Gold And Apple

The exponential or parabolic or Hubbert phenomenon typically looks like this:

Source: Wikimedia Commons

It occurs in nature and it occurs in the markets. Occasionally the exponential run up is followed by a flattening out at the top, to make an S-curve:

Source: Wikimedia Commons

But most of the time there is a collapse down the other side, fairly equal to the run up, and here are some examples of that:

Source: Chris Kimble

Apple is the world’s biggest stock by market capitalisation and now dominates the fortunes of the Nasdaq. Apple’s chart has gone parabolic over the last few years:

Source: Stockcharts / Yahoo

So is it due to collapse? Well, here’s the thing about exponentials: they can get steeper and steeper, putting on faster and faster gains.  Recognising the pattern therefore isn’t enough, plus there is the possibility that a chart that has gone exponential flattens out into an S-curve rather than collapses. Typically, a parabolic that reflects a speculative mania to valuation excess will result in a collapse, whereas a parabolic that reflects genuine growth or fair value may flatten out.

In this next chart we can see that Microsoft was bid up to a forward p/e of 67 in 2000, compared to a historical average around 15. The new internet companies of the time reached 8% of the total US stock market capitalisation, the SP500 reached a p/e of over 40, and the Dow-gold ratio reached an all time high of just under 50. By various measures, it was clear the tech parabolic became a speculative mania, and a collapse followed. Of course, timing the exit from the parabolic was difficult – it only looks easy with hindsight.

Source: Reuters

As can be seen, Apple is currently valued at just a 13.8 forward p/e, which is cheaper than the historical average, and it is cheaper than the majority of SP500 companies currently. So whilst it has exceeded Microsoft’s capitalisation of 2000, it isn’t the same kind of speculative bubble.

The near term view of Apple looks like this. A correction is occurring, following a higher high on negative volume divergence.

 Source: AfraidToTrade

That suggests it may correct further yet, and in so doing it is dragging down the Nasdaq. As the Nasdaq is usually the leading index, other indices are usually affected. So Apple’s fortunes are important. But Apple’s parabolic does not suggest a collapse as its rise is based on genuine growth and its valuation is still relatively cheap. Barring an economic downturn whereby all stocks are affected, I expect Apple to resume its uptrend post-correction, or to flatten in an s-curve if Apple’s growth starts to slow.

Turning to gold, we see the same exponential pattern over the last few years. At any point up the curve a trader could have called a top based on an unsustainable trajectory, but the curve just got steeper. The 9 month consolidation from 2011-2012 brought about bigger calls for a top, but again it appears to be resolving upwards into what should be an even steeper parabolic.

Source: Valcambigold

Assessing the parabolic for gold is more complex than for equities, because there are multiple valuation measures for gold as it fulfils various purposes from inflation hedge to hard currency to commodity. The publisher of that chart compares the percentage of assets in the gold sector as one measure. Certainly the 1% current position is not excessive compared to 26% in 1980 or dot com companies reaching 8% of the US market in 2000.

Valued as a reserve currency in the face of large monetary base expansion, its parabolic appears to reflect genuine fundamentals.

Source: Economicsfanatic

As a non-yielding asset that fares well when real interest rates are negative and declining, it has also been rising at ‘fair’ value.

Source: Moneyweek

However, when we look at its relative expensiveness to real estate or equities, it is into the historic extreme zone. Versus equities, it could yet become more relatively expensive to reach down to the 1980 level, but on this measure alone the gold parabolic does reflect some speculative froth.

Source: Sharelynx

Other ways to value gold include its relative price to food or broad commodities (due to close relations) and the proportion of its demand from investment (central banks and investors) versus supply growth. Drawing all together, I would suggest the picture for gold is one of a parabolic so far based largely on fundamentals, i.e. a genuine ‘growth’ based exponential rather than a speculative mania. However, I also suggest that this is likely to change ahead. I have argued elsewhere that yields should begin to rise now, that ‘investment’ demand for gold is due to top out in the next 18 months whilst supply is already growing, and that a whiff of policy change in relation to rates was enough in the 1940s to kill the gold bull (rather than requiring real rates to go positive). I believe we will get that whiff once we reach an inflationary spike next year.

