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From the “Yellen Call” to “globalization” and from “disruption” to “dumping“, 2017 had it all and Goldman Sachs’ annual ‘themes’-driven crossword is just the ticket as the final few minutes of the trading year tick away…
Via Goldman Sachs,
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The Answer (don’t cheat!) – click image for legible version
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Americans who are lucky enough to own their own little slice of the ‘American Dream’ are about $2 trillion wealthier this year courtesy of Janet Yellen’s efforts to recreate all the same asset bubbles that Alan Greenspan first blew in the early 2000’s. After surging 6.5% in 2017, the highest pace in 4 years according to Zillow data, the total market value of homes in the United States reached a staggering all-time high of $31.8 trillion at the end of 2017…or roughly 1.5x the total GDP of the United States.
If you add the value of all the homes in the United States together, you get a sum that’s a lot to get your mind around: $31.8 trillion.
How big is that? It’s more than 1.5 times the Gross Domestic Product of the United States and approaching three times that of China.
Altogether, homes in the Los Angeles metro area are worth $2.7 trillion, more than the United Kingdom’s GDP. That’s before this luxury home on steroids hits the market.
In the New York City metro, total home values equal $2.6 trillion, more than the French economy — and enough money to buy 8,494 Boeing 787-10 Dreamliners.
And here is a look at the “Housing Bubble 2.0” on a state-by-state basis:
Ironically, among the 35 largest U.S. housing markets, the one to experience the greatest total home value growth happened to be Columbus, Ohio, which gained 15.1% to $152.3 billion.
Meanwhile, the millions of Americans who have been forced into renting following their short sales or foreclosures in the wake of the last housing bubble, threw a record $485.6 billion dollars down the drain in 2017 on rent, an increase of $4.9 billion from 2016. Not surprisingly, folks in New York and Los Angeles spent the most on rent in 2017 while San Francisco rents soared to such high levels that renters collectively paid $616 million more in rent than Chicago renters did, despite there being 467,000 fewer renters in San Francisco than in Chicago.
Of course, as we pointed out at the end of November, while staggering, the pricing gains on housing only look to just now be heating up…
As the latest housing data shows an uptick in sales, Case-Shiller’s 20-City Composite index surged 6.19% YoY in September – the fastest rate of gain since July 2014.
As Bloomberg notes, the residential real-estate market is benefiting from steady demand backed by a strong job market and low mortgage rates. The ongoing scarcity of available houses on the market, especially previously-owned dwellings, is likely to keep driving up prices.
Eight cities have surpassed their peaks from before the financial crisis, according to the report.
All 20 cities in the index showed year-over-year gains, led by a 12.9 percent increase in Seattle and a 9 percent advance in Las Vegas (slowest gains in Washington area at 3.1 percent, Chicago at 3.9 percent)
Luckily, American’s are too ‘smart’ to get crushed by another housing crash this cycle…no, this time around they’re not taking any chances and are instead taking all their equity out of their homes to buy Bitcoin…which is a genius plan if we understand it correctly.
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After tumbling in early December, gold has exploded higher since The Fed hiked rates on 12/13, hitting $1310 today – the highest since Oct 16th.
And as Gold has soared so the dollar index has collapsed…
Interestingly in the last month, Gold and Bitcoin have seen a wild ride – converging again today…
As Reuters reports, the dollar’s drop to three-month lows versus a basket of currencies on Friday lifted gold to its highest since mid October.
Putting the year’s relative performance in context…
This is the dollar’s worst year since 2003… despite 3 Fed rate hikes, repatriation expectations, and exuberant economic hopes.
“In the last couple of weeks, trade has been relatively thin, yields have been under pressure and the dollar as well, so gold has profited from that,” ABN Amro analyst Georgette Boele said. “If you look over the year, dollar weakness has been the main theme.”
The impact of three U.S. interest rate hikes this year was offset by the dollar’s weakness, Boele said. “The dollar is the most important driver, and then real yields. The Fed is increasing rates, but the dollar’s not profiting.”
This is gold’s best year since 2010… despite no volatility, no inflation, and a total lack of comprehension of any geopolitical risk in equity markets.
