crisis-induced policies as soon as possible. Financial markets will, of course, object loudly. But what do independent central banks stand for if they are not prepared to face up to the markets and make the tough and disciplined choices that responsible economic stewardship demands?

The unprecedented financial engineering by central banks over the last six years has been decisive in setting asset prices in major markets worldwide. But now it is time for the Fed and its counterparts elsewhere to abandon financial engineering and begin marshaling the tools they will need to cope with the inevitable next crisis. With zero interest rates and outsize balance sheets, that is exactly what they are lacking.

 

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Dec 26 Best of the Best: The Most Popular Thoughts from 2014 AUreport

Best of the Best: The Most Popular Thoughts from 2014

As natural resources bounced all over the charts in 2014, readers turned to the experts interviewed by The Gold Report for insights on what was driving these ups and downs, and how they could protect themselves—or, better yet, benefit—from the volatility. We combed through interviews with experts featured during the year, and offer some thoughts you might want to consider as you prepare for 2015.

Steven Hochberg, chief market analyst at Elliott Wave International, drew a record number of readers and comments with his chart showing a pending countertrend for gold. "Many indicators are confirming that we're in the end stages of the rally that started in 2009. Sentiment is one. Sentiment tends to get very extreme at trend reversal points. It is extremely optimistic at highs and extremely pessimistic at lows. The bears shrink down to almost nothing when you're coming into a rally high. Recently, the bear contingent shrank down to 13.3%, which was the lowest in 27 years."

