Mark J. Lundeen
mlundeen2@Comcast.net
18 September 2009
Color Key to text below
Boiler Plate in Blue Grey
New Weekly Commentary in Black
Below is my BEV chart for the Bear Race.
The gap between the 1929-32 Bear, and our Bear, is getting wider. As long as this market continues heading up in little baby-steps, this is my story and I’m sticking to it!
This is really excellent market action. But we are still in a Bear Market, and will continue to be in one until reality forces US balance sheets to recognize the massive loan losses from past “Liquidity Injections.” Consumer, Metals and Energy Prices must also raise in proportion to past, current and future US Currency Creation.
Stock Market cannot have a true Bull Market, a market based upon profits and losses, until the manipulation by the Fed and US Treasury ends, and we * all * pass through a world of pain.
Below is the 8-Count & DJIA BEV Chart
The chart above is one boring chart, and that’s fine with me. Look at the daily percentage moves in the table below. No big up or down-days. In fact this market is mostly up-days. This is excellent market action, but we should expect a correction soon.
Daily Volatility Statistics for Wk 101
DJIA
% Move
DJIA 2%
8-Count
NYSE
70% A-D
Monday
9626.80
+0.22%
0
-
Tuesday
9683.41
+0.59%
0
-
Wednesday
9791.71
+1.12%
0
-
Thursday
9783.92
-0.08%
0
-
Friday
9820.20
+0.37%
0
-
Historical Daily Volatility is < 1.0%
Source Dow Jones
NYSE’s 52Wk Highs & Lows
NYSE 52Wk Highs and Lows are lagging indicators. A stock can change from being an Advance to a Decline stock in a single day. But it’s not so simple for a stock to go from one price extreme to the other during a 52 Week period. Let’s take a look at NYSE 52Wk Highs and Lows from 1950 to 2009. I’ve displayed the data as net 52 Week High-Lows, as a percentage of total shares traded daily on the NYSE.
Net NYSE’s 52Wk Highs are rising again. No mystery here. The largest percentage of NYSE 52 Wk Daily Lows from 1950 to 2009 happened almost a year ago. On 10 October 2008, we see 87.45% of the Stocks trading on the NYSE hit their 52 Week Lows. An amazing number! But note how this occurred during the DJIA BEV -40% Bear Market. Last March when the DJIA became the #2 All-Time Bear since 1885, only 25.86% of the NYSE’s Shares hit their 52 Week Lows. It seems that October’s BEV -40% bottom cleared the deck.
The chart below, with the Green DJIA BEV Plot, tells the story better than I can. The 2002 Bear Market was nothing special as far as NYSE 52 Wk High and Lows were concerned – strange.
It has been almost a year since the DJIA’s BEV -40%, and 6 months since its BEV -50% Bear bottoms. With the nice Bullish rise in the market, expect seeing a dramatic increase in the NYSE 52Wk Highs soon. This assumes that the stock market continues to increase. If it does, but the NYSE 52Wk Highs fail to rise dramatically, it’s a sign that the general stock market is not doing as well as the shares included in the stock indexes we watch everyday. That would not be a sign of health in the stock market, and another indication of market manipulation by the “Policy Makers.”
But why pass judgment now? I’ll publish this chart in about a month or so and we will see what’s happening in this important internal market indicator.
The Lundeen Bear Box and Step Sum is below.
As of today, (18 Sept 2009) the DJIA has increased in price 1-day more than it decreased since the beginning of the 2007-09 Bear. But the Step Sum only looks at whether the DJIA goes up or down. How much the DJIA moves each day is something the Step Sum ignores. So it’s not surprising seeing the DJIA well below its October 2007 highs. But I have to admit, from Day-467 (17 August) to Day-490 (18 September) the rise in the Step Sum has been huge. How much longer can this continue without a correction?
If the DJIA & its Step Sum continues to rise, I certainly want to come back to my NYSE 52Wk Highs and Lows chart a month from now.
The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum rises. When bearish, it falls.
