Moving Averages

Gold climbed $11.80 or 0.69% in New York yesterday and closed at $1,712.70. Silver surged to a high of $32.232 and finished with a gain of 1.36%.

Gold in USD (2 Year) With Support At 100 and 200 Day Moving Averages - (Bloomberg)

QE1, QE2, Operation Twist 1, Operation Twist 2, a Fed balance sheet that is now expected to be $5 trillion in 2 years, and all we get is a lousy manufacturing economy that according to the Chicago PMI just dipped into contraction, or for all intents and purposes, recession, printing its first sub-50 print, 49.7 specifically, on expectations of a 52.8, and down from 53. This was the lowest since September 2009 and the biggest miss in 4 months. Specifically, the employment index came at a two and a half year low, New Orders, Backlogs and Deliveries had their 3 month moving averages at the lowest since Mid 2009, and Capital Equipment printed at a 17 month low. But not all hope is lost: at least prices paid soared for the third consecutive month to 63.2 from 57. Cue not just recession, but stagflationary recession. It also means that both the Manufacturing ISM and Q3 GDP will be a total disaster. Time to start pricing in QE X to be followed 24 hours later by QE X+1. The central bank cartel is starting to lose

According to data released by ACEA (European Automobile Manufacturers’ Association) new passenger car registrations fell 8.9% in August after a decline of 7.8% in July. In 2011, Germany produced 5.8 million passenger cars, of which 77% (4.5m) were exported, making cars and parts the most valuable export good (EUR 185bn). A heavily export-dependent German automotive industry looks vulnerable to setbacks in important markets.

We have seen consecutive weeks of bullish strength in the gold and silver markets. Gold has completed what is known as a ‘Golden Cross’ and silver is poised to complete one in the coming days. A ‘Golden Cross’ occurs when not only the current price, but also shorter-term moving averages such as the 50 day moving average “cross” or rise above the longer term 200 day moving average. Gold’s 50 day moving average (simple) has risen to $1,651/oz and is now comfortable above the 200 day moving average (simple) at $1,645/oz and accelerating higher. Silver’s 50 day moving average (simple) has risen to $29.86/oz and will soon challenge the 200 day moving average (simple) at $30.47/oz.

Given how many unconventional means have been deployed over the last weeks, I wouldn’t exclude some form of stimulus postpartum depression… With nothing in immediate sight, it’d better hold. Why does my heart feel so bad?

The technical picture for Euro gold looks near perfect now. Gold has been trending higher since May. The long term charts show a series of higher lows and higher highs and even in the correction of recent months there have been a series of higher lows and gold gradually consolidated between €1,200 and €1,400/oz. Gold is now comfortably above the 50, 100 and 200 day moving averages. In the last four years, there have been 3 periods of correction and consolidation which have lasted 12 to 13 months (see boxes in first chart) and we appear to be coming to the end of another such period. Break outs from such consolidations often lead to sharp moves higher and thus new record highs above €1,359/oz and possibly over €1,600/oz should be seen before the end of 2012. The fundamental back drop of the unresolved Eurozone debt crisis , deep divisions in the ECB and a high degree of uncertainty regarding the euros long term future strongly suggest that the euro will continue to fall against gold in the coming months. Further confirmation of robust demand for gold is seen in figures showing that exchange-traded products backed by the gold expanded to a record. Smart money from Paulson to Soros to PIMCO continues to diversify into gold. Gold ETFs holdings have now surpassed Italy to become the world’s third-largest gold holdings when compared with national gold reserves.

Industrial unrest hobbling the South African platinum industry deepened yesterday, prompting fears of a broader mining crisis in one of the main platinum and gold producing countries. Platinum and gold prices continued to soar partly due to real concerns of supply disruptions after 44 people died during strikes at a pit owned by  Lonmin. About a fifth of global platinum production capacity is idled in South Africa today as the nation holds a day of mourning for 44 miners and policemen killed in the deadliest police violence since apartheid ended (see Newswire). Massive discontent has spread to two other important platinum mines. Amplats, the world’s largest platinum producer that is 80% owned by Anglo American, disclosed it had received demands for pay rises at its Thembelani mine. Meanwhile, another miner, Royal Bafokeng, said about 500 people were protesting outside its Rasimone mine, and preventing others from going to work. It seems likely that the protests will spread from the platinum sector, to other sectors, including the gold mining sector.

Gold’s remonetisation in the international financial and monetary system continues.  LCH.Clearnet, the world's leading independent clearing house, said yesterday that it will accept gold as collateral for margin cover purposes starting in just one week - next Tuesday August 28th. LCH.Clearnet is a clearing house for major international exchanges and platforms, as well as a range of OTC markets. As recently as 9 months ago, figures showed that they clear approximately 50% of the $348 trillion global interest rate swap market and are the second largest clearer of bonds and repos in the world. In addition, they clear a broad range of asset classes including commodities, securities, exchange traded derivatives, CDS, energy and freight. The development follows the same significant policy change from CME Clearing Europe, the London-based clearinghouse of CME Group Inc. (CME), announced last Friday that it planned to accept gold bullion as collateral for margin requirements on over-the-counter commodities derivatives.  It is interesting that both CME and now LCH.Clearnet Group have both decided to allow use of gold as collateral next Tuesday - August 28th. It suggests that there were high level discussions between the world’s leading clearing houses and they both decided to enact the measures next Tuesday.  It is likely that they are concerned about ‘event’ risk, systemic and monetary risk and about a Lehman Brothers style crisis enveloping the massive, opaque and unregulated shadow banking system.

