Brief Weekend Update

Please excuse the brevity and standard of this post. Internet provision in Australia is behind the times (payable, slow, restricted or unavailable), and it appears this will continue for the remainder of my time in Australia and again in New Zealand. I am currently approaching the region around Melbourne.

We’ve reached extreme bearishness levels in coffee, sugar, gold, silver and wheat, as well as oversold readings and what looks like a capitulation in both gold and miners. These are normally the circumstances in which I would buy, but I am happy with my exposure in commodities and as the alternative scenario remains in play (secular commodities peak passed) I do not wish to twist here. I am awaiting more evidence in support of the primary scenario (secular commodities peak ahead within the next 12 months), which would include evidence of another extreme hot year developing globally (January data not in yet), evidence of sunspots still climbing towards their peak (currently a quiet sun), and technical breakouts with momentum in the laggard commodities. Oil and copper have been involved in the pro-risk rally, which I believe is a good sign, particularly as oil correlates normally well with both agri (key input in production) and gold (inflation hedge).

US equities remain resilient but I maintain the overall picture for equities, as represented by the MSCI World Index, is that a consolidation began at the turn of February. My short treasuries position made some progress in line with the pro-risk rally but also looks to be digesting a little.

The latest leading indicators from the Conference Board showed a move into the positive for Japan, another +0.1 reading for the UK and flat for Korea. The latest ECRI leading indicators reading for the US showed a small pullback but still strong positive. The OECD leading indicators for all the OECD countries showed the healthiest picture for some time. The overall picture remains supportive for pro-risk.

We are in a down pressure period until the full moon around the 25th February. On the flip side, geomagnetism remains tame.

So I watch and wait. Equities have stretched to the upside, agri and precious metal commodities have stretched to the downside. A switch in performance ought now to follow, with bearishness extremes in the latter providing the fuel. Gold is certainly testing patience, but there is a historical pattern of assets pre-secular parabolic finale doing their best to shake out weak hands before the final upleg, plus on a secular view (since 2000) it can be seen that gold has been consolidating near its highs over the last 18 months, which is not a typical secular bull ending pattern. Nonetheless, the case I made for the ‘alternative scenario’ (secular commodities peak passed) remains potentially valid for now (though I rate it lower probability), so I await developments to shore up the one or the other scenario.

30 thoughts on “Brief Weekend Update

  1. Citigroup just took a jab at precious metals and mining on Friday. It downgraded Fresnillo Plc and Randgold Resources to a position where they advise people to sell. This downgrade follows lacklustre precious metals performance and the P/E ratios of the respective mining companies are deemed unreasonable with Fresnillo at 22 and Randgold at 18. People are saying these P/Es are unlikely to reflect further gains ahead.

    Citigroup is stating that it wouldn’t be unreasonable to assume that Gold and Silver prices are “hibernating”, and given the last hibernation lasted 20yrs or so, they are suggesting that if precious metal sentiment worsens from here, nobody can expect to see a sustained rally in prices until 2033. I gauged Gold bug reactions on twitter, when I tweeted about a 20yr hibernation, and they dismissed the idea by citing economic problems or simply came up with excuses like central bank intervention. Clearly, there is no co-ordinated movement of money into PMs to warrant a major move upwards. It seems like every Gold bug is looking out for themselves and nobody else.

    Essentially, there is a complacency amongst Gold bugs. One of the tweeters I talked to had bought Gold at the 2011 peak, having bought into the furore of the time, and he was getting frustrated about how he’d made a loss and he tweeted to Max Keiser, asking when prices would go substantially higher. Personally, I think that if we see Gold failing to surpass its 2011 peak by the end of 2014, it is time to call the end of the Gold bull run. It seems fair to say that a correction followed by a downtrend plus a lack of new highs for at least 3-5yrs is a sign of a bear market mentality settling in.

      1. SLV remains almost 40% below its April 2011 peak. It almost certainly has a more definitive bubble price action leading up to that peak. The correction since then might have been so damaging to confidence that people assume it’s going nowhere anytime soon. One trader on an article about the Silver 2011 tumble on the the Telegraph newspaper website said the 2010-11 bubble was one of the easiest bubbles to trade. Volume was seen to have risen in the months leading up to the peak and dumb money got brought into trading at the end of the bubble, as tends to happen.