He concluded: "For the first time in three years, we were able to count a complete declining Elliott Wave pattern from gold's 2011 high. We saw extremes in sentiment that suggested to us the start of an impending gold rally. I think that rally is in its very infancy right now. Ultimately, it's going to carry gold higher. I think gold has upside potential from here."
Shadowstats economist Walter "John" Williams also saw good news for gold in 2015 as part of his hyperinflation forecast for the coming year. "Fundamental economic activity as measured in areas such as retail sales, industrial production, housing starts, payroll numbers and the broadest measure of unemployment—all those numbers are going to deteriorate. The economy is going to head down as we get into reporting in early 2015. Along with that will come renewed expectations of action by the Federal Reserve to accommodate the financial system, particularly the banking system, and the combination of those factors will, I believe, help to trigger a massive decline in the U.S. dollar. As a result of that, we will see spikes in commodity prices, such as oil. We will see a flight to quality in areas such as the precious metals—gold and silver."
Former Federal Reserve Chairman Alan Greenspan also lauded the prospects for gold during a presentation at the New Orleans Investment Conference. "Gold, and to a lesser extent silver, are the only major currencies that don't require a third party credit guarantee. Gold is inbred in human nature. Gold is special. For more than two millennia, gold has had virtually unquestioned acceptance as payment to discharge an obligation. Remember, Germany could not import any goods in the last part of World War II unless it paid in gold.
"Today, China is beginning to convert part of its $4 trillion ($4T) foreign exchange reserve into gold as a partial diversification out of the dollar. Irrespective of whether the yuan is convertible into gold, the status of the Chinese currency could take on unexpected strength in today's fiat money, floating international financial system. It would be a gamble for China to try to buy enough gold bullion to displace the United States' $328 billion of gold reserves as the world's largest holder of monetary gold. But the cost of being wrong, in terms of lost interest and cost of storage, would be quite modest. If China embarks on a gold accumulation program, global gold prices will rise, but only during the period of accumulation."
Joe Foster, fund manager at Van Eck Associates, had a global perspective on the source of downward pressure on the commodities in 2014. "At the beginning of the year, gold was being driven by risk concerns. Investors started worrying about risk when we saw problems in emerging markets like Thailand, Turkey and, eventually, Ukraine. The Chinese economy seemed to be slowing down. It was less of a supply-demand story and more one of people looking at gold as a safe haven and a hedge against some of the risks in the world."
He updated his thoughts in a December note to readers with these insights: "Gold companies are in a better position to operate given lower prices; any significant cut in mining production does not appear imminent. With the stability of the global financial system in question, we believe gold and gold shares may help investors diversify portfolios and preserve value if tail risk becomes a reality."
Jason Mayer, portfolio manager for the Sprott Resource Class Fund, observed in September that "Investors have been reacting in fits and starts, and everyone is still very cautious. I track a number of funds, and I watch how they perform on a day-to-day basis. What I have found interesting is that a number of resource funds in Canada continue to be underweight, particularly in gold equities. I notice they underperform on days that gold stocks have good moves. The generalists out there among the institutional money have little to no presence in various gold equities. For the most part, people have abandoned the space." He predicted that before investors return, they will want to see some upward trajectory. "I don't know if it's going to be a couple of data points that confirm the arrival of an inflationary environment, or the cessation of this disinflationary environment that we've been in since 2009."
Harry Dent, editor of Economy & Markets and Boom and Bust newsletters and author of "The Demographic Cliff," shared his simple strategy for surviving withdrawals from markets on crack. He advised readers to get liquid. "I think gold is extremely oversold right now. People are very bearish on it after the recent fall, but this isn't the time to panic and sell. It is due for a bounce back up to $1,300/oz or even $1,400/oz. That would be the time to lighten up before it goes down again."
Chen Lin, author of What is Chen Buying? What is Chen Selling? newsletter, is also busy doing his homework so he is ready when the market turns, something he sees as inevitable. In the meantime he is focusing on companies that can actually make money at $1,000/oz gold. "One thing for sure is that I sleep well at night holding companies that can flourish even at $1,000/oz. And when the bottom happens, companies with cash will be able to buy out the overleveraged companies," he said.
Bob Moriarty, founder of 321.gold.com, called the current volatility in October when he said: "There is a flock of black swans overhead, any one of which could be catastrophic. The fundamental problems with the world's debt crisis and banking crisis have never been solved. The fundamental issues with the euro have never been solved. The world is a lot closer to the edge of the cliff today than it was back in February." He had some sheltering advice: "The U.S. Dollar Index got irrationally exuberant, and it's due for a crash. When it crashes, it's going to take the stock market with it and perhaps the bond market. If you see QE increase, head for your bunker."
As far back as March, Sprott US Holdings CEO Rick Rule warned about a bumpy ride ahead. "My suspicion is that we have put in lows in the precious metals and they will trade higher, but not straight up. The gains will need to be consolidated. It will be volatile on the way up. The long-term thesis has a lot to do with the increasing ability of the bottom of the demographic pyramid to increase its standard of living, which involves more commodities. I'd say that the great unsung hero of a rebound in the fortune of commodity producers has been the increasingly constrained supply of resources. The demand side on resources has been very slow because this recovery in the West has been a false, paper recovery. It hasn't been accompanied by capital spending or jobs. It's an interest rate-led recovery with flat auto sales and home starts."
On the critical metals front, Simon Moores, manager of data for Industrial Minerals, was optimistic because of the possible impact a Tesla battery Gigafactory could have on demand for graphite, lithium and cobalt, perhaps even copper and aluminum. "Should Tesla choose to use natural flake graphite, the demand for battery-grade material could go up 154%," he said. He advised forward thinking. "If we look at the history of graphite prices, or any commodity for that matter, it's in the times of inactivity that we should be preparing for the next boom. We should try to see where new demand is coming from and identify any supply issues. But most people don't. They usually only act once there's an issue, not before."
Adrian Day Asset Management founder Adrian Day tried to put the gold price in perspective. "Let's not forget where the price of gold was a decade ago: $250/oz. It has done very well to be stuck at $1,200/oz. The number one thing for gold is the dollar, particularly in the near term. The dollar has to turn. Several Fed officials are now expressing concern about the strength of the dollar. If we see several weak economic reports in the next few months, the Fed is going to make noises about continuing to ease. That would push the dollar down and push up the price of gold."
Silver-Investor.com Editor David Morgan got more personal with his advice in October. He pointed out that he is grateful that he is part of the small minority of people on earth who have a portfolio to worry about. "Money is important, but it needs to be put in the proper place. There is more to life than how much money you can make. Nature preaches balance and when things get out of balance, it has a way of bringing them back into equilibrium. This is most evident in the natural resource sector. We're acting as if the earth is income rather than capital. The result is that we are using up our base capital in the form of forests and water and metal and not replacing them. That is unsustainable. I'm afraid we are going to pay a high price for that. We need to live within our means rather than getting all we can. It's more about what you can contribute, maintain and sustain than who has the most toys."
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Merry and Bright - by Gary Wagner

