Guest Post: It Ain't Over 'Til It's Over

Tyler Durden's picture

From Contrary Investor

It Ain't Over 'Til It's Over

If there is one lesson to be learned from the Japanese experience with deleveraging over the past few decades it’s that deleveraging cycles have there own special rhythm of reflationary and deflationary interludes.  Pretty simple thinking as balance sheet deleveraging by definition cannot be a short term process given the prior decades required to build up the leverage accumulated in any economic/financial system.  If deleveraging were a short term process, it would play out as a massive short term depression.  And clearly any central bank would act to disallow such an outcome, exactly has been the case not only in Japan over the last few decades, but now also in the US and the Eurozone.  We just need to remember that this is a dance.  There is an ebb and flow to the greater (generational) deleveraging cycle.  Just as leveraging up was not a linear process, neither will the process of deleveraging be linear.  Why bring this larger picture cycle rhythm up right now?  The recent price volatility we’ve seen in assets that can be characterized as offering purchasing power protection within the context of a global central banking community debasing currencies as their preferred method of reflation for now, specifically recent the price volatility of gold.

Time to step back and have a look at the “rhythm” of gold over the last decade to hopefully provide perspective on not only the price of gold itself, but really on the character of the deleveraging cycle.  We’ve experienced quite the nasty price correction in gold as of late.  Is it really that Euro banks have been either liquidating or accelerating gold leasing in order to raise precious capital?  Sure could be.  We’ve also had a lot of recent converts to precious metals given the prior 25%+ two month run in prices we saw earlier this year.  As is usually the case, the market gods need to teach these folks a lesson and separate the traders from the real investors.  That’s more than well underway.

We’ve always maintained that THE most important activity we face each and every day, especially in the tech supercharged multi-media world of the moment, is separating white noise from meaningful information.  If we had to guess, 90% of daily Wall Street “commentary and analysis” is white noise.  It’s hot air.  And maybe that number should be much closer to 100%.   So, one of the noisy drumbeats that has resurfaced as of late is that “it’s over for gold now that it has pierced its technically important 200 day moving average to the downside”.  Fact, gold pierced its 200 day moving average to the downside in seven of the last nine years (inclusive of 2011).  This is far from some rare occurrence.  Far from.  In fact the only two years of the last nine not to witness this technical break were 2009 and 2010 – the two years in which we witnessed the US Fed print the largest amount of money on record.                  

For now, the thinking that gold’s break of the 200 day moving average is the sure sign of bull market death is white noise.

Although this is just our own personal interpretation, at least over the last three years gold has not only reacted to central bank monetary largesse, but it has done a great job of anticipation of the very same.  The following chart documents gold since 2009.  We’ve marked the periods where the Fed started up the quantitative easing (QE) process in 2009 and 2010.  Notice the rallies in gold prior to each QE initiation?  In each case gold anticipated the event a number of months in advance and actually corrected a bit when the process finally started.  The short term “buy the rumor and sell the news” type of trading behavior?  You bet.  Question, was the large run in gold this year over the June through August time frame strong anticipation of a European Central Bank (ECB) money print that simply has not arrived quite yet?  Moreover, was the run back up in price into late October from the spike September lows again anticipation that the ECB would commit to QE in the Euro “summit” and subsequent late October “fix it” proclamation?  With investors ultimately disappointed in no immediate money print/currency debasement, we now find ourselves in corrective mode once again.  Sound reasonable in terms of short term price rhythm?  Hopefully keeping it simple makes sense.

If we look at the intraday highs and lows in gold since August of this year through last Friday, we find that the metal has experienced a so far top to bottom price correction of just over $360.  This is the largest nominal dollar per ounce correction since the gold bull began in 2001!!  In nominal dollars per ounce it even eclipses the 2008-2009 price correction, which was one nasty price decline.  So naturally it feels bad and can easily trigger quite the emotional response.  But I’d suggest to you it should be expected as gold has moved to ever higher nominal prices in its bull market journey so far.  And “journey” we would highlight as a key character point.

