Today's guest post comes to us from Argentus Maximus. Argentus is the author/instigator of a terrific and very popular forum called The Setup For The Big Trade. It can be found here: https://www.tfmetalsreport.com/forum/4460/setup-big-trade
QE, The Gold Price, The Meaning of Words, and the Congressional Cycle, by "Argentus Maximus"
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean -- neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
Paul Volcker said of his tenure at the Fed, and I paraphrase in my own words here, “if I had to do it over again, everything else would be done exactly the same but I would keep a tighter control over the price of gold”.
Fast forward a half century and here we are again. The clock of time has turned and again a great depression is on. The price of gold is suppressed. It is hardly surprising.
Let me refer to another gold bear. During the 1998-2000 gold bear market called Brown’s Bottom in the gold price there was a similar time during which the price of gold was manipulated downwards under threats of sale, and eventual actual sale itself of a substantial amount of the Bank of England gold, IMF gold, and sellable gold from anyone else willing to sell and their dog. We are now aware that the banks in the UK were insolvent and were able to cover naked shorts and recapitalize using cheap gold prices brought about by the unfortunate UK Chancellor of the Exchequer.
Let’s change the subject and look at something else for a moment. Some people can be perplexed by the fact that stock markets are making highs while the economy bumps along the bottom. They assume that the stock market should be low, since it is supposed to be an indicator of how the economy is doing. Not in this case. Market players know full well that the stock market would be bottom bouncing, if there were no stimulus free money being pumped into financials. So an opposite kind of reality emerges during recessions under monetarism. The stock market does well when the economy is booming, and it also does well when the economy has crashed and is bottom bouncing. The stock market has even developed a twin personality to suit this “are we in stimulus or not” dual reality with it’s bullish and bearish states of being called “risk on” and “risk off”.
So economy down stock market up, economy up stock market up. I think i can figure out who came up with that idea!
But what happens between the depression and the boom?
Logic would suggest that the Central bank trainer wheels get taken off the economic bike.
So let’s see, that would mean the stock market has to crash when things begin to improve. Nah! Never! Impossible! Oh .... hold on! Wait a minute ...... What was it that Ben Bernanke hinted at last week? Quantitative easing stimulus would end? … No! Absolutely no way, never, he said it would continue ... What he said was the Fed will be “flexible” ..... .
By now readers have figured out where I’m going with this. The switch from stimulus to no stimulus could kill the patient but it has to be done or the state fails.
From the Fed’s point of view, if the economy improves .... interest rates begin to rise. Well that seems to be happening. And QE requires to be slowed to a trickle and stopped .... much caution is required next. So they were hinting that they might consider possibly doing a teeny tiny little bit of QE reduction some time in the distant future...hardly any reduction at all really. The market bombed anyway! And what was that phrase Ben used?.... “tapering”. Such a harmless word. Almost as good as using QE instead of printing. Tapering = not printing. I can see it now in the dictionaries of the year 2025. “QE definition: printing money, stimulus, opposite of tapering. “
Language and the meaning of words can be such a flexible thing. Rather like the Fed. Ben is good with words. We need to listen carefully.
“Would you tell me please,” said Alice, “what that means?'
…. said Humpty Dumpty, looking very much pleased. “I meant by "impenetrability" that we've had enough of that subject
But if the economy is beginning to show early signs of recovery, we would begin to see a move down in the stock market as it realizes the easy money will die off soon. And down it has most certainly been going. OK Just a little bit. But it’s early days yet. The first sign of a thaw is far from the blooms of the summer still a ways off. But are early signs showing? Sure!
Earlier in 2013 the stock market rotated from high dividend bond alternative stocks into utilities during a slight consolidation, and it is now rotating into more mainstream stocks. After that it will move into specialists and the smart money will be gone by then. But gone into what? Where is value to be found if not bonds ?.
The commodities market. That’s where.
So if we are at the stage where the earliest signs of growth are only visible to the Fed, and the insider-est of the insiders (that was my experiment in language and new words!) then what would the gold price be reasonably expected to look like at that precise time. Well logic (dangerous!) suggests that gold would be still in it’s maximum suppression mode, at the bottom of a bear market in fact. About to come out of suppression. And so it is! Hooray! Well maybe not, but you get my meaning.
