GM Jenkins' Fundamental Law of the 21st Century Gold Bull Market

This is looking to be a volatile week ahead. Risk-averse traders need not apply.

I'm not feeling especially bullish, but I'm nonetheless long GLD and SPY, and I closed my UUPT position (3X US dollar ETF) Friday.

I'm long gold because I think it will close November above where it is now. If it doesn't, that would be just the second month since 2001 it closed below this 40% trend channel (which it's currently just barely below, with 9 days remaining). 
Moreoever, we're close to long term support (300-day MA of daily highs and daily lows), which I doubt will be broken again anytime soon. If it is broken I will reconsider, of course, and probably change my tune. But until then, I like the post-QE3 potential upside here compared to the downside, and want to be long. 



However, I will be monitoring the mining stocks, which I hope are only tanking violently because of tax-related selling. On Wednesday, I sold my entire gold position when GDXJ and SLW fell 5-6% while gold and silver were up and the S&P was flat. I did this because it has never been the case (to my knowledge) that such a divergence hasn't been followed by gold and silver going lower in the near term. Sure enough, that happened the next day (Thursday), and I bought back after some further downside on Friday. Incidentally, I described this decision in a comment on Turd's site, where, in passing, I unveiled GM Jenkins' Fundamental Theorem of the 21st Century Gold Bull Market, which I shall more succinctly express here, as follows:
The price of gold will never fall so low that members of the middle class (working professionals, retirees, widows, etc.) who have not already bought bullion start to feel psychologically comfortable buying bullion. Nor will price rise to the point where they begin to feel psychologically uncomfortable not buying bullion (i.e. panic buying) until they are priced out of the market. In other words, until fiat money accelerates its approach to its intrinsic value of zero, gold will always be in a tight range where the growing obviousness that it's a good investment is matched by the appearance (and accompanying propaganda) that a massive sell-off is imminent.
Thus spake GM Jenkins (please cite only with attribution!). Those who have completely missed the boat, by which I mean those who do not even have a hand on it, shall not drown. Nay, verily I say unto you, they shall be boiled slowly like proverbial frogs. If we consider the average price of gold over the past year, it won't go higher every day. But perhaps the average price over the past year and a half will. (I say this because if you examine a sliding window of weekly moving averages, and look for the minimum period of time n for which the graph over the past 10 years has been monotonic, you get n= 78 or so.) A year and a half sounds about right, the equivalent of the pot full of frogs going up in increments of 1 degree celsius per month.

Gold in euros may retest support, which is why I wouldn't be surprised at seeing the euro rally. 
But I'm counting on the long term support band (orange, dotted) on this 9-yr $GOLD chart to continue to hold.
 I'm long the S&P 500 because (1) it's oversold (e.g. RSI <30), (2) I don't think the Plunge Protection Team will let gold outperform the S&P500 in 2012, as it currently is on this ratio chart:


and similarly to the $SPX:$GOLD ratio, (3) the $DOW:$GOLD ratio is right at its 38.2% retracement, suggesting it will increase, and since I already mentioned I don't expect gold to fall, the DOW should go up (hedging is for lesser men).

I'm not playing with silver until $35 is cleared, but if/when it is, I think $35 becomes the floor.







28 comments:

Jeanne d'Arc said...

@GM - nice post, and you almost convinced me :-p

That chart of gold, the one that one sees everywhere, with it going up methodically over ten years. What happens to it next? Does it go parabolic to the upside (because, I'm sorry, I just don't see it)? Does it continue at the same rate? Or does it break down (which it actually already has in one sense)?

Or does it break down PROPERLY, in which case the rush for the exits will be Volkeresque?

I like what you see in the S&P, however. I see the same in other stock markets. One could just throw a dart at a table of stocks, and make a long profit.

GM Jenkins said...

I realized that my fundamental theorem as written unfortunately made no sense, so I have revised it to more accurately convey my wisdom. It is almost as helpful now as Jim Sinclair's latest advice here: http://www.jsmineset.com/2012/11/17/in-the-news-today-1372/

GM Jenkins said...

Does it go parabolic to the upside (because, I'm sorry, I just don't see it)? Does it continue at the same rate? Or does it break down (which it actually already has in one sense)?

My best guess is that gold will continue to coil around its line of best fit on the log chart that probably reflects ~20% gains every year, but with a wide variance year to year. We're near the low end now, which is why I don't see $1650 being broken.
I don't see a rush to the exits occurring until the Fed starts raising interest rates and showing it can unwind its balance sheet without the sky falling, among other things. That would surprise me, but it's certainly possible; nothing's inevitable.

GM Jenkins said...

In the end, to invest in gold is to bet on the whole shithouse going up in flames. I look at the world around me and I think: how can this shithouse possibly not go up in flames?!

But then it was Adam Smith, the Original Gangster of the Austrian School, who said "There is a great deal of ruin in a nation."

S Roche said...

Jd'A, you answer your own question... Paul Volcker has left the building. When he restored faith in the USD that country was the world's largest creditor, now it is history's largest debtor, with insurmountable unfunded liabilities baked in. The EU, Japan, UK and China are all printing, taking the soft option.

I am dropping the Kyle Bass link everywhere but it is particularly appropriate here:

http://www.scribd.com/doc/113621307/Kyle-Bass#fullscreen

Jeanne d'Arc said...

@S Roche: I think it all comes down to me being a real contrarian. Why follow everyone to one side of the boat, when history shows that they'll all start running back to your side at some point? (And please don't give me the argument about most members of the public being unaware of gold - that's utterly irrelevant, as we all know.)

No-one has a functioning crystal ball, of course, but the trader in me (and I know you're a keen trader too) says that to go long when everyone else is suddenly interested in going long - and after such an enormous long move is a huge leap of faith.

As GM says, it's now about betting on the shithouse going up in flames. I dismiss that possibility (and am regularly vilified for it), so my only natural conclusion is that gold is not far from being played out, and the smart money should go to something else. Something that is unnaturally low at the moment. I don't know what that will be, of course, but we can all make some shrewd guesses.

So, yes, Volcker has left the building. But betting on the next Volcker, when everyone else is betting against, just doesn't seem like so much of an insane move to me. History will tell us who's right (and possibly after we're all worm fodder...)

JdA

S Roche said...

Chere Jd'A,

Contrarian...hmmm. Page 10, Figure 23:
http://www.gata.org/files/DeutscheBankReport-09-18-2012.pdf

1980 was 14% (the trial run), today is 1% allocation to gold...

Sometimes things are what they seem.

Yes, during Weimar one could have made a fortune being long Marks... if one had perfect timing of Government attempts to arrest the slide.

Why not continue to short as spikes allow, but hedge with unlevered physical?

Bonne chance!

SR

Tony said...

Jd'A,

Remember the herds running for the lifeboats on the Titanic? It's fun to play contrarian, but the herd mentality isn't always wrong. It's my humble estimation that this ship is sinking whether it's popular belief or not. Buena suerte finding yourself a lifevest!

Jeanne d'Arc said...

Cher S Roche,

Well, indeed. As it happens, I'm not short gold, and I doubt that would be a good trade at the moment. And when it gets oversold, I tend to buy. And when it's overbought, I go short. I treat it the same as any old common-or-garden stock. [shock, horror, 'nurse - the screens'.]

It's my petulant refusal to get excited about 'physical' that upsets people. As I've said before, many times, if the shithouse really does go up in flames, then your 'physical' protection will last about a nanosecond before it's confiscated or taken from you at knife-point or you die hungry gently stroking it.

I do understand some people's attachment to physical - it makes them feel safe. It's like a comfort blanket, or religion. But like the tooth fairy (or religion), one's faith in it doesn't make it any more true.

I'm still happy hoovering up productive assets at knock-down prices. And if the shithouse does go up, then I expect the Phyzz buyers and me will be equally poor.

C'est la vie,

JdA

Beer Holiday said...

JdA,

According to Quentin Tarinteno, even in the worst confiscation scenario I'll be able to keep at least 1 gold watch for my grandsons :-) (possibly NSFW)

http://www.youtube.com/watch?v=graC0isA82w

More seriously, you have a point, but I think there are shades of grey, and who knows what fraction of you're gold will make it through. I tend to think probably all of it, especially outside the US.

One of the worst "confiscations" not just of gold, but all property and wealth was the communism in China. A lot of the gold from that era was never found, because you can always hide gold in the countyside, but many of those poor folks didn't make it back to their hoard.

Maybe the best investment is guns and gold, a ranch in Texas and 1 million dollars in nickels (h/t Kyle Bass)

Biosci said...

GM,

Your theorem sounds like a prediction of the observable effect of some process that cannot be observed directly. In this case, how the market price of gold will react to managed currency devaluation.

Lord Sidcup said...

It seems to me that JdA values cleverness/originality, more than material wealth.

Funky Tape said...

JdA - your previous post concluded with the "charts look like shit" and game over pic. Then you just mentioned that no one has the crystal ball. You're so much convinced of your analysis that you won't even bet with it?

As a trader why would you give a rip either way or even waste you time on such crystal ball rubbing? Big fan of what the STF stands for and have always respected you work, but I'm concerned you're off your med here.

Funky Tape said...

GM - thx for the charts. Dig your style and always have. However, why are you not including volume and participation levels in any of this?

I'm seeing less that 4% short float with about a day to cover in both GLD and SLV. Seems a tad complacent. Thoughts?

Jeanne d'Arc said...

@Funky Tape - er, I'm slightly thrown by this. I really don't know what you mean.

The post you're talking about was on silver, and I was saying it was 'game over' for those who were desperately trying to do another pump on silver, because everyone is more wary now.

I do believe that the silver charts look like shit. And I have often been short silver, and in a very public way. I was short until today, actually, when I got stopped out. I'll probably go short again over the next few weeks. I'm neutral on gold, so am neither short nor long. So I am betting with my own analysis, I think.