Gold, which is also on course for its best month since August, has also benefited of late from technically driven momentum, analysts said.
ScotiaMocatta’s technical team said in a note that chart signals for the metal look positive after it broke above its 100-day moving average this week at $1,295 an ounce. “Momentum indicators are bullish.”
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Just yesterday we warned that the lives of the world’s new “Bitcoin Billionaires” had just become a bit more complicated after reports surfaced that one such crypto investor, Pavel Lerner, was kidnapped by a group of armed men wearing ski masks as he left his office in the Obolon district of Kiev earlier this week.
While it may have seemed that his fate was sealed at the moment of his kidnapping, the Financial Times has just confirmed the Lerner has been released after paying his kidnappers a $1 million ransom in Bitcoin.
An executive of a UK-registered cryptocurrency exchange kidnapped in Ukraine this week has been released after paying a ransom of more than $1m in bitcoins, according to an adviser to the Ukrainian interior minister, in a crime he dubbed “bitcoin kidnapping and extortion”.
“He was kidnapped by an armed gang for the purpose of extorting bitcoins,” Mr Gerashchenko told the Financial Times, adding: “We have operative information that he paid more than $1m worth of bitcoins.”
He said Mr Lerner was held for one and a half days, “then released in a state of shock. … He got very lucky that he remained alive.”
As we noted yesterday, Pavel, a Russian citizen, has a number of startups in Ukraine linked to cryptocurrency mining and blockchain technology. In addition, he is also the CEO of EXMO, a UK-based Bitcoin exchange.
According to prior reports from The Telegraph, Lerner (40) was pulled into a black Mercedes Benz by a group of armed men wearing ski masks as he left his office on December 26. Adding to the intrigue of the abduction, EXMO’s website suffered a DDOS attack yesterday morning, which knocked trading temporarily offline, just as news of the kidnapping begin to draw public attention.
Following the news of Lerner’s disappearance, EXMO issued a statement requesting “any information regarding his whereabouts” and assuring customers that he could not be ‘convinced’ to give up their Bitcoin or personal data stored on the exchange.
A spokesman was unavailable for comment but a statement sent to RT, the broadcaster backed by the Russian government, said that Mr Lerner’s kidnapping would not affect the business.
“We are doing everything possible to speed up the search of Pavel Lerner,” it said.
“Any information regarding his whereabouts is very much appreciated. Despite the situation, the exchange is working as usual. We also want to stress that nature of Pavel’s job at EXMO doesn’t assume access either to storages or any personal data of users. All users funds are absolutely safe.”
Of course, Lerner is not the first Bitcoin extortion target for the world’s new breed of crypto terrorists. Earlier this month we reported that, Nice Hash, the largest crypto-mining marketplace, was hacked with over 4,700 bitcoins, worth over $62 million, stolen and ultimately ending up at the following address:
Conclusion: If you’ve made a small fortune trading Bitcoin over the past couple of quarters it may be best to keep that information to yourself…
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Since the start of 2017, a number of opportunistic investors sought to profit from the expected demise of the physical retail sector, a trade which we and others dubbed the next “Big Short” – also known as the “Amazon crushes everyone” trade – and in which investors bought credit-default swaps against subordinate bonds in certain CMBX derivative indices that are tied to CMBS deals with healthy concentrations of loans against shopping malls and retail centers.
As CMBS advisory Trepp notes, the trade gained notoriety last February, when spreads for the BBB- and BB rated components of the indices went through a massive widening. They continued to widen at a somewhat steady clip until only recently. That alone indicates the trade, particularly if executed early, has paid off nicely.
CMBX consists of a group of indices that are each linked to a group of 25 CMBS conduit deals issued during a particular year. The indices are used as an indicator of the overall performance of the CRE market and enables investors to make bets on corresponding long and short positions.
Investors who expect deals in a specific index to incur losses can buy protection: they would pay a fixed-rate premium to a seller of protection who would bet against losses. If losses occur, the seller of protection would cover them. So, a short trade becomes most profitable when deals in an index suffer actual losses. It also becomes profitable in the event spreads widen, as they have.