        It seems a lot of people got roped into buying precious metals in the run-up to what they thought would be the largest jump in precious metal prices, only for a sharp correction to occur in Silver and a slightly milder correction in Gold.

      2. Not all bubbles are killed off by a 50% drop immediately after the peak. The DJIA was in a bubble up to 2000, and when it corrected at the start of its bear market, it fell by 35%. Major secular moves like the drop in Silver prices can easily get overlooked if people insist on there being a set of rules by which a bubble must be defined. My view is that the markets are fluid, new generations of traders make a new set of rules for the markets when they enter them. The rules of the market that shaped the precious metals bull of the 1970s would undoubtedly differ from the bull of the 2000s. As they always say, past performance is never indicative of future gains or losses.

        1. Possible Pete. But look at the monthly bollinger bands of the Dow in 2000. There is no signs of a real bubble (An other thing is the NDX)! The stocks in the DOW are the biggest of the world and more defensive in a downtrend.

          Silver is a commodity. And commodities bubbles are more intensive.

  2. Hi John,

    Are there known cases of these longer term cycles inverting?
    If we get a solar cycle peak this year, and somehow commodities climb to new highs after 2014, then at what point would you consider it a possible big cycle inversion?
    While I think energy prices could be lower by the end of the decade, I am not so sure about food prices and metals. The ongoing rounds of QE around the world are going to have some effect sooner or later, and lower prices for “stuff” seems to be an unlikely outcome. Also given a growing world population combined with dwindling supplies in the ground, and rising costs to get it out of the ground.
    Maybe technology will ultimately give us cheaper food and metals, but that’s not going to happen overnight.

    1. Food prices may be higher, that is a good point to make. It depends on whether we have hotter, drier summers from now on. As for metals, China is already starting to slow down its acquisition of hard assets, and it’s orienteering its economy towards a consumer led growth model.

      QE has undoubtedly allowed billions of new USD to enter existence, as well as billions of new GBP. However, consider this: in Japan, the BoJ has been using QE since 2001, yet they remain in a deflationary spiral. Using QE isn’t in itself necessarily an inflationary policy. Central banks could create new money but it might simply sit on bank balance sheets and never get out into the actual economy. It just depends how deep the debt hole is for banks.

      I’m inclined to think the 2010s may see commodities fail to repeat the price rises of the 2000s. The 2000s seem like the decade of the BRICS dash for growth, where they bought up oil and other commodities to create a nice hard asset reserve. Now China seems to be accepting that future growth may not be double digit for a long time.

    2. No solar cycle inversions that I know of.

      A new secular bear market in commodities would in practice be permanently higher prices going sideways, rather than a long period of falling prices. But we would need to see some fundamental developments support that: genuine growth, reduction in inflationary central bank policies, increased commodity supply, a de-railing or slowing of China, an easing of global wierding (climate change and natural disasters), some new technological paradigm shifts. I put good odds on some of those happening, to fulfil it, but it’s going to be interesting to see whether there is something cyclical in the global wierding or whether this is going to keep accelerating.

  3. Hi All

    Whether you think the secular trend has changed or not I believe the graph I posted on my blog on the 3rd of Feb showing the two phases in the cycle amply demonstrates that there is little point in owning gold in phase one. This phase lasts at least until week 26 or 28 of this year.

    Even in the big bull periods the returns in phase one have been negligible.

  4. John, in your studies to you consider geomagnetism and geostorms bullish or bearish? I take it as positive that there seems to be negativity towards gold/silver especially the likes of Citigroup. 85% of all analysts are wrong 75% of the time if you look at the stats. 95% of all traders do not make money in the long run. Inflation has nothing to do with the quantity of money or whatever. We are taught that but in is purely confidence and the fear of prices going up that drives inflation. Study John Law. Trade a system. GLD is hitting those oscillators so either we bounce or break. If we bounce we either break out or we reverse and go lower. Prediction is futile.

    1. Hi Robert
      “Prediction is futile”
      I guess you are wasting your time on this site, because thats what its all about……….prediction.
      No offence meant.