For some time now we have been warning about the danger to portfolios given the deteriorating fundamental, economic and technical backdrop in the markets.  Our warnings, for the most part, have been ignored as individuals continue to chase stocks in hopes that "this time will be different", and somehow, stocks will continue to ramp higher even though all three support legs are weakening.  Currently, it is the imminent arrival of the next round of Quantitative Easing (QE) that keeps "hope" elevated but further Central Bank intervention is unlikely in the near term leaving the markets at risk of a further correction. The technical and fundamental setup is currently a negatively trending market.  It is very likely that, in the current environment, we will retest the May lows, if not ultimately set new lows, in August.  Those lows will likely coincide with further weakness in the economy which should be the perfect setup for the Fed to launch a third round of Quantitative Easing.

While the S&P closed lower for the day, the dramatic save as ES (the S&P 500 e-mini) hit 1399.5 (again) pushed it all the way back to the safety of VWAP and perfectly unchanged from pre-FOMC news. Meanwhile, Gold and Silver lost around 2%, Treasuries snapped 13-15bps higher in yield and the USD ripped 0.6% higher closing pretty much at their extreme levels of the day. AAPL was unphased as the rest of the world appeared to sell any and everything on news of no more Fed liquidity in the short-term as the stock clung to its VWAP ending with new all-time highs once again. VIX, which managed to surge over 16.5% once again - above yesterday's highs - recovered all the way back to practically unchanged by the close (outperforming the small loss in stocks on the day). With Treasury yields and the USD back at one-week highs and stocks just 0.5% off their multi-year highs, it looked for a moment like equities were going to reconnect with credit's much less sanguine perspective - and indeed they covered half the difference at one point - but by the close HY and IG credit remains unchanged from Friday 3/23 while the S&P is up over 2% from then. Volume was average today but concentrated in the sell-off period of the day but we note that average trade size was very near the lowest of the year (suggesting algos using small lots to tickle us up to VWAP for the close) and some larger blocks going thru in the last few minutes as we peered above VWAP - combined with the shrug from credit, significant weakness in the major US financials, and unwinds in every other asset class - make us nervous for unhedged equity longs here - especially with European weakness now a trend and not a one-off.

On Thursday morning, President Hu Jintao of China, President Dmitry Medvedev of Russia , President Dilma Rousseff of Brazil, President Jacob Zuma of South Africa and Prime Minister Manmohan Singh of India shook hands at the start of the one day meeting in New Delhi. Top of the agenda was the creation of the grouping's first institution, a so-called "BRICS Bank" that would fund development projects and infrastructure in developing nations. Less noticed and commented upon is the aspirations of the BRIC nations to become less dependent on the global reserve currency, the dollar and to position their own currencies as internationally traded currencies. The leaders of BRIC nations and other emerging market nations have adopted the idea of conducting trade between the five nations in their own currencies. Two agreements, signed among the development banks of Brazil, Russia, India, China and South Africa, say that local currency loans will be made available for trade between these countries. The five fast growing nations participating in local currency trade will allow participants to diversify their foreign exchange reserves, hedging against the growing risk of a euro or dollar crisis. The BRICS want to have easy convertibility of currency to make it easier to use the real, ruble, rupee, renminbi and rand amongst themselves without having to always use the US dollar. Higher intra-Brics trade, conducted in their own currencies would shield their economies from economic dislocations in the west. Left unsaid so far is the possibility that one of the BRICs or the BRICs in unison might peg the value of their respective currencies to the ultimate store of value and money - gold.

Iran's oil exports have dropped in March as buyers prepare for sanctions, and shipments are likely to shrink further if Obama determines by Friday that markets can adjust to less Iranian oil and tightens sanctions even further. Sanctions could eventually leave half of Iran's oil output cut off from international markets, according to analysts and officials. Iran is also being excluded from global commerce and the global economy by being locked out of the international payment system – SWIFT. SWIFT, the Brussels based clearing house, announced last week it will cut services to Iranian banks on foot of European sanctions, in order to comply with the EU Council. The service denial includes Iran’s central bank, which processes Iran’s oil revenues. Some 30 Iranian banks will be blocked from doing international business. History suggests that the trade, economic and currency war with Iran may soon degenerate into an actual war. Increasingly, the regime in Iran has little to lose in engaging in a more aggressive foreign policy – including attempting to close the strategically important Straits of Hormuz.

Seemingly hidden from the mainstream media's attention, we note that the last six weeks has seen the second largest devaluation in the JPY since Sakakibara's days in the mid-90s. As Sean Corrigan (of Diapason Commodities) notes, this has to be putting pressure on Japan's Asian neighbors - not least the engine of the world China. Furthermore, JPY on a trade-weighted basis has cracked through all the major moving averages and sits critically at its post-crisis up-trendline. As we noted last night, perhaps Japan really is toppling over the Keynesian endpoint event horizon. JPY weakness and the carry trade may not be quite as hand in hand if rates start to reflect any behavioral biases, inflation (or more critically hyperinflation) concerns any time soon.

Below is the broad view of igold bugs ndex symbol $HUI, which shows how the analog has strengthened recently. The key, of course, is to break beneath that lower horizontal line. If we can do that, life gets interesting in a big hurry.

In this chart and analysis, we compare the S&P 500 (black line) to the American Association of Individual Investors (AAII) weekly survey. The AAII reports their respondents in three categories: bullish, bearish, and neutral. To analyze these AAII statistics, we create the “Farrell Sentiment Index,” defined as the number of bulls, divided by the number of bears, plus .5x the number of neutrals = Bulls/(Bears+.5Neutrals). This data can be quite volatile week to week, so we opted to convert this formulaic data series into two different types of charts.