I predict a speculative mania in gold will occur, based on historical mirrors, and we will then see the divergence from fundamentals that will bring about a huge run up followed by a collapse. But thus far, gold’s parabolic is not particularly speculative, and that does suggest that the Dow-gold ratio could reach 1980s levels before reversing. There is no easy way to time an exit from a speculative parabolic that has diverged from fundamentals, only to recognise it and then choose your weapon. That weapon could be trailing stops, or solar cycle timing, or technical indicators such as overbought/overbullish extremes together with negative internal divergences. But first, let’s look for evidence of transition from value parabolic to speculative parabolic.

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26 thoughts on “Gold And Apple

  1. John, You are genius for me to produce such comments. You should get Forex Oscar for Your job. Amazing, outstanding and shocking 🙂 It’s a good opportunity for all sceptics to show that ‘yes, market is predictible only because we are a part of a big picture” 🙂

  2. Great stuff. First time I have seen anyone mention a fundamental/value parabolic though it makes perfect sense. Car usage in the early 20th century, television usage in the middle, computer usage at the end, mobile devices currently. From all of the great charts, it looks like we need to put a trailing stop on the global adjusted monetary base. Pretty amazing to see how smoothly that was managed prior to 2008. The current crop of central bankers may end up with very sad biographies when all is said and done. Finally, on cotton, looks like a few more steps may be needed to get back to ground level on the Champs du Mars.

  3. Traders will trade price swings regardless of trend, but for those investors amongst us, I hope you are smart enough to protect yourselves for all the awful things that will play out post US election and well into 2013/14. One way to protect yourself when bad times comes is to own assets that will appreciate during turmoil. Another way is to learn how to sell short assets that will suffer during turmoil.

    While many many many bulls here and else disagree, I see Chinese real estate will most likely experience a hard landing, Euro Crisis heading for a final climax which could include a well overdue default out of Greece and US will once again enter a recession. Australian, Canadian, Hong Kong and Singapore real estate is in a bubble. The world will have problems going forward.

    I have shorted various risk assets, and one of them is Apple at the end of August as already disclosed here on the day of entry. There are many other things I have done to protect myself, including holding a large Precious Metals exposure. My outlook is for a terrible 2013 and 2014. Protect yourself before its too late!

    1. Tiho, My mentor (she worked for Marc Faber for 10 years during his Drexel Durham time in HK) is willing to swing trade only the 30 yr treasury notes and expect it to drop to 2.0% in the next panic attack. She is as bearish as you are.

  4. If Apple’s share price were to match the extreme P/E valuation which we had with Microsoft in 2000, Apple’s share price would need to be at least 3,150 points right now, instead of the 630 points that Apple Inc. currently equals.

    Bursting bubbles should be anticipated when we see doubling within the space of a year. If prices more than double than we can be sure the thing which is soaring is growing at an unsustainable amount. As I once said before, the bursting of a gold bubble for me would be when gold doubles in the space of a year. For example, if Gold was at about $1800-2000 by March 2013, and had been able to reach $36000-4000 by January-March 2014, bursting would be imminent.

  5. Tiho, i´m in line with you, US is very near the recession, China, Brasil and all the emerging countries are in a big trouble, also basic material.

    From 2000, there are go and back movements, the 9th a drop about 50% in the Industrials, we saw in 08-09 as we can see 1914-15 from 1906 and so in previous markets. After a big mov. up about 100% for 2-3 years, not more, is done with an extra.

    Gold for me, if a i attend the historical chart, we must see a drop about 42% from 1922 to 1.100+- and after 800%.

    See the past: from 25$ to 190 1st parabolic mov. a drop to 110 and 800% to 873 in 1980.

    Thanks John

    Thanks Tiho.

    1. Interesting question. This coming Monday is the new moon, so that gives us a few days yet to potentially rally. But if we don’t, and we make an inversion, then looking back at what happened for the following full moon after such new moon inversions, I see a couple of examples of a double inversion (up into the full moon) but otherwise mainly just a regular downward bias into the full moon, nothing exceptionally big.

  6. Hi John,
    I have been following you for a year and have been impressed with your overarching investment theme. One nagging question. You say in forecast 2013 part 1 that a luni-solar cycle is made up of three solar cycles and the end of this cycle marks a commodity blow off top. I have searched the web and can’t find your timing for 1 luni-solar cycle. So how did you arrive at this cycle length?
    Thanks for all your work it is much appreciated.

    1. Hi scorpio, thanks. A solar calendar is one Earth orbit of the sun, 365 days, accurately tied to the seasons, with a month averaging almost 31 days. A lunar calendar is based on lunar phase, the moon orbiting the Earth, and a lunar month averages 29.5 days, so not accurately tied to the seasons. The lunar calendar therefore drifts from the solar calendar by about 10-11 days a year, and comes back in sync 33 years later. That is one luni-solar cycle.