Think of the “Step Sum” as the sum total of all the up and down price “steps” in a data series over time; an Advance – Decline Line for a data series derived from the data series itself. Logically, bull markets will have more net up days, while bear markets will have more net down days. Understanding the Step Sum is no harder than that.
Gold & DJIA Bull Market’s First 443 Weeks
On a weekly basis, Gold’s Bull Market has lasted 443 weeks since its start in Barron’s 02 April 2001 issue. Never has a major Bull Markets progressed so silently, as have Gold’s and Silver’s for the past 8.5 years.
Gold’s Year End Closing Price
Year
Price
Gain
1999
287.30
2000
273.90
-4.66%
2001
276.50
0.95%
2002
349.30
26.33%
2003
409.25
17.16%
2004
441.10
7.78%
2005
505.00
14.49%
2006
620.50
22.87%
2007
833.75
34.37%
2008
880.80
5.64%
2000/08 Total: 321.58%
Currently in September 2009, with Gold at $1020 an ounce, Gold has increased 372% since 2000.
From 2000 to 2009, What Other Investment outperformed Gold?
Source Barron’s
Note: in my weekly data files, my data is dated by the Barron’s issue it came from. Doing this allows me to go directly to the issue in question if I later detect an irregularity in my data.
As gold has been in a Bull Market for the past 443 weeks, I thought it would be interesting comparing Gold’s first 443 weeks with the DJIA’s.
- Gold (Barron’s Issues Dates: 02 April 2001 – 21 Sep 2009)
- DJIA (Barron’s Issues Dates: 09 Aug 1982 – 28 Jan 1991)
The above chart proves the absurdity of any assertion the Gold Market is overvalued. In past reports, I’ve claimed the DJIA in 1991 was overvalued, based upon its Historic Dividend Cycle. But I’ve never seen anyone else make this claim. So in 2009, seeing the Gold Market’s ascent in its first 443 weeks tracking closely to, yet below the DJIA Bull’s track for most of this same period, on what basis can Stock Bulls now claim Gold and Silver are overpriced?
If Gold continues to follow the DJIA’s lead, in 8-years (the 2000 DJIA top) Gold would be at $3,814. Personally, I believe Gold will do many times better than that, and we will not have to wait 8-years to see the Golden Bull leave the DJIA’s 1982-00 Bull far behind. In the chart above, we may be witnessing Gold’s breakaway move from the DJIA now.
Let’s take a quick analysis of the DJIA from 1982 to 1991, the DJIA Bull’s first 443 weeks.
For the first few months of the DJIA’s 1982-00 Bull, (Red Plot Above) few people, in or out of the stock market expected much from the DJIA’s piercing of the 1000 level. Their skepticism was warranted. After all, from 1966 to 1982, the 1000 DJIA had disappointed 5-times before, as we see below.
But by Wk100 (02 July 1984, DJIA @ 1,132, & up 44%), the general market consensus was the DJIA was in a Bull Market, with few market commentators expecting the DJIA to fall below 1000 again. That was a good call, as the DJIA then started a 200% rise that terminated in the Crash of October 1987.
At the bottom of the 87 Crash, (Wk279) the financial industry started a hugely successful, 13-year advertising blitz making the case to the general public that it was possible to retire in comfort by “investing in stocks for the long-term.” The bottom of the October 87 Crash also proved to be an excellent low-risk entry point for the adventurous. In the chart below, we see the NYSE’s Daily Volume increased significantly in the next few years. A sure sign that the public had fallen in love with what Wall Street was selling.
Look at the chart below. We can see the day in August 1982 when the DJIA Bull Market started. Look at the jump in NYSE Volume. Bull Markets feed off volume!
The point I’m making is, by Wk 443 in the DJIA’s Bull Market, financial advisors and market commentators were fully committed in promoting stocks as a means of increasing one’s wealth.
After 8.5 Years, the Gold Bull’s 443rd week, Gold and Silver have closely followed the DJIA’s Bull with absolutely * no support * from Wall Street. This is amazing Bullish by itself, but look at what the Precious Metals still have coming their way in September 2009:
- The Federal Government is expanding bank credit to a banking system the US Treasury has bailed out once already.