Merry and Bright

Well, not so much gold and crude. Pricing continues under pressure for those two leading commodities and the end of the downward push is nowhere in sight.
Oil is a bit more complex than gold, but here is the short version on today’s slide. Supplies are building. No major producer has cut production and it is going into storage. They’re doing this in hopes that prices will turn around. The perverse effect is that such tactics only drive the price down lower. As you probably well know, this is a tactic that other commodity producers use when prices are low. Coffee is notorious for that game play. You probably also know that eventually it catches up with the commodity in question. A glut is a glut is a glut.
Gold, of course, has an assigned value, more or less agreed upon in the marketplace by traders and investors. It moves in relation to money; equities and outside markets such as oil. The relationships are clear. How those relationships move mechanically is not always clear.
Fundamentally at the moment we have some clear signals that do not look bullish. The U.S. economy is bellowing and snarling, a pent-up beast finally unleashed. So, a need for safe haven is out of the question. Crude keeps dragging gold with it. Unless consumption somehow ramps up and production is ratcheted down, there is no good reason why the price should rise anytime soon. And if oil rises, it won’t rise much.

Some analysts and think-tankers are saying that the Saudis and a few of their cohorts in league with the United States are keeping prices as low as possible to hurt ISIL/ISIA and to punish the Russians and other pro-Assad forces in Syria. It’s a sort of win-win for the forces of stability at any price.
Just as an aside, the Saudis have about $1.4 trillion in reserves. They could stop producing oil tomorrow and have 10-years’ worth of money in the bank.
Let’s be reminded that volatility is our main watchword in the holiday season. Today has been extraordinarily quiet, as will be Friday and much of next week.
Wishing you as always, good trading, and to all a good night…
Gary Wagner

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Quiet Ahead Of Santa - by Peter Hug

Quiet Ahead Of Santa

Markets are very subdued, with a shortened session in North America, and London gone for the day, as you slip into the office this morning.  May be a bit more volatility before the egg nog breaks out, but by noon the tapes should be begin to flat line as the futures shut down after lunch.
I wish everyone a safe and happy holiday.

By Peter Hug

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Where are the Stops? Wednesday, December 24: Gold and Silver

Editor's Note: Professional traders have a very good idea of price levels at which buy and sell stop orders are located on a daily basis. And now you will, too! If pre-placed buy or sell stop order are triggered, bigger price moves can immediately follow. Most stop orders are located and placed based upon key technical support or resistance levels on the daily chart, which if breached, would significantly change the near-term technical posture of that market. Having a good idea, beforehand, where the buy and sell stops are located can give an active trader a better idea regarding at what price level buying or selling pressure will become intensified in that market.

Below are today's likely price locations of buy and sell stop orders for the active Comex gold and silver futures markets. The asterisks (**) denote the most critical stop order placement level of the day (or likely where the heaviest concentration of stop orders are placed on this day).
See below a detailed explanation of stop orders and why knowing, beforehand, where they are likely located can be beneficial to a trader.

February Gold	Buy Stops	Sell Stops
	$1,184.90	$1,181.20
	$1,190.00	$1,173.40
	**$1,200.00	**$1,170.70
	$1,203.60	$1,150.00
March Silver	Buy Stops	Sell Stops
	$16.00	$15.69
	**$16.175	**$15.53
	$16.50	$15.35
	$16.81	$15.085

Stop Orders Defined
Stop orders in trading markets can be used for three purposes: One: To minimize a loss on a long or short position (protective stop). Two: To protect a profit on an existing long or short position (protective stop). Three: To initiate a new long or short position. A buy stop order is placed above the market and a sell stop order is placed below the market. Once the stop price is touched, the order is treated like a “market order” and will be filled at the best possible price.
Most stop orders are located and placed based upon key technical support or resistance levels on the daily chart, which if breached, would significantly change the near-term technical posture of that market.
Having a good idea, beforehand, where the buy and sell stops are located can give an active trader a better idea regarding at what price level buying or selling pressure will become intensified in that market.
The major advantage of using protective stops is that, before a trade is initiated, you have a pretty good idea of where you will be getting out of the trade if it's a loser. If the trade becomes a winner and profits begin to accrue, you may want to employ "trailing stops," whereby protective stops are adjusted to help lock in a profit should the market turn against your position.
By Jim Wyckoff

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Wednesday's Analytical Charts for Gold, Silver and Platinum and Palladium

Understanding the charts:

Due to popular demand, we have added Palladium to the list of Analytical Charts that Metals Analyst Jim Wyckoff features.

Sharpening Your Trading Skills: Using Bollinger Bands

Sharpening Your Trading Skills: The MACD Indicator

Sharpening Your Trading Skills: Moving Averages

Sharpening Your Trading Skills: The Relative Strength Index (RSI)

"Wyckoff's Market Rating" System Explained

By Jim Wyckoff

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