The Institutional Eye In The Sky
Apr 3, 2012
- Large movements in the price of US T-bonds can affect the price of gold dramatically. Since I highlighted the overbought condition of the monthly T-bond chart, some investors have concluded that the bond bull market is over.
- I believe that this conclusion may be a little premature. There is no question that the indicators and oscillators on the T-bond monthly chart are overbought, but that alone is not enough to call an end to a major bull market.
- It’s critical to look at why those oscillators are overbought, and that means giving careful consideration to the viewpoints expressed by institutional money managers and major commercial bank economists. Central banks usually consult with institutional players before making major changes in interest rate policy.
- The current viewpoint of most institutional money managers and bank economists is not that bonds have topped out and are about to enter a “papa bear” market. Their view is that central bank managers and government treasury departments have worked together to implement substantial global monetary easing, and that easing will continue for quite some time, barring any unforeseen surprises.
- Actions produce reactions. Global monetary easing was designed to boost economic growth, not make the debt payable. Growth has occurred, and the long term bond market chart suggests that global monetary easing (GME) is likely to continue.
- Please note that there is a difference between the phrases, “likely to continue”, and “guaranteed to continue”.
- To view the monthly bond chart, please click here now. Technical analysis of the bond market chart supports the fundamental views held by institutions, central banks, and government policy makers. Institutional money managers have moved some risk capital away from bonds and into general equities, because they believe central banks and policy makers are likely to continue to engage in GME for most of 2012 and perhaps all of 2013 as well.
- Institutional money managers and commercial bank economists expect that growth produced by GME will continue over the next 6-18 months, and 2013 should see even stronger growth than in 2012. They expect GDP to grow at 3-4% for the next 6-18 months, and in my opinion, they are likely correct.
- The symmetrical triangle in play on the monthly bond chart supports the scenario that temporary weakness in the bond will be followed by further GME policy actions, which will produce more anemic growth.
- The bond is not falling because of inflationary concerns. It is falling because institutions, central banks, and governments believe that GME will produce more growth and push the general stock market higher.
- Will GME solve the OTC derivatives-based debt problem? No. The enormous wedge pattern in play on the gold chart is an echo of the bond market chart, and suggests that while it is a waste of time trying to guess whether “the low” is in for gold, the current congestion pattern is a consolidation, not a top, and price will be launched above $2000 this year, by the implementation of more GME.
- Fundamentally-based liquidity flows create charts. Charts don’t create fundamentals, but they can create additional liquidity flows. Those of you who follow the major economic reports know that most market liquidity flows are based on fundamental analysis, rather than technical analysis.
- On that note, yesterday was a watershed day for the gold market. The Indian gold industry strike was suspended, and the suspension is likely permanent. During the strike, over $1 billion a week was lost by the Indian gold business. Without Indian buyers in play, rallies can be feeble even if the market is oversold.
- The end of the strike is occurring at a very key point in “technical time”. The gold chart shows an enormous wedge pattern, with head & shouldering action within the wedge. To view my take on that h&s pattern within the wedge, please click here now.
- That picture speaks a million words, and if you take the time to learn how institutional money managers think, you’ll probably have a lot more patience with your positions. The system is already bankrupt, and debts have been marked to model.
- The institutional money managers see all the same charts that you see. They know the debt is un-payable, but that doesn’t mean that the price of gold starts skyrocketing “any moment now”. A bankrupt system can remain open and continue to operate, indefinitely. The massive wedge pattern indicates that the gold price is coiling to strike at the $2000-$2500 price area, because of the size of the pattern, the time length of the pattern, and because of the institutional view that GME will continue.
- When will gold possibly “go parabolic”? That comes after growth dies a withering death rather than an explosive one, and institutional money managers and bank economists call for much greater global monetary stimulation. I doubt that a parabolic move happens before 2014, but anything is theoretically possible.
- A parabolic move could also occur if there is an unexpected surprise that rocks markets. I agree with Morgan Stanley’s head of global economics, Joachim Fels, that an oil price spike or a gridlock amongst government policy makers are the two biggest “tail risks” to the scenario that I’ve laid out here.
- I’ve noticed substantial frustration in the gold community, but I believe a lot of the frustration would disappear if investors could have patience with the viewpoints held by major institutions and central bank managers.
- Simply put, there is a lag time between the implementation of GME and the pick-up in economic activity. That pick-up in economic activity is happening now, and is likely to continue throughout 2012 and perhaps throughout 2013.
- That could put further pressure on the T-bond price, but it would not “finish it off”. An oil price spike could do great harm to the bond, and a policy making gridlock would also likely create a severe correction.
- You might feel a need for your gold stocks to rise in a parabolic price move right now, but that doesn’t mean it’s going to happen before institutional money managers see the current economic growth begin to fade. They see “more of the same” GME coming, which means more slow growth coming for the next 6-18 months. In my professional opinion, that is the most likely scenario over that timeframe.
- What that means for gold is higher prices, but not a parabolic move just yet. Once growth deteriorates, either later this year or sometime in 2013, I strongly believe that institutional money managers and commercial bank economists will pressure central banks into engaging in much more aggressive gold buy programs, with the sole goal of devaluing paper currency, thereby reducing the debt owed by the world’s debtors to the world’s creditors.
- If you feel frustration with gold, silver, commodities, and gold stocks, you’ll realize that most of your frustration probably comes from “fighting the institutional tide”. Things don’t happen before their time. Trying to make what institutional money managers are doing fit your view is a mistake. Fit your view around theirs. Work as a team, and you’ll get richer, with less frustration. Waiting for the system to “blow” is a waste of time. It’s already blown, it’s already been marked to model, and the creditors are going to get paid much less than they are really owed, with heavily diluted paper currency. So, your gold positions are going much higher!
Apr 3, 2012
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