      1. No, I am not wasting time. I like John’s site and I am searching for the Holy Grail as much as you are. The more I search, the more I come to the conclusion that we are all fooled by randomness. In general, I believe you could have random entries and still make money. What matters is really the risk i.e how you take losses and profits (this is skill) – the rest is luck. These are just my personal reflections.

      2. My own take: prediction is very much possible to some degree (to enough of a degree to create a permanent trading edge), but it’s a game of probabilities (nothing works all the time, no holy grail). Cycles (dominant in nature and so in the markets) and trend extrapolation make it possible, plus in the markets there is also technical analysis (unofficial gentlemens agreement to give the markets more order where there would be less). Money management is the other key ingredient, which is less talked about on trading sites and blogs.


        Chaos is often confused with randomness – and they really aren’t the same thing at all.

        The idea of probability and randomness is linked with the idea that there is no way that we can predict what is going to happen even in principle.

        Chaos on the other hand is where we have a system that is in principle 100% predictable but in practice all we can do is to give the probability of any particular outcome.

        For example, that well known example of randomness, the fair coin, is in fact a better example of chaos. In principle you can take the initial conditions of the coin and how it is about to be thrown into the air and use the equations of Newtonian mechanics to predict exactly how it will land on the table.

        This can be done in principle with certainty and there is no need to invoke randomness or probability to explain the behaviour of the coin.

        More at site…being a weather guru, I know a little bit about programming randomness in to forecast weather patterns. Good read not too technical.

    2. Geomagnetism is bearish (explanation in my PDF). The cumulative geomagnetism model has a downward slope during periods of increased geomagnetism and an upward slope during periods of negligible geomagnetism. Other than the period between June and Sept last year, in the last 4 years equities and commodities markets have tracked it well (geomagnetism affecting sentiment):

  5. I only base my own trading on 1,000 and 1,000 of data points that define my edge. I am still not sure if it is all random. Hence I think prediction is futile in the sense that you add many parameters such as this indicator or that etc. The sooner you are able to commit to one strategy and not change too much the sooner I think it works. Otherwise, the more conflicting date there will be and I do not think anything works 100% of the time. I like the sun spot and moon stuff and think it is enough just to trade on this for reasonable profits. The search for the Holy Grail is what screws us up as traders ;).

    1. What I mean with randomness is that even if a “permanent” edge is found, I think all edges are self destructive in the end even cycle theory in the sense of the “Observer Effect” in Physics or Metaphysics. For sure we can we profitable as traders but what counts is the risk. I.e. when profit is taken and when loss is taken and the amount wagered in relation of your account. The actual entry could be random or you could just use a straight line on the chart and be profitable. This works for me i.e. the straight line. All traders search for the Holy Grail in one way or the other.

  6. A simple strategy is just to go short ma(2 day) cross above and reverse ma(2 day) cross below. Beats the SPY. All you got to do. Nobody does this. Why? Because we are Yale students instead of traders.

    “Look, for example, at this elegant little experiment. A rat was put in a T-shaped maze with a few morsels of food placed on either the far right or left side of the enclosure. The placement of the food is randomly determined, but the dice is rigged: over the long run, the food was placed on the left side sixty per cent of the time. How did the rat respond? It quickly realized that the left side was more rewarding. As a result, it always went to the left, which resulted in a sixty percent success rate. The rat didn’t strive for perfection. It didn’t search for a Unified Theory of the T-shaped maze, or try to decipher the disorder. Instead, it accepted the inherent uncertainty of the reward and learned to settle for the best possible alternative.

    1. The experiment was then repeated with Yale undergraduates. Unlike the rat, their swollen brains stubbornly searched for the elusive pattern that determined the placement of the reward. They made predictions and then tried to learn from their prediction errors.

      The problem was that there was nothing to predict: the randomness was real. Because the students refused to settle for a 60 percent success rate, they ended up with a 52 percent success rate. Although most of the students were convinced they were making progress towards identifying the underlying algorithm, they were actually being outsmarted by a rat.”

      1. Hi Robert,
        What the scientists failed to do was add a third parameter.
        No food , left or right.
        And thats the Market.
        We can learn to go left and get a 60% return, but more often than not,there is no return in any direction.
        Now what?

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