Gold’s Bull Market Resumes

The counter-trend bounce in the S&P500 continued last week. The large cap index closed up another 2.7% but since volume on the way up has been far lower than in was on the way down earlier this year, the bounce can be viewed as just that, a bounce that’s driven more by short-covering, not the start of a major leg up to new all time highs. In fact, as well covered in these posts, the S&P500 has further room to bounce before threatening the larger downtrend that started late last year. The S&P can climb well past 2,025 and even up to 2,050 before this larger downtrend can be declared broken….to the upside.

Other technical indicators suggest that now the S&P is becoming very over-bought on the daily charts. And given that the S&P has still not reclaimed the 200 day moving average (which looms at about 2,025) there’s major overhead resistance that lies dead ahead. On the longer term weekly charts, the distribution pattern that began in early 2015 looks very much in tact. And the latest bounce very closely echoes the big bounce that took place in the fall of 2015, a bounce that clearly failed before new all-time highs were reached.

On the ground floor, in the US economy, the news was not good last week. The week kicked off with a disastrous Chicago PMI report, which recorded its worst reading since March 2009. Pending home sales fell. The Dallas Fed manufacturing survey is still in disaster territory, all due to the collapse in the price of oil. ISM manufacturing only met expectations. Construction spending beat expectations, but initial jobless claims, PMI services, and factory orders all disappointed. ISM services beat expectations, but only very slightly. Finally, the big number of the week (payrolls) was deceiving. On the one hand, the headline number of jobs beat consensus estimates. On the other hand, average hourly earnings dropped, instead of rising as expected. In fact, the drop in average hourly earnings was so bad that according to economists it was the equivalent of losing about 700,000 jobs. So while the headline number of jobs was 50,000 above expectations, the total earnings of the workforce actually fell. That suggests that people who are working are making less money because their hours worked and their pay rates are falling. And given that most of the jobs that have been added over the last few years have been of low quality (eg. waiters, bartenders and maids) it’s no surprise that we’re seeing lower total workforce earnings. All this means that the US consumer is earning less money to spend on goods and services and this makes a recession even more likely to occur.

Finally, after peaking in 2011 at an all-time high (in US dollars), gold—one of the most hated asset classes by banks and financial advisors—has quietly entered a new bull market. In gold, both the 50 day moving average has crossed above the 200 day moving average and the 200 day moving average has started to slope upward. This should come as no surprise when the European Central Bank is printing (electronically) currency under its own program of QE and the Japanese central bank has embarked on a negative interest rate policy (or NIRP). To buyers of gold, the trade-off is simple—-own gold and preserve value, or hold cash and lose value. And since these two huge central banks are showing no signs of reversing their policies anytime soon, there’s a good chance that gold’s recent run up has much further to go.

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