An Interesting Development For Gold and All Other Markets

34
Thu, Aug 11, 2016 - 3:47pm

Over the past two weeks, ZeroHedge has chronicled another dramatic rise in the TED Spread. What does this mean and what might this portend for gold? Hmmm...those are excellent questions.

The latest post from ZH on this issue was published this morning and I strongly encourage you to review it before you go any further: https://www.zerohedge.com/news/2016-08-11/libor-blows-out-fresh-6-year-h...

And what is the TED Spread? Here's a very simple and straightforward explanation from Wikipedia:

To simplify it even further...a higher TED Spread has, in the past, often been an indicator of short-term funding stress or credit risk. Again, from Wikipedia, this:

Here's a long-term chart of the TED Spread which shows the highs listed in the information above:

Obviously, spreads at present pale in comparison to historical extremes. However, note that we are currently seeing the highest spreads since early 2012 and, when you look at the three-year chart, the trend becomes a little more interesting:

So now the point of this post...

Have a look at this one-year chart of the TED Spread and be sure to note the dates we've placed upon it, December 31, March 30 and June 8:

Now have a look at a one-year chart of the S&P 500 with the same dates noted:

On balance, the two charts above make some sense when taken together. If the TED Spread is a measure of funding stress or credit risk, then it would follow that peaks in the spread would coincide with short-term peaks in the stock market. Historically we've seen this, too, with stock market drops in 1987, 2000, and 2008 that coincided with TED Spread peaks. As this situation resolves itself, a "flight to safety" during equity corrections leads to bond buying, which leads to lower interest rates, which ultimately leads to a return to tighter and smaller TED Spreads. So, could the current spike in the TED Spread be a precursor to another stock market drop. Yes, it certainly could. In fact, the chances range from possible to likely.

However, I'd like to point out something else that, for us, is far more important. Remember, the most likely way for the TED Spread to come "back into whack" is through falling interest rates. And, as we all know, falling interest rates prompt investors and HFT trading machines to bid up paper gold. So, when we look at the one-year chart of gold with the same December 31, March 30 and June 8 dates placed upon it, what do we see?

Look, this is not meant as some sort of forecast for higher gold prices over the next few days and, from a historical perspective, TED Spreads are still not all that high. However, there should be no discounting of the fact that the most recent TED Spread peaks led to temporary but stout equity market declines and sharp run-ups in the price of gold. For what it's worth, I'd be sure to keep an eye on the TED Spread as we go through August. If it and the stock market peak and begin to roll over, don't be surprised if gold (and silver) suddenly surge to new 2016 highs.

TF

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AGAUOOOBuck
Aug 12, 2016 - 12:14pm

AG strategy ooobuck

Agree I suspect AG has seen a good run and will likely consolidate some around here off took of half my position (nice fat profit) kept 25% cash and 25% (spread into Orezone ORZCF and Sarama SRMMF resources) FWIW

Good luck

bikerdocOOOBuck
Aug 12, 2016 - 12:01pm

RE: AG foaming?

AG have increased production by 2x - 3x since Nov. 2012. More production capability is emerging. Go figure.

infometron
Aug 12, 2016 - 11:25am

@Dr P

Quite right, I've been lucky these past few times I've traded in and out (or in this last case at least not unlucky), but overall I would have done much better to have just sat tight since January. Am I getting better? Probably not, but it helps to keep me alert.

Dr. P. Metals
Aug 12, 2016 - 11:19am

@info

ive tried 3 times to "time" JNUG, it's impossible :( I've lost about 3 shares in position by trying, now I'm sitting tight, until proven right. You'd have to get extremely lucky to get it right due to the open gaps. Up and down.

infometron
Aug 12, 2016 - 11:07am

Jumped back in...

Jumped back into JNUG with half my dry powder at the same price I sold yesterday.

Just in time, hopefully as the flag pattern resolves to the upside...

BoatboyOOOBuck
Aug 12, 2016 - 10:24am

@000Buck

Me too Exk is performing nicely I may move mome AG money there

stingbee
Aug 12, 2016 - 10:17am

Re: We Are Really Struck in A Range

Silver and Gold should be moving much higher, but were are stuck in a range. Gold seems to be shackled around $1260.00. It is pretty obvious that we are not going to see any big moves even with today's subdued economic activities. But, regardless, it appears paper money wants to chase risky assets for the time being and keep the indices at all time high.

Frustrating...This is when you realize charts sometimes don't mean jack within an asset class that is against the establishment-Central Bankers. In real life, GOLD should have traded towards $1370 or higher, and Silver around $21.00 or higher.

OOOBuck
Aug 12, 2016 - 10:12am

AG foaming?

Strikes me that AG is topped out in the 18.50 area. It's seen these levels before as a top back in Nov of 2012 but that was with silver at 32.50 and gold at 1735. I continue to hold a hefty position but plan on lightening up and moving funds to a few others. Anyone else thinking similarly?

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Colin Hussey, MBA DipFA
Aug 12, 2016 - 9:20am

very enlightening analysis @turd

very happy to have signed up a month ago, cheers

Antony von Clearwell
Aug 12, 2016 - 8:49am

Now do the right thing

And fall through 100 alright...

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