- The US National Debt is rising to obscene levels.
Still, it’s rare finding an “investment expert” who doesn’t wince on TV at the thought of purchasing actual gold, or silver, as a hedge for the coming devaluation of the US dollar.
Why should this be?
No Defaulting on Contracts made with the Devil!
The Washington Political Class and the Financial Industry made a pact with the Devil. The deal was that they could do anything they wanted; to anyone they wanted to do it to. The only consequences of their misdeeds would be more power and wealth for the “Policy Makers.” After reading this clause in the Devil’s contract, the greedy cretins saw no reason to read further, and signed on the dotted line at the bottom of the contract. Too bad they didn’t read a little further down, as the More Power and Wealth in Payment for Bad Deeds Clause was only to last for a few decades, after which the Hell-to-Pay Clause becames effective.
Since the 1960s, Wall Street has transformed itself from a center of capital formation, financing industry and commerce, into a den of thieves. For the past 10 years, (maybe I should say 20 years) Wall Street has spent its energy making massive financial deals of no beneficial economic consequence. They’ve become issuers of financial assets of known (to Wall Street) bad faith, and purveyors of fraudulent risk management scams in the hundreds of trillions of dollars. What were the commissions paid to Wall Street banks for derivative sales whose notional value exceeds 1-quadrillion dollars?
I don’t know. But no one steals from widows & orphans, on an industrial scale, without kicking back some of the loot to Washington’s political class. It’s just not done! I’m making no allegations of illegal activity. The lawyers in Congress made sure would get their cut in a completely legal manner.
Wall Street and Washington in the era of Greenspan, went far astray from the days when Barron’s posted Clarence Barron’s credo in the top of every issue.
“Finance: The Application of Money to Practical Ends”
- Barron’s Masthead Credo from its 1920’s issues
The fact is, after decades of inflationary “monetary policy” there is now massively more money locked up in dubious financial assets than there is stuff for these assets to purchase, * at current prices *. The Hell-to-Pay Clause comes into effect as consumer and energy prices rise to reflect this fact. Sorry to have to inform you, but there is no loophole around this clause. But it seems that China is trying hard to find a way to avoid paying the Devil his due. It’s a pity, but this is simply not possible. China would love to sell their US Treasury Bonds, but to whom, and for what?
The “Policy Makers” Gold Problem
Seeing wealth flow out of their paper assets, and into asset classes too diminutive for bloated Wall Street to fit into, signals the beginning of the end of our current era’s inflationary business-as-usual financial system. The Hell-to-Pay clause is about to become operative. There is not much the “Policy Makers” can do about it either, other than to continue to lie, and steal from Peter to pay Paul. It goes without saying, Wall Street and Washington will continue collecting their commissions and taxes for “Services Rendered.”
The viability of tens of trillions of Wall Street’s (and the World’s) stocks, bonds and “risk management instruments” are increasingly seen as questionable assets by foreign central banks and forward-thinking investors. For sometime, many foreign financial interests have stopped thinking about how they can they obtain more of what Wall Street is selling. Their current concerns are what should be done with the stock, bonds and derivatives they already have. Gold and Silver prices are rising for a reason; smart money wants out of US$ assets.
To understand the difficulties this shift in the flow of money, from financial assets to commodities, presents to Wall Street and Washington, we need only examine the US Gold and Silver Eagle markets. Here is a link and a table for the yearly mintages for US Eagles from 1986-07.
