Timing & trends

Peter Schiff – Gold, Oil & The Fed’s Greatest Fear

shapeimage 24

With continued volatility in gold, silver, oil and stocks, today King World News interviewed Peter Schiff, CEO of Europacific Capital.  Schiff told KWN it’s inflation that is causing the move in stocks.  He also discussed gold and the mining shares, but first, here is what Schiff had to say about oil and the situation in Iran:  “I hope we don’t get involved in Iran.  Anytime we get more involved in the Middle-East we create more problems.  Maybe the administration is looking for something to blame the high oil price on, rather than admit it’s excess money printing causing the problem.”



Momentum and sentiment numbers are at levels associated with previous important tops. As noted last week, insider selling has also reached that level. We keep in mind the dramatic Outside Reversal in so many key items on March 8. Some thought it was triggered by Bernanke’s comments on that day.

Our view has been that markets were primed for change, and the reversal was a “heads up”.

Another such dramatic reversal will be critical.


Stock markets have had a very good run. But, in these times there are no long-term trends. Rallies become so compulsive – as do the inevitable sell-offs.

From the troubles of Summer 2010, the S&P rallied 31.7% in nine months.

From the troubles of last August-September the gain has been 30 percent, and counting, in only five months. Fears of October have been forgotten as the favourable season continues. Last week, we noted that firm crude oil prices would “sustain speculative interest in the general stock markets”.

Recent interest is focusing upon Apple, which is a phenomenon, and the banks, which is a caution. The latter (BKX) have enjoyed a sharp rally on almost certain knowledge that the “stress test” would be benign [1]. It should be stressed that the test is a computer model build on macroeconomic assumptions. For more than a decade, Mister Market has shown little regard for such models.

The 13 percent rally in a couple of weeks has driven the RSI to the level reached with the high at 59 last April. That was an important high and the subsequent low was 33 in the gloom of October.

One of the features of important tops is that all sectors may not peak at the same time. Base metal mining stocks (SPTMN) topped in late January and the Transports in early February. The recent high for the Oil Patch was at the end of February.

Overall stock market atmosphere is becoming rather heady.

Credit Markets

At the short-end, spreads stopped narrowing a month ago, but have yet to reverse. At the long end – corporate spreads continued to narrow.

Over in the dreadful world of sub-prime the strong rally from October ended in Early February. The price has declined to a narrow trading range. No break down.

The “saucering” bottom in the twenty-year yield has resulted in a distinctive rise in rates. In so many words, the top is in for the bond contract and the action has rolled over. Some of the decline could be due to firm economic numbers, but it is worth keeping in mind that the long bond has been a huge asset in play and the play appears to have ended.

However, the municipal sector has not been doing well. After registering an Upside Exhaustion in February, the MUB has suffered a sharp decline. Last week, the NPI accomplished a big test of the high set in early February. The three-day decline has been interesting.


Once again, the street is hot on commodities.

Base metals (GYX) enjoyed a good rally to an RSI in early February that has ended recent rallies. The chart is in a narrowing wedge that will likely fail and set the down trend.

Grains (GKX) are still in a modest rise.

Crude is in a favourable season that could run for a number of weeks.


Last week we noted that the dollar was still in the pattern that has led to important rallies. Rising through 80 would be an important step and the action yesterday almost made 81, but needed a little rest. This could run into next week.

Signs of the Times

Last Year:

“Economic Optimism Growing Amongst Brokers”

– Schawb Survey, March 8, 2011

“State of The Stock Market: Bullish Overall”

– Chart Swing Trader, March 21, 2011

“Better-than-expected data on confidence and manufacturing bolstered optimism on the economy.”

– Bloomberg, April 15, 2011

“Temperatures Lowest For Time of Year Since 1940s”

– CBS Chicago, April 20, 2011

This Year:

“Global mining industry remains optimistic that the commodity boom is going to run for years.”

– Financial Post, March 6

“The outlook for global growth is very good for commodities…it’s a good story.”

– Business Day, March 8

“The [stock] bull market that no one believes”

– Huff Post, March 14

The “Spike” In Interest Rates: Are Treasuries FINALLY the Short of the Decade?

There has been a lot of talk about the “spike” in bond yields over the past week. Some are declaring the end of the bull run in bonds and some are even calling for a complete spike in yields. Everyone is so sure that bond yields are now headed higher since “risk-on” is back as the Stock Market hits 3.5 year highs.

For years now, US government bonds have looked like terrible investments, what with those trillion-dollar deficits and multiple wars and all. But Treasuries just kept rising, earning their owners nice returns and making their critics seem like financial illiterates who didn’t know a AAAA credit when they saw one.