So asking oneself a few test questions seems to be appropriate:
Is gold at the end of a long decline? Yes. At the end? Maybe.
Is gold sitting on long term support that can not be broken ... Well sort of. The old support level is broken and above us, and the new lower support is proximate to price but not really challenged yet.
Are there signs that the suppressing organizations are getting short of gold to sell having been selling for a protracted period. Sure. In fact, according to COT some of them seem to be well on the way to being stocked back up again. But the Central Banks who were selling the longest (sure they only swap it, such a nice word that ... swap .. full of possibilities) seem to be buyers, especially the CBs over there in the East who didn’t have much interest in suppressing gold seeing as US inflation is exported to their country by the dollar devaluation,. Then there are the ABN non-delivery of physical gold to clients, nudge nudge, wink, wink, but they have loads of gold! Loads I tell ya! The GLD is draining. The COMEX seems to be a little light on the shiny yellow stuff lately. So I think that we can say there is plenty of anecdotal evidence that suppressing organizations may be getting a tad low in their vaults.
What is the current sentiment on gold as an investment? Positive and widely owned, mania demand and parabolic, or negative and lightly owned? We need to be contrarian in these matters but not too early. Well I guess you could describe gold sentiment as uber-bearish and nobody owns any. (except in Turdville) Good. They will all need to get some when it “turns”.
So the earliest of early signs all seem to be telling the same story. Buds are visible, but not greenshoots just yet. And when we add them together a picture emerges. The Fed knows the QE which was contained in financials is bleeding out into the economy. It can’t keep on easing. It needs to bring the stock market down instead of crashing it. So a hint here, a word there, a little suggestion of changing conditions to elevate the perceived risk of stocks and get them down the gentle way. That will do the trick. Also take note of the reaction of capital. The instantaneous rush to the doors was highly instructive, and should not be forgotten during the coming months.
So I hypothesize that the market is about to be weaned off stimulus, gradually, and it will still hurt. Gold’s suppression will, it is to be assumed, also be wound down. That will have implications for gold and those who hold it. The gold winter appears to be about to thaw into spring. And as the old QE regime decouples and the normal relationships between asset classes return, a link with economic activity will become relevant to stock values once again. Then when the time is right the rotation from stocks to commodities, including gold and silver, will begin.
Under these conditions I suggest that a failure of the gold market to make significant new lows is a bullish sign.
I tend to consider the market as a quasi cyclic place where certain rhythms exist. So lets’ look at a chart. To see what a cycles analyst can make of QE and the market it just has to be the SPX. Sure enough a two year cycle exists. How interesting and quaint that QE should have a rhythm of 2 years, just the same time period as a certain US election cycle. Pure coincidence I’m sure! Nothing worth looking into there!
Take a look at the 2 year cycle in US stocks. It does not appear to be all that powerful.
However in the second chart I have tweaked this cycle, flipping two lows up into highs. Suddenly the 2 year cycle leaps out as being the main force synchronizing QE, and the stock market, and the re-election of congressmen. There is much food for thought in that chart.
The second chart also gives a timing perspective on when QE will be re-imposed for another round, or not. And why should it be when the US President in in a second term and not seeking re-election. Fed Chairman Bernanke’s upcoming resignation also fits the timing of this cycle.
However since QE began this cycle has altered its shape somewhat. The regular pumping has chopped the bottoms off the cycle effectively changing them into little tops between the usual tops. This can be expected to last only so long as the QE monetary stimulus pump is still in operation. But regardless, the SPX has recently arrived at a top for this cycle. The implications of coming off a top are clear enough and confirm a far as a cycle can, that for one reason or another either the stimulus or the effect of it is reducing.
And in the normal world, the sequence is bonds, then stocks, then commodities.
The cycle charts I enclose will provide an idea of when these things can be expected. Observation of the procession actual events must be done to confirm that the re-coupling scenario hypothesized at here has begun and is playing out. Gold will react when it does.