Total Mintage of US Gold and Silver Eagles
1986 to 2007
YEAR
SILVER EAGLES
GOLD EAGLES
1-oz
1/2-oz
1/4-oz
1/10-oz
1986
5,393,005
1,362,650
599,566
726,031
912,609
1987
11,442,335
1,045,500
131,255
269,255
580,266
1988
5,004,646
465,000
45,000
49,000
159,500
1989
5,203,327
415,790
44,829
81,789
264,790
1990
5,840,210
373,210
31,000
41,000
210,210
1991
7,191,066
243,100
24,100
36,100
165,200
1992
5,540,068
275,000
54,404
59,546
209,300
1993
6,763,762
480,192
73,324
71,864
210,709
1994
4,227,319
221,633
62,400
72,650
206,380
1995
4,672,051
200,636
53,474
83,752
223,025
1996
3,603,386
189,148
39,287
60,318
401,964
1997
4,295,004
664,508
79,605
108,805
528,266
1998
4,847,549
1,468,530
169,029
309,929
1,344,520
1999
7,408,640
1,505,026
263,013
309,829
2,750,338
2000
9,239,132
433,319
79,287
564,232
569,153
2001
9,001,711
143,605
48,047
128,964
269,147
2002
10,539,026
222,029
70,027
62,027
230,027
2003
8,495,008
416,032
79,029
74,029
245,029
2004
8,882,754
417,019
98,040
72,014
250,016
2005
8,891,025
356,555
80,023
72,015
300,043
2006
10,676,522
237,510
66,005
60,004
285,006
2007
9,028,036
140,016
47,002
34,004
190,010
TOTALS:156,185,582
11,276,008
2,237,746
3,347,157
10,505,508
This is just US Mintage. Had I included mintages from Canada and other National and Private Mints, it would still be obvious that the Gold and Silver Coin and Bar Markets can not absorb Tens of $Trillions Fleeing from Paper Assets without sending Gold and Silver Prices to levels Few People could believe possible today.
Source CMI Gold and Silver
Graphic by Mark J Lundeen
After decades of inflating financial asset valuations, the precious metals market of actual coins and bars, is microscopic compared to the market capitalization of the world’s bond and stock markets. If only 5% of the wealth currently contained in financial assets exited the stock and bond markets (and US AAA Rated Single-Family Mortgages) entered the physical gold and silver market, the price of metal would explode!
The rise in Gold, is signaling the decline of the US$ and financial asset’s dollar valuations. A paper asset double whammy. Wall Street and Washington will lose most of their influence internationally and domestically. That has always been the result of monetary inflation! The quote below is from William Durant, concerning 10th Century China.
“Such were the sources of that flood of paper money which, ever since, has alternatively accelerated and threatened the economic life of the world.”
-William Durant: Our Oriental Heritage, (1935) pg 780
In money’s four thousand year history, this is but one example of how monetary inflation has devastated an economy. So why are the current schools of Keynesian economics ignorant of this history? What if they’re not? Maybe the Greenspans and Bernankes of the world know exactly what they are doing. The best article on this subject was written by Alan Greenspan himself.
Seeing gold above $1,500, and rising, as US Long Bonds Yield’s exceed 6%, will signal the beginning of the end of business as usual for the “Policy Makers.”
From 1975 to 2001, the price of Gold and the yield on the US Long T-Bond were in a tight relationship. In the chart above, we see that after 2001, as Gold started its rise, US T-Bond yields went their own way, to lows not seen since the 1950s. I expect the decoupling of Gold with the US Long Bond yield is only temporary. This chart strongly suggests (demands?) that interest rates will rise significantly in the future.
If Gold has exceeded its 1980’s highs, I expect to see the yields on US Long T-Bonds to exceed their 1981 highs of 15.04%. If this should happen, the Stock, Bond and Real Estate Markets would be devastated. But it’s darn bullish for Gold and Silver!
I’m not cheering for the Bear! But things were done by the best and the brightest in academia, high finance, Congress, and the Federal Reserve. They sowed our economy with inflation, and we will reap the consequences. It really makes no sense standing on the tracks as a freight train comes speeding down the line. Step out of the way! That’s my opinion anyways. CNBC will tell you something else. But as always, the decision is yours.
COMEX Gold Default and the Price of Gold
COMEX Gold and its “Open Interest” (number of active contracts trading) are only paper contracts, but at present, they are good as gold in the minds of many. A fact in common with all futures markets is that most contracts traded are ultimately settled in cash. So delivery of the contract is possible but not usually demanded. After all, who wants 5,000 bushels of Corn dumped on their driveway?