Spreads Move Wider and Wider
The spread blowout in CMBX has been especially pronounced for the 6 and 7 series, which are tied to CMBS deals issued in 2012 and 2013. Those spreads have widened largely due to the perceived greater exposure to struggling mall properties and retail bankruptcies. The focus of the trade has been placed on junior bonds in the lower credit stack because the notes are typically the first to incur losses when distressed loans are liquidated or written off.
Compared to their tightest levels in late January, BBB and BB spreads for the two segments initially widened between 130 and 295 basis points, respectively, in just two months as word about the trade emerged. While the sell-off paused momentarily in April, spreads for the BBB- tranches of CMBX 6 and 7 resumed their climb by August. The spreads then peaked at year-to-date highs in early November that were 358 and 202 basis points wider, respectively, than their lows in January.
By the same token, spreads for the lower credit BB bonds in those same indices reached highs that were a staggering 499 and 254 basis points wider than their narrowest points roughly 10 months ago. During this devaluation period, the traded price pegged to the BBB and BB portions of CMBX 6 and 7 series were reduced by 10 to 17% as investors rushed to crowd the trade.
Prices and spreads for the derivative positions have since recouped some of their losses as the market has begun to catch on that the underlying bonds are being priced below their actual worth.
Broader Retail Worries Weigh on CMBX
It’s no secret that the retail landscape is in the midst of an unprecedented revolution. The cause of the blowout in CMBX spreads centers on the idea that the weak performance of certain retailers, particularly JCPenney, Sears, and Macy’s, would impact the properties they occupy. The three department store chains often anchor class-B and -C malls and have been shuttering stores by the dozens.
Such closures often trigger co-tenancy clauses for other in-line mall tenants, prompting them to downsize or vacate altogether. The thinking has been that properties, particularly those in secondary or tertiary markets, exposed to the three firms are at greater risk of default and losses. As such, those holding short positions in certain CMBX indices would receive a payout.
But has the bet paid off? Not quite. Retail loans are the most exposed property type for both the CMBX 6 and CMBX 7 indices with a 38.24% and 32.4% concentration, respectively. But only 1% of the remaining balance of retail assets has been marked as delinquent.
So far, only 40 retail loans in deals tied to the CMBX 6 and 7 series have paid off, and four incurred losses totaling $4.3 million. Each of those notes disposed was in a 6 series deal. No losses have been attributed to deals tied to CMBX 7. But the number of distressed retail mortgages will likely increase as they inch closer to their scheduled maturity dates and collateral performance continues to deteriorate.
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The art of (future) war is rapidly evolving with Beijing spearheading the push into the first modern operational hypersonic glide vehicle (HGV). According to The Diplomat, the weapon, known as the Dong Feng (“East Wind”), DF-17 for short, is designed to challenge existing missile defense systems, such as America’s anti-ballistic missile defense system called: Terminal High Altitude Area Defense (THAAD).
An unnamed U.S. government source, who has studied recent intelligence reports on the People’s Liberation Army Rocket Force (PLARF), said China conducted two separate tests of the hypersonic missile back in November. The first test was conducted on November 01 and the second test took place on November 15. The Diplomat signals, that the November 01 test was the first Chinese ballistic missile launch to take place after the Communist Party of China’s 19th Party Congress in October.
Following half-dozen development tests between 2014-2016, the most recent tests were launched from the Jiuquan Space Launcher Center in Inner Mongolia. The Diplomat then explains that the November 01 test was widely viewed as successful after the hypersonic weapon hit its intended target “within meters.”
During the November 1 test flight, which took place from the Jiuquan Space Launcher Center in Inner Mongolia, the missile’s payload flew to a range of approximately 1,400 kilometers with the HGV flying at a depressed altitude of around 60 kilometers following the completion of the DF-17’s ballistic and reentry phases.
HGVs begin flight after separating from their ballistic missile boosters, which follow a standard ballistic trajectory to give the payload vehicle sufficient altitude.
Parts of the U.S. intelligence community assess that the DