Gold continues its advance

This week the Dow Jones saw above-average volatility, especially early in the week, but on Friday closed only 3.92 percent from its last all-time high.

The Dow Jones in the table below (#10) was down 6 percent at Monday’s close, but recovered as the week progressed to Friday’s close, and that was the story for the rest of the indexes in the table too.

As mentioned before, this week was volatile; above average daily moves in the market and that is never good for the stock market. But looking at these indices BEV values for August 9th, most are less than 5 percent away from their last all-time highs, meaning they remain in scoring position for making new all-time highs in the weeks to come.

Key for the Dow Jones to be able to go on to new all-time highs from here is its ability to rid itself of the excessive volatility seen in the past two weeks in its daily bar chart below. Monday, August 5th was a 2 percent day for the Dow Jones. If that was an isolated event, there is a good chance the Dow Jones will go on to new all-time highs. But if the Dow Jones sees more days of extreme volatility in the weeks to come, even a big 2 percent daily advance, it would not be a good development for the bulls.

As far as following the market in the coming weeks, I’m focusing on whether or not daily volatility continues to be extreme as in the last two weeks, or if the daily advances and declines resume to the levels seen before the end of July in the bar chart below.

Following the NYSE’s 52WK Highs and Lows provides investors with a valuable insight into the stock market. Let’s study this data from 2006 to 2011, during the housing market boom and bust, as well as the first three years of Doctor Bernanke’s reflation of the markets with his QEs. The data below is daily, but only NYSE 52WK High – Low nets of +/- 300 or greater are plotted.

In the late stages of the Sub-Prime Mortgage bull market advance, the NYSE produced positive H-L Nets of greater than 300. Then in the summer of 2007, H-L Nets broke below -500, with one daily spike below -1000. Still the Dow Jones continued advancing until it peaked on October 9th 2007, a day the NYSE managed only a H-L Net of 147.

In the following year the Dow Jones deflated, as did the broad stock market as seen by the negative 52WK H-L Nets. Then on October 10th 2008, exactly a year after the Dow Jones’ top, the NYSE 52WK Nets plunged to -2891. This was the day the Dow Jones broke below 40 percent from its bull market high of the year before. The Dow Jones had not seen a 40 percent market decline since November / December 1974 and everyone from the President, the Congress and the girl next door was freaking out.

A key insight to the Sub-Prime Mortgage market decline, the second deepest percentage decline since 1885, is when the Dow Jones bottomed with its historic 54 percent decline on March 9th 2009; the bears at the NYSE could produce only a 52WK H-L Net of -826. So the Dow Jones may have bottomed in March 2009, but the NYSE itself bottomed in October 2008 when its H-L Nets peaked at -2891.

At some point in a market decline, investors need to be looking for a reason to buy. As it turned out in early 2009, this poverty of 52Wk Lows at the NYSE on a day the Dow Jones found itself 54 percent below its previous bull market high, proved to be an excellent reason to do exactly that.

Currently the NYSE 52WK High – Low data is neutral at best. Below, the last four BEV Zeros for the Dow Jones are highlighted in blue and gold. The last all-time high for the Dow Jones of July 3rd saw a H-L Net of 220, but the following BEV Zeros of July 11-15th saw their H-L Nets fall off. Seeing the Dow Jones making new all-time highs is no longer inspiring the other listings trading at the NYSE to do the same, and that isn’t bullish.

In the past week with the Dow Jones coming under pressure, NYSE H-L Nets went negative for the first time since late May. This isn’t necessarily proof positive of a market top, or that a big correction has begun. But it bears watching to see what follows, whether NYSE 52WK Lows continue expanding ever deeper into triple digits.

The yield curve below continues to get ever more inverted as summer progresses to autumn. An inverted yield curve signifies a “tight monetary policy”, and a tight monetary policy is something bulls in the stock market fear. One thing that should be noted is that the yield for the 30 year bond is not far from declining below the Fed Funds Rate. Should that happen that would be very, very bad.

What’s odd about our current inversion of the yield curve is that usually it’s the Federal Reserve that raises its Fed Funds Rate over the yields of T-bonds to invert the curve – but not this time! 

Nope; this time it’s the entire US Treasury Bond Market (the US National Debt) lowering its yields below the Fed Funds Rate. And two weeks ago the FOMC cut its Fed Funds Rate by 0.25 percent, which bizarrely increased the inversion in the yield curve. Has this happened before? I don’t believe it has. 

In the summer of 2019, are we looking at one of life’s mysteries wrapped in an enigma in the US T-Bond Market? Maybe, but most likely not. 

Maybe the mystery seen in the US T-bond market is best explained by looking at the German Sovereign Bond Market in the chart below, where yields (Blue Plot) fell below 0 percent (Red Line) in the first week of June of this year. And this week yields for the French Sovereign Bond Market also went negative.

Who is buying German government debt at a guaranteed loss? I suspect the European central banking system is. However, in driving Europe’s bond yields below 0 percent, they are creating a capital flight situation from Europe’s bonds into the American debt market, including corporate and muni-bonds. Every week I download the bond yield data Barron’s publishes, and they are in a state of collapse because of what we see in the chart above.

Another thing I would draw your attention to in the chart above is exactly when bond yields in Germany began their current collapse: July 2008, at the start of the American Sub-Prime Mortgage Market Crisis. 

The European bond market has never recovered from the 2007-09 credit crisis, and neither has the American T-bond market in the chart below. Before the crisis, one could get a yield of 5 percent on a 30 year US Treasury bond. At this week’s close the return on a 30 year bond collapsed to 2.25 percent. For years I believed bond yields bottomed in June 2016. I’m not so sure of that anymore.