This is legitimate, as most traders currently live or die in a world that counts its profits and loses in US Dollars. However, with the current management of America’s fiscal and monetary affairs, the day is coming when gold traders will stop trading gold at the COMEX as a means of gaining more US Dollars, and begin to see their COMEX contracts as a vehicle to exchange their undesirable dollars for gold.
The problem this creates is that the COMEX doesn’t have sufficient gold in its vaults to deliver actual gold to settle all the gold contracts being traded. There is nothing unethical in the COMEX doing business this way, as COMEX Gold Contracts have always been understood primarily as hedges against dollar losses in the Gold Market. This is true in all futures markets. But the possibility of actual delivery was always there, if seldom used by most traders. If the Obama Administration and Congress continues to inflate the US money supply to worthlessness, the day is coming when gold traders will refuse US Dollars, and demand settlement in gold.
This will cause a technical default in the Gold Futures markets. It’s a default, as the terms of the contract cannot be honored by the short side counterparties, or the exchange. But only a technical default, as the CFTC will allow the COMEX to refuse delivery of gold, and insist that traders demanding physical gold accept US dollars from their Wall Street counterparties – or receive nothing in settlement.
This recently happened with Barrick Gold’s counterparties, although it happened outside of the jurisdiction of the CFTC and the COMEX. Barrick owed actual gold, as payment for its gold-loans it had taken during the 1990s and early 2000s. Barrick, the largest gold miner in the world, was allowed to pay back its gold loans in US Dollars. The original gold lent to Barrick came from various Global Central Banks’ gold reserves, and I suspect from the US Treasury’s gold vaults too.
What a technical default on the COMEX will do to the price of gold is not hard to understand. If traders are refused gold, but instead handed a check, payable in dollars, for settlement on their gold contracts, these gold traders will convert their dollars into gold at coin shops and bullion dealers. That is a very tiny door for all those dollars to squeeze through! A default at the COMEX will rocket the price of gold to dizzying heights. How much impact this will have on the price of gold can be understood in the following example.
From 1986 to 2007, (21 Years, sorry I don’t have data for 2008 & 09) the US Mint used 14,282,221 ounces of gold to mint its 1oz and lesser weight Gold Eagle Coins, as per the table above.
In the last CFTC Report available at the time of writing my report, there were 451,713 contracts in the COMEX Gold’s Open Interest; each contract is for 100 ounces of gold. That represents a potential claim of 45,171,300 million ounces of gold trading in NY daily for the week of 08-Sep-2009.
Ratio of Real Gold to Comex Paper Gold 21 Years of Gold Eagle Production14,282,221
Paper Gold Ounces Traded On Comex45,171,300
Ounces Paper to Ounces of Real Gold3.16
21 Years of US Gold Eagle Production (1986-07) is only 1/3 of the Paper Gold that Traded at the COMEX in Early September 2009
Sources: CMI Gold & Silver & COMEX
Graphic by Mark J Lundeen
The 21-year mintage of US Gold Eagles, (1986-07) is not the entire world’s supply of gold, nor is the COMEX the only market in the world, where paper gold contracts trade. But the world purchases Gold Eagles and trades paper gold in New York at the COMEX. It’s interesting seeing the ratio of 3.16 ounces of COMEX Paper Gold to each ounce of actual gold in Gold Eagles. I expect this 3.16 ratio of paper to actual gold to be very low. A ratio of 50:1, or greater, might be more appropriate, as there are many other forms of paper gold other than COMEX contracts, like the gold-loans Barrick Gold defaulted on. This same analogy is also true for the Silver Market, but most likely even more so!
Ultimately, I expect purchase of Gold & Silver Eagles (or any physical form of gold and silver) will prove to be a wiser decision, than trading paper gold on the COMEX. What Congress, President Obama, as well as the US Treasury and Federal Reserve are doing right now, will ensure I’m proven correct.
Mark J Lundeen
18 September 2009
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