There has been a lot of talk about the “spike” in bond yields over the past week. Some are declaring the end of the bull run in bonds and some are even calling for a complete spike in yields. Everyone is so sure that bond yields are now headed higher since “risk-on” is back as the Stock Market hits 3.5 year highs.

But we all need some perspective. The “spike” that we saw last week was not inordinary.


TheArmoTrader & The Big Picture

Gold: “We’ve passed the point of maximum despair,”

Even the bulls are turning bearish on gold prices. Or rather, they’d like to.

“Everything’s beginning to look as if it’s turning the corner, we’ve passed the point of maximum despair,” reckons Nick Moore, head of commodity research at state-owned Royal Bank of Scotland in London. He cut the bank’s bullish 2012 forecasts for all precious metals except goldback in January.

But now, “A number of things which would have kept people with an eye on the upside for gold have now been neutralized.” And despair over, gold must be fated to sink, right? Not quite.

“Gold can now settle back,” Moore tells Bloomberg, plumping a cushion and fetching a foot-stool.

Over at Mineweb, “Is gold now the contrarian play?” asks Geoff Candy, pretty much answering his own question by asking it, and also noting that analysts pointing to “warning signs” can only find “fairly optimistic” ones for gold prices.

“The one danger with gold is that the bullish consensus on gold is now higher than it’s been at any time for the last two or three decades,” says former base-metal trader (and Eurocrat nemesis) Nigel Farage, speaking to Eric King. Markets do whatever it takes the screw the most people the most, of course. But while “there is a danger that the short-term speculative market finds itself a bit long of gold,” says Farage, the outcome really isn’t that bad.

“You can’t discount – when a market is shaped that way – that it could have a dip.”

Jeez, let’s fetch it a towel and a bathrobe! Won’t anyone call gold’s bull market dead?

“Ten years ago gold was not owned by retail investors but was primarily held by central banks,” says UK asset manager Armstrong Investment, overlooking the world’s biggest holders both then and now – Indian households. “Strong performance, uncorrelated returns with other asset classes and the advent of easily-accessible ETFs have seen investors make ever-increasing allocations to the precious metal.” SocGen strategist Dylan Grice agrees, also noting that “Gold just isn’t the misunderstood, widely shunned asset it was a few years ago. Isn’t the gold bull market now long in the tooth, with better opportunities to be found elsewhere?”

But again, both analyses find more cause to stay long of gold than sell it, let alone short it. Grice because the real crisis – the final calamity awaiting Western state finances – still awaits. Armstrong because “an allocation to gold [still] makes sense in a diversified portfolio.”

Still, “Investors should not view [gold] as a safe haven without its own inherent risks.” Most notably because its correlation with equities – the way it moves in (or out) of line with stock markets – has risen to what seems a high level since risk assets bottomed in early 2009.


“Over the long term,” says Armstrong, “gold has been a perfect portfolio diversifier – positive returns with no correlation to traditional asset classes. [But] over the past three years gold priceshave shown a correlation of 0.8 with the S&P500.”

Now, gold and the US stock market would show a correlation of +1.0 if they moved in lock-step together. They’d show a perfectly negative correlation of –1.0 if they moved in precisely opposition. So the three-year reading of +0.8 does indeed suggest gold has lost a good chunk of its risk-spreading power, moving higher as stocks have also moved up and threatening a sharp drop if equities now lose their mojo.

Look again at the chart, however. Because this strong correlation is hardly unknown. And while the current three-year correlation of +0.8 has been maintained for seven months so far, it was achieved (and breached) for 33 months in 2005-2008…nine months in 1987…and 11 months back in 1980.

What really matters is the huge swings in between. See, all told, and since gold prices began to move freely in the late 1960s, gold has moved in the same direction as stocks – on a quarterly basis – for pretty much half the time. It’s gone the other way for pretty much the other half, leaving gold a great diversifier overall. Neither positive nor negative. Just unrelated.

Or as a statistician would put it, the rolling 12-month correlation between Dollar gold and the S&P 500 index has been 0.04. That’s as good as zero. There’s really very little link between gold and equities long term. And what link there is comes through, say, a strong correlation today, and then strongly inverse correlation tomorrow. Net-net the result comes out at sweet nothing. Provided you buy and hold for the long run, rather than daring to time a move in (or out) on where the latest correlation now stands. Or where you judge the rest of the world to be, relative to the 11-year bull market in gold prices.

Looking to start or add to your gold bullion holdings today…?

European Stock Market Recovery

The world’s stock markets are increasingly interrelated. The psychology of traders, which drives most short-term price action, is continuously shaped by the nonstop torrents of global news flow. So even Americans can no longer afford to ignore what is going on in overseas markets. And the influence of European stock markets in particular is large and growing, making their recovery well worth watching.