And where does all this stop? Are American bonds fated to decline below 0 percent as German and French sovereign bonds have? 

Below is a chart of a US 30Yr T-Bond issued in February 2011; if in the weeks to come its yield declines below its current low seen in June 2016, that’s not good. Why would that be a problem? Because what is driving these bond prices up (Blue Plot) and Yields down (Red Plot) is capital flight from somewhere else. 

Don’t be shocked when the day comes we see this hot money from somewhere else get up and leave the US debt market just as fast, or even faster than it came in.

Another interesting feature of this bull market in the US bond market is how well gold and silver have been doing since it began in early summer. 

As seen in gold’s BEV chart (published later in this article), since the end of May gold has trading differently after finally breaking above its BEV -27.5 percent line ($1360), where for six years this level functioned as a line-of-death for any attempt to break above it. All this is good news; still, one missing item I’ve been waiting for in this advance has been a big increase in gold’s daily volatility. 

Gold’s daily volatility 200 day M/A below, has finally turned the corner, breaking above its 0.50 percent line. But as seen in the 1970s to early January 1980, as well as from 2001-09, an advancing gold market brings with it increasing volatility much greater than we’ve seen so far in this advance.

As I’ve done with the Dow Jones, with its 2 percent days, I’ve assigned volatility thresholds for gold; (+/-) 3 percent, and silver; (+/-) 5 percent. Let’s look at gold’s 3 percent days since 1969 in the chart below. The upper chart plots the raw data; the days where gold moved (+/-) 3 percent or more. The lower chart plots the total 3 percent days of extreme volatility by year.

Since January 1969, there have been 12,715 COMEX trading sessions, of which only 424 saw gold move more than 3 percent from a previous day’s close. But as seen below, days of extreme volatility in the gold market are not random events, but cluster during those times when gold is in play, whether that means gold is trending up or down in a major market move.

There’s a big difference between volatility in gold, silver and the stock market; extreme market volatility in the Dow Jones is a feature of big market declines. With gold and silver that is also true, but extreme volatility is also a feature of major market advances in the old monetary metals, this is not so for the stock market.

As seen in the annual totals for extreme volatility in gold above and silver below, their last extreme day happened in late 2016, almost three years ago. Looking at this data going back to 1969, if the current advance is fated to take out gold and silver’s last all-time highs in the months or years to come, the old monetary metals are once again going to become volatile markets. Seeing extreme days of volatility stacking up in 2019, after a three year hiatus in these charts, should prove to be big positive events for the bulls.

Following this anticipated development in the news will be easy. Any day the Dow Jones sees a daily move of 2 percent or more is always news worthy, the same is true when gold moves 3 percent or more and when silver sees a 5 percent daily move. 

What a beautiful picture of a technical breakout gold has drawn with its BEV chart below. It should be framed and hung on a wall.

Below in gold’s step sum chart we see the history of the past five years in the gold market. First the collapse in market sentiment (Red Step Sum Plot) from March 2014 to December 2015, as gold (Blue Plot) found its bear market low in December 2015. At that bottom market sentiment for precious metals was foul, as anyone thinking of selling had already done so, most taking their losses at the bottom of a 45 percent market decline as they did.

Next came an accumulation stage, where the public still hurting from the bear market spurned gold as an investment. However, from January 2016 to May 2019 someone was buying all the same.

Then on June 19th of this year, when gold broke above $1360, and moved ever higher, another stage in the market advance for gold began where gold will attract an expanding circle of devotees willing to exchange their dollars, pounds, euros, yen and yuan for an ounce of gold.

At some point, maybe years from now, and then maybe before Christmas, there will be a buying panic in the gold and silver markets. When will that happen? My best guess would be when we see global bond yields stop going down, and begin spiking alarmingly upwards. If you’re thinking of buying gold and silver, you best do so long before that happens!

In the Dow Jones’ step sum chart below we see market reality (the Dow Jones / Blue Plot) struggling to get above, and stay above the highs of January & October 2018. What a difference when compared to gold in its step sum, and BEV charts! 

Market sentiment (the Step Sum / Red Plot) remains bullish. But since August 1982, the public has been given good reason to believe that all market declines are opportunities to buy more, but now cheaper stocks. In the years to come, I expect Mr Bear will finally give the public good reasons to believe that isn’t always true.

In gold’s step sum table below I like seeing gold’s daily volatility’s 200 day M/A break above 0.50 percent. How much longer do we have to wait for a day of extreme volatility, a day where gold moves +/- 3 percent from a previous day’s closing price? The sooner that happens, the better it would be as far as I’m concerned. But maybe we’ll have to wait until gold breaks above its BEV -20 percent ($1510.88) or its 15 percent ($1605.40) lines before the public once again is willing to buy gold as an investment.

It won’t take much new buying by the public to cause gold to rise by 3 percent or more in a single day. Central banks in the past few years have drained much of the supply of above ground gold stock from the market. Rising demand in a market with diminished supply is a recipe for much higher prices.

Since the Dow Jones’ last BEV Zero on July 15th, it’s seen more daily declines than advances. With its 15 count remaining at or above -3, except for one -5 on August 5th, the selling in the stock market is in line with the ebbs and flows always present in the market. In fact, in a strong market advance, a pattern of daily advances and declines seen above could easily push the Dow Jones to higher levels.

But that isn’t what has happened since the Dow Jones last all-time high on July 15th. Instead the Dow Jones is shedding valuation. In the weeks to come this could all turn around. All the Dow Jones has to do is to advance a few percent above its last all-time high, as gold has done with its line-of-death at $1360 since June 18th.

With the yield curve becoming ever more inverted, I have a hard time believing that is going to happen.

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DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.