Why waste time on the crystal ball rubbing? No idea. Why waste time on anything? It's something to do, I suppose. What a daft question!

Jeanne d'Arc said...

@Lord Sidcup:

...JdA values cleverness/originality more than material wealth...

Well, I suppose that if that's the worst that people think of me, I'll be happy with that.

S Roche said...

Chere Jd'A,

I somehow doubt that is truly the worst, given how people will mistake your position as anti-gold an' all...

I cannot reconcile "petulant" with the slip of a girl who saved La Belle France way back when. Following voices, yes, as it worked for you before. Well, up to a point.

Anyhoo, as your namesake said "Aide toy, Dieu te aidera" and in that vein and in response to your challenge I would like to explore the asymmetric trade of our lifetimes that is Japan today, (which was a major part of the Kyle Bass letter I linked, which I suspect remains unread)...perhaps you might take this up on your trading site. Bloomberg today has this: http://www.bloomberg.com/news/2010-06-09/women-prefer-men-holding-government-bonds-japan-finance-ministry-ad-says.html which I feel we will all look back on one day as an obvious sign.

@GMJ I think your gold price definition is a real contribution to the understanding of the trade in gold and gold instruments, it certainly is to my own. Reading 10+ yr old metals site comments reveals the same trepidation at $300 gold. My understanding also benefits from my acceptance that the denominators presently used to measure gold can go to zero. They have before and they will again.

It may be overly simplistic but I believe your definition regarding gold pricing has and will continue to drive many to silver, as it is really the odd one out in any list of precious metals prices.

SR

Jeanne d'Arc said...

@S Roche - Ha! Actually, it's funny that you mention Japan, as I think Japan is possibly the strongest argument against my thesis. Japanese stocks have been so depressed for so long, and the country unable to get out of stagflation (and with enormous debt:GDP ratios), that the one chink in Jeanne d'Arc's medieval armour that I really worry about is Japan-like conditions elsewhere. But there are a lot of differences between Japan and other big economies. I've been thinking about it a lot, and might do a post on it some day.

BTW - my reply to you said, "...if the shithouse really does go up in flames, then your physical protection will last..."; what I of course was talking about was, "...then one's physical protection..." Having re-read it, it sounds a bit aggressive/personal, and I didn't mean it that way. I did genuinely mean "one's".

JdA's Trading Set Ups is abandoned, unfortunately. I just didn't have time for it whilst working on my new project. I realised that it required more updating/effort than I'd imagined, and I would have had to stop doing Screwtape to do that. And I know how much that would have upset our regular audience here... ;-)

S Roche said...

Jd'A,

Yes, gold being fungible, not for a moment did I think that you were singling out my own gold...how vindictive would you have to be? and powerful? Can Pro-Simians do that?

Moving on, I would like to see the hive-mind address Japan and the trading opportunities for what I see is just mathematically inevitable. One interesting point, I have read there are 600 or more local currencies in Japan. I look forward to your article.

SR

Jeanne d'Arc said...

Just reviewed my charts of silver. Will short the life out of it tomorrow/Thursday if it gains any more strength.

S Roche said...

A suggestion...why not have a sub-section of this site devoted to trading set-ups?

GM Jenkins said...

However, why are you not including volume and participation levels in any of this? ... I'm seeing less that 4% short float with about a day to cover in both GLD and SLV. Seems a tad complacent. Thoughts?

Good to know you're still reading the blog, Funky Tape.

Re: volume, I don't really use volume in trading decisions. Maybe I should. I kind of just play it by ear, go with what's been working, drop stuff that stopped working, etc. I don't make a living trading btw, if that's not obvious, and though I like taking some big risks I feel justified bec most of my investments are buy &hold (incl large caps, real estate, metals, miners which are unfortunately in the red except SLW).

With respect to the GLD short float isn't 4% pretty high?

GM Jenkins said...

Your theorem sounds like a prediction of the observable effect of some process that cannot be observed directly. In this case, how the market price of gold will react to managed currency devaluation.

Very well put, Biosci - that's exactly what I was getting at. It could be some emergent phenomenon, but the fact that a major asset class wends its way higher and higher for 12 straight years while the great majority of analysts and commentators continue to laugh at "gold bugs" and such ... that requires some explanation and points to something going on behind the scenes. That's why I think the next 6 months will be very important: if we have another leg up, past $2000, which in effect would continue the basic trajectory upward, a Bayesian analysis makes some kind of manipulative or conspiratorial inteprreattion/ hypothesis more and more likely

GM Jenkins said...

A suggestion...why not have a sub-section of this site devoted to trading set-ups?

That sounds like a good idea, SRoche, maybe an outlet for bloggers and readers alike to put forth ideas.

GM Jenkins said...

Contrary to what I've written in this post, gold in euros is looking good to me right now.

S Roche said...

TSU No. 1 Long gold short Yen.

GM Jenkins said...

TSU No. 2, took profits for the week ... all in cash to enjoy Thanksgiving :P

S Roche said...

TSU No. 3

Long RIMM, one for Jd'A.

Universally scorned, new OS being well reviewed...