      1. Mervyn King made a very significant speech recently, in which he spoke about possibly abandoning the inflation target of 2% at the BoE. It’s clearly a sign that they aren’t sure when interest rates can rise without sparking deflation, so it’s likely rates will stay low for a while, until they’re convinced inflation won’t suddenly disappear. It also means they aren’t sure of what the perfect level of inflation ought to be.

        My understanding of the target was that it was placed at 2% because that level of inflation doesn’t raise unemployment too much. In some ways, it’s as if inflation hitting 5%, as it did in 2011 doesn’t seem to matter, because it will inflate the debt away and won’t scupper the debt reduction plans as nominal gdp will still be rising in relation to debt. They seem to have a pro-inflation bias right now, which is healthy considering deflation would happen if they raised interest rates.

        However, earnings growth is still far lower than CPI, so we could see erosion of wealth through inflation, plus inflating debt away, or they could adopt the deflationary view, raising interest rates, choking off growth, causing crashes in asset prices, and worsening the debt problems, as Japan knows all too well. It seems the inflationary path is the lesser of 2 evils, but it could lead to a period of excessive inflation in the future one day.

  7. Hi John
    Really appreciate your work and your ability to endeavour to find logical market directions on the balance of probabilities .
    Reflecting on your current article , and the last one Near Term Timeline , your raised 9 relevant factors , but in no “preferential factor “order . Given the Carolan dip/slash crash is current/passing soon , would you care to nominate your own views of order of importance ?
    I’ll repeat them here for ease
    1) US Earnings start tomorrow with Alcoa and continue until Mid-November

    2) 12-15 October Carolan crash window

    3) US Elections are 6 November

    4) Lame Duck Congress session 13 November for decision on fiscal cliff

    5) Correction in commodities, and potentially equities too, into around 21 November, based on Gann, before mega commodities rally erupts lasting all 2013

    5) Late November market top predicted by Eurodollar COT futures

    6) 28 Nov – 7 Dec Puetz crash window

    7) 22 Dec last major Bradley Turn of 2012

    8) 31 Dec / 1 Jan fiscal cliff comes into effect, if no postponement or change, i.e. tax rises and spending cuts which will hamper the economy

    9) Presidential election seasonality suggests equities should consolidate a little here in October and then make a push higher around the election, and potentially even higher by year end:

    I was intending to raise it also , but Tiho has succintly done it ie the influence of China stimulus/ real estate collapse .
    Wish there were more writers of your calibre here in Australia .Thanks again for your contribution and clarity
    cheers
    Maplelegion

    1. Hi Bruce, thanks. Bradley, Puetz and (probably, though new to me) Carolan I would not specifically trade, just be aware of, as I have found the first two hit and miss.

      Gann and Presidential, they are more substantial, I believe. Gann reflects the repetitions brought about over time by solar cycles, in my view, and Presidential the cycle of political policies. I find them more reliable.

      The macro events of earnings, election and fiscal cliff are all important. Earnings seasons usually have a theme – the market sells off or the market rallies. We need a few more reports yet to gauge the beat rate and therefore the theme.

      Eurodollar COT predicted the June 2012 low accurately, as well as the June-Oct correction in 2011, but I want to see more examples. If it is to correcly predict a late Nov top then we should see other topping indicators lining up as we approach it, so that will be my measure.

    2. Hi John. First-time post though I’ve been following your work for a few months – not a trader, but appreciate high-class analysis and also your graciousness and felicitous turn of phrase.

      Maplelegion, I don’t know whether marketanthropology.com is Oz-based, but he (assumption; could be she) has had at least recently a focus on Aussie dollar – see Oct 8 post for eg and interim target for FXA of 84.

      Anthony Tudela at changeintrend.wordpress.com who I think is known at this site is Oz-based.

      Regards
      Malcolm

      PS: I am unable to sign in to wordpress at the moment, which I think you prefer John.

  8. Without the necessary psychological conclusion parabolic blowoffs cap secular bulls with, sentiment will generally remain bullish. After any normal topping that isn’t driven by an extreme popular speculative mania, plenty of buyers rush in to reestablish positions when they think the correction has run its course. Secular bull markets really can’t climax without the extreme psychological whipsawing of the parabolic blowoff and subsequent collapse. It shatters bull psychology.

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