In top to bottom percentage movement terms, the correction in gold we’ve seen so far just happens to be almost smack dab in the middle of top to interim bottom percentage price corrections we’ve seen in gold since the decade of the 2000’s began, as is documented in the next chart.  And this is the definitive end to the gold bull market?  Noise, for now.

                     

If we were to witness gold drop in a percentage magnitude similar to what we witnessed during the 2008-09 correction, we’d be looking at something near a $1,350 low.  If that were to occur, the short term “bull market is over” noise would simply be deafening.  

We know we're talking to ourselves primarily, but we need to remain open to multiple outcomes at any point time.  An ongoing truism, at the very least simply to retain our sanity and allow non-emotional forward decision making.  As we always tell clients, we need to hope for the best, but plan for the worst.  After all, it’s all about risk management in this wonderful world.  So from this contextual standpoint, a few realities that might not seem so pleasant, but need to be part of ongoing monitoring and decision making.  We think it’s important to have a look at data point anecdotes we’ve seen in prior gold bull cycle corrections.  Specifically, let’s have a look at the fingerprints of Bollinger Band experience in prior gold price corrections.  To the point, as is seen in the chart below, when gold has met up with the lower portion of the weekly Bollinger Bands over the last decade, the first “touch” of the lower band was not the last. Gold has tended to “ride” the lower band for a while before again resuming flight after a needed breather.  Over the last few weeks we’ve now experienced the first “touch”. Although there are zero guarantees here, the history of the gold bull tells us to anticipate one or a few more testing “touches” of the lower band.  And that may certainly mean lower prices will be probed as gold tests for an interim bottom in its ongoing price journey.  It feels weird right now because we have not had this experience in two and one half years – the longest stretch yet in which gold has avoided an encounter with the lower weekly Bollinger band.

Again, although this is strictly our own personal interpretation, just how low could the price of gold descend in an absolutely worst case scenario?  What lies below may seem shocking, but hopefully will become a bit clearer in looking at the chart after this.  Below are what we consider to be very important total bull market price levels.  Shocked yet?  If gold ever corrected to the lower level near 1050, we’d personally be stunned if there were even one gold bull left on planet Earth!  But it’s all within the realm of potential outlier possibility.  Do we actually think this will happen?  Personally, no, but our personal thinking is not what’s important.  It’s planning for a range of market outcomes and developing a plan around each that’s so important to the total investment process. This is clearly an extreme potential outcome.

But what forces us to at least consider extremes is what you see below that are two critical longer term technical trend lines for the current gold bull market.  Again, the gold community would probably be catatonic if we ever kissed these lines; we just personally hope to avoid the catatonic state if at all possible.
                   


                       
One last technical anecdote to keep an eye upon as we consider the important asset class that are the precious metals. The bottom clip of the chart shows us yet another important technical indicator that is the monthly stochastics for gold.  In very simple terms, gold has been in bull market flight when the monthly stochastics have remained above 50, as it is now, and vice versa.  Even the meaningful 2008-09 correction saw a very short lived dip below this line as being the only violation so far n the secular bull cycle.  This very simple technical indicator would have kept one “on the right side” of gold for two decades now.

Finally, as we step back and look at the fundamental landscape, it’s very hard to imagine a world devoid of money printing ahead.  We see currency debasement in the current cycle as being driven by two very important phenomena.  Of course debasement is being used by central banks as a rhythmic offset to the really macro global deleveraging cycle playing out right before our eyes each and every day.  Secondly, you’ll remember that in the 1930’s deleveraging cycle we witnessed countries across planet Earth erect trade barriers as a means of combating the deflationary effects of the global deleveraging cycle of that period.  Our personal viewpoint is that the currency debasement of today is taking the place of the trade barriers of yesterday given the politically incorrect nature of trade barriers within the context of a current globalized economy where cooperation among not only governments, but importantly central banks, has become crucial.  And so the global debasement activities are over for this cycle?  Only if the deleveraging cycle is complete, which we all know it is not.  Europe will have absolutely no choice except to overtly print money ahead.  The only question is whether this occurs before or after a hard default.  In stealth form the printing has already started.  No printing means the European deleveraging cycle happens very quickly, but of course it would be accompanied by a deflationary fireball of historic proportion that would impact the entirety of the global economy quite negatively. And that is how likely to happen?  The end of the global deleveraging cycle is so far from complete that in no way can it be currently “seen”, and yet the end of the gold bull can?  We beg to differ.  Bull markets in any asset class “breathe” as they both inhale and exhale.  It’s all about rhythm.  For now, gold is simply exhaling.  Just remember, it ain’t over ‘til it’s over.   

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SheepDog-One's picture

How can we look at something as heavily manipulated as gold, put up a chart of it, and conclude anything? If they feel like it, gold will be -$100 tomorrow morning, and has nothing to do with charts.

El Viejo's picture

Same could be said of stocks right?

AldousHuxley's picture

...annnnnnd.....it's over.

GetZeeGold's picture

 

Sooooo.......it's down $100?

 

Oh wait....it's not.

economics1996's picture

Inhaling begins in February.  

Quinvarius's picture

Things seemed to happen a month or so early this year.  I'd be wary of thinking you have some timing pattern nailed.  The market anticpates and adjusts.  What is the best month for a currency crisis anyway?

LowProfile's picture

...And who do you think will scarf all that gold up if they do that?

You can manipulate a market in the short term.  Not the long term.

eureka's picture

This is another T. DURDEN post via proxy indicating maybe money "printing" isn't so bad after all - since it can be portracted - i.e. the kicking of the can down the road, which T. DURDEN otherwise consistently ridiculed throughout 2011.

Very pragmatic of T. DURDEN indeed.

So why all these soft-on-printing articles in one day...?

One can do more than merely wonder. Could it be because I am vehemently attacking the T. DURDENs on this exact nebulous, self-contradictory and dis-ingenous position-set, throughout all posts today- because I see it as utterly related to the Republican Party Establishment's attempt to destroy Ron Paul's fair chances in the Republican Primary - which further stringently relates to the current fervor and high activity of US Empire and its proxies to provoke a distracting and to the Pater-Land'HomeLand tit falling sheeple and foreign capital response?

Meanwhile in one US HomeLand corner, LAPD is plastering LA streets with heavily armed police and issuing massive amounts of daily jay-walking tickets, speeding tickets, running orange light tickets etc. Subway stations are flanked by multiple LAPD SUVs and patriol cars - platforms plastered with shoulder-hung machine guns on bullet-proof and helmeted cops and HomeLand and Sheriffs and probably lots of undercover CIA and FBI teams (you know if from their worked-out bodies, fake corporate ID badges, their goatees and restlessly aggressive stares and stomping around.

US is preparing WWIII - and the T. DURDENs should at leats know it. Now they do. Wheteher they have a position or not - and whether they post it or not - is their prerogative.

The point in relation to this post is - that if the deleveraging cycle isn't over, THAT is thanks to the USUKs exported money printing regime - AND - furether, the point is that there is a choice to be made other than simply buying more gold and hoping for profits down the road (at the end of can kicking) - namely, to fight for "America"'s constitutional revival - via fighting for Ron Paul's campaign, which is right not under stealth and scummy atack by one Elite-Proxy, today the Republican Establishment's Elite.

http://www.infowars.com/ron-pauls-iowa-finish-biggest-fraud-since-kenned...

Forget about gold for a few weeks - its not going to disappear - it takes care of itself. If you want to do anything for your country, your children and for FREEDOM - fight now, and this whole year, to get Ron Paul - first nominated for the GOP (against its elite's empirial wishes) - and then to beat Barry, the pseudo-monger, traitor and mediocre elite henchman in office during the past cycle.

BURRY BARRY - FIGHT FOR RON - FIGHT DIRTY - FIGHT WITHOUT CEASING - WE CAN WIN IF YOU WANT IT.

SemperFord's picture

I agree, anybody in LA knows they are giving tickets like crazy!!! FUCK DA POLIZE!!!

tyrone's picture

the LA bruthas sho betta not even glance at them stony staring mirror shades or they will know what rodney king didn't wanna know

LowProfile's picture

"running orange light tickets"

lulz

fnord88's picture

"Could it be because I am vehemently attacking the T. DURDENs on this exact nebulous, self-contradictory and dis-ingenous position-set, "

 

Yep i'm sure they are scouring the internet for your posts, then searching frantically for guest posters to refute you. As everyone here knows ZH hates Ron Paul, and would do everything in its power to stop him.

 

Or maybe its becuase this is a FINANCIAL site first and foremost, populated by people that believe in gold, and are interested in differing perspectives on it.

 

Or maybe, just maybe, the Tylers realise barracking for Ron Paul is total waste of fucking time, as the system will not be reformed from within, and people removing thier fiat by converting to gold, in the long run, has a much better chance of forcing change than getting excited about a candiate WHO WILL NEVER BE ALLOWED TO WIN.

You cannot win at the ballot box, you cannot win on the battlefield, you cannot win in court. You can buy gold, and win by not playing their fucking game. It's not about money printing being OK, it's about money printing being inevitable. 

GiantVampireSquid vs OWS UFC 2012's picture

Well done.  The system cannot be reformed from within.  The game is fucked up and bullshit, get indepence from the whole system, that way you win every day!

fnord88's picture

Should note that I love Ron Paul, and hope he does win. But experience with politics has taught me to not be so naive.

Thinking Ron Paul is going to fix the US is kind of like thinking lotto will solve your financial problems. It could happen, it would be nice if it did, but using it as Plan A is just fucking stupid. 

Rakshas's picture

That is the grand advantage that paper has over gold; you can fold into so many shapes and forms, like, PM origami  - oh shit no wait I'm thinking of Gold - physical gold I mean not  .....paper gold er white gold .... is there a wax gold??

Oh wait, no there is GOLD, Good ol' Yellow fuking gold 19.3 g/cc gold  if you want to buy gold you buy gold, if you want to buy expensive bum wad you buy paper gold aka GLD - and then you can revalue it to -100 monetary units of your chosing.

..... or you can bet on black 27 on the GLD wheel...... 

Here is a visual for any taxpayer that might be here:

http://www.youtube.com/watch?v=fyYtAUJSneQ

 

 

 

 

 

 

GeneMarchbanks's picture

Even though this article was mostly technicals(which are more in doubt every day) it was still pretty good. We are moving into another era though... post MF era...

AmCockerSpaniel's picture

How old is this article? "25%+ two month run in prices we saw earlier this year." this year?? Sounds like 2011 some time.

LawsofPhysics's picture

Like technicals matter.  Good article though. After reading it during lunch, I certainly wish there was an ETF for the black markets because the only way these "markets" will survive is through central bank coordination/manipulation the world over.

Mr Lennon Hendrix's picture

Gold technicals matter to know which cliff the Ponzi Ball will roll off next.

smlbizman's picture

fed ex man just showed up today....au shucks and ag ain...hope to see him soon ...

hedgeless_horseman's picture

 

 

Highlighting $400, $800, and $1600 is a good illustration for the old adage that when a position doubles, sell half, and hope it was the biggest mistake you ever made.

 

LowProfile's picture

Get back to us at 51,200 and let me know how smart you feel.

hedgeless_horseman's picture

 

 

You must still be holding on to that CSCO you bought in '99.  At least you now get a  .06 dividend to help offset that giant opportunity cost.

LowProfile's picture

Wow.  Are you fucking retarded or what?

So you sell half your gold every time it doubles.  What do you suggest someone buy with that cash (assuming you have enough food, medicine, tools, materiel and guns)?

Gold isn't a trade, it isn't a bubble, it's the only thing that will be left standing when the reserve currency comes to the same conclusion all reserve currencies come to.

There will be a time to get back into stocks.  It will come when there is complete apathy about them.

 

hedgeless_horseman's picture

 

 

What do you suggest someone buy with that cash (assuming you have enough food, medicine, tools, materiel and guns)?

Land.  Lots and lots of good land with good water.  Horses and cattle, too.  Travel and education for one's children.  Travel, food, and art for myself, and a good pack of hounds.

DoChenRollingBearing's picture

@ LowProfile

Yes.  If gold runs to $5000 I will, maybe, sell a small position.  Maybe a little more at $10,000.  If we run to FOFOA numbers ($25,000 +), then we will see what I will buy if I unload my gold.  Maybe the two gas stations in town, MONOPOLY!

TheAkashicRecord's picture

Come watch CNN's censorship of a soldier supporting Ron Paul's foreign policy

"lost our tech connection" is the excuse given conveniently after the solider starts talking about Iran and Israel

http://tiny.cc/c8ga6

And now back to Mitt Romney

GeneMarchbanks's picture

Anybody who watches CNN is already dead inside. CNN is a soul thief that gives eye cancer, I spoke with a physician about this. It's just science...

Cancel your cable/satellite and use the proceeds to fund Paul.

oddjob's picture

That is some sweet music Gene.

ZeroSpread's picture

The article..same procedure as every year. Just as this lil vid - worth a watch.

Merkozy in the mood to celebrate. Tyler, you might appreciate although there's no google translate for this yet.

 

http://www.youtube.com/watch?v=ECjz5Y7Antk&feature=related

Mr Lennon Hendrix's picture

I'm not done reading yet, but this is a superb article.  I will ad, people always buy those tops.  Get price action high enough and people come out of the woodwork.  It works this way for leasing as well.  Imagine, you are Bernanke (horrible, I know), and you have the ECB and all their banks on the line for an FX swap.  You let gold rise and then lease the top.  And since you let gold rise demand has increase.  It's part of the Central Bank game, and a large part at that.

Cognitive Dissonance's picture

Every time I read or hear someone talk about this or that country past or present having gone through this or that I always say to myself..........yeah, but this is global.

Please show me some examples of nearly the entire developed world deleveraging at the same time. Then maybe I will listen a bit more carefully.

Mr Lennon Hendrix's picture

The (first) Great Depression was global.

LawsofPhysics's picture

So is the second. With electronic accounts, you simply don't "see" the breadlines.  Wake the fuck up folks, the graph above uses a LOG scale on the Y-axis.

virgule's picture

[...the graph above uses a LOG scale on the Y-axis...]

Yup. I really wonder what is the *physical* meaning of drawing a trend *line* on a log scale to determine price levels - especially when the time series doesn't follow the line, meaning it's not bound by the underlying exponential plot?

Would have been a lot more informative to show that gold fits very nicely around an exponential base of 27.72 (that's % p.a. average) since 01/01/01. Gold isn't *bound* by this exponential either, but it has a lot more physical meaning.

Cognitive Dissonance's picture

I tend to agree up to a point. The 'developed' world back then was much smaller, the amount of financial leverage used before the (Great Depression) deleveraging began was much less and most people still 'created' real things with their own hands. This is often over looked. The very fact that we are so interdependent adds its own special degree of leverage.

Thanks for your quick response LH. :)

GeneMarchbanks's picture

In truth we're not interdependent. We're linked, or better said, chained. At some point cascading defaults will show us the dark side.

Cognitive Dissonance's picture

Poor choice of words on my part. I agree that we are captured, or as you so correctly said, chained. Thank you for clarifying.

Bangin7GramRocks's picture

What happened to all the Ron Paul posts? I have a big bag of told you so to all the idealistic numb nuts who thought that he actually had a chance to win the republican nomination. And to think how many guns, canned goods, body armor and barbed wire that could have been bought with all those wasted campaign donations.

Mr Lennon Hendrix's picture

Iowa voted for Huckabee last time.  It doesn't matter.  Did you see the Drudge Poll?  Paul won hands down.

Hmm...'s picture

Hmm...

Unfortunatly for Mr. Paul, the Drudge Report does not determine who will be president.  Things like the Iowa Caucus do.

In the end, Paul supporters have to understand that Mr. Paul cannot and will not win the REPUBLICAN nomination for President.  Why?  becuase in the end he isn't Republican.  His views do not well match the Republican Party.  Yes, we all agree that his views SHOULD match the Repubs, but they don't.  Thus, the Republican Party will make sure that he will not win the nomination. 

Mitt Romney captures the "pragmatic" Republican and the established republicans

Rick Santorum has coalesced the conservative and evangelical vote (wow).

and Ron Paul won huge in the independents, the young, and the dissilusioned Republicans.  But in many of the coming primaries those groups are simply not allowed to vote... Thus, how will Ron Paul win when his base WONT BE ALLOWED TO VOTE to get him into the Presidential race???

the only chance Ron Paul has to become president is to become an Independent. 

as a disclosure, I've said for some time that Ron Paul cannot win.  And I still stand by that.  this doesn't mean he isn't in essence a good man (with some major flaws, like all men)..  My favorite choice for President Denis Kucinich also has no chance to win, so me saying no chance to win doesn't mean he wouldn't make an acceptable president.  I do like the fervor of the Ron Paulites although they have some naivete as to how the world really works.    which is surprising especially since they know how fucked the financial and political sphere is in other respects.

Ron Paul's chief contribution to the process is not his ability to win (he cannot) but he has given focus to ideals that are ignored by the Democratic and Republican and Media elite, similar to the Tea Party and Occupy Wall Street movements. 

The day does seem to be coming when a third party can make waves here...  despite the political elite.

LowProfile's picture

If he doesn't win, it will be the fault of assholes like yourself who kept saying he couldn't, and then (in)acted in a manner to fulfill their beliefs.

kridkrid's picture

People eat what they are fed.  That's how we are programmed.  Allow for actual "news" and Ron Paul would be your next president. That CNN clip is the perfect example.  It used to be that only Fox needed to discredit or ignore Ron Paul. But now everyone is getting in on the game. I watched some MSNBC last night... it was absolutely remarkable how often they referred to him as unelectable. "But the Dems really need to figure this phenomenon out... how is it that the staunch anti-war candidate is doing so well in the pro war party? The dems need to figure out how to tap into this"... Laurance O'donnel... then more or less repeated by everyone else in their group... over... and over... and over. 


It isn't that Ron Paul isn't electable... it's that the real power in this country doesn't want him to be elected (and people like the guy who you responded to is the useful water-carrying idiot).  "Useful water-carryiing idiot" pretty much defines our electorate.  Is what it is.

LowProfile's picture

"It isn't that Ron Paul isn't electable... it's that the real power in this country doesn't want him to be elected (and people like the guy who you responded to is the useful water-carrying idiot).  "Useful water-carryiing idiot" pretty much defines our electorate.  Is what it is."

Dude.  Don't you see?  You just joined his circle jerk.

johngoes's picture

What we're fed visually subliminaly applies too. I noticed in yesterday morning's local newscast talking about Iowa that they mentioned that Romney, Santorum, and Paul were in a dead heat. However, the graphic they used showed the entire gaggle - and every candidate's face was displayed with a straight ahead shot with a benign smile, except Ron Paul, which was a picture of him taken from a low angle with a monster frown. Classic "one of these is not like the other" image. My wife and I both laughed because it was so patently obvious who MSM doesn't like.

 

DosZap's picture

LowProfile

You just do not get it.I would LOVE RP to win.

He can never win, because the system is set up against him.

He came in #3 last night at 21%, less than 3,500 votes behind.Did he get the TIME of day from the media?.NO.

He has already been written off.ONLY the CHOSEN will be nominated, I do not care if he won every straw poll/caucus there is.

The GOP will NEVER allow it.The media will never allow it,to get the Nomination, we would have to have two parties that want the world, and the US to turnaround, and get back to what it was meant to be.........a Const Republic.

Never happen, only one way.Military coup, and set the house back in order,get rid of the cancers.

That's it.

It's a RIGGED game,it's Take Down Time.

 

 

LowProfile's picture

Keep saying that, I'm sure it helps you sleep at night despite your not lifting a goddamn finger for the cause of Liberty (and in fact, working against it by your defeatist, cowardly attitude).

You got your aliases confused, BTW.  Making a note of that.

Starting to look like it's your intent to run RP down after all.  You filthy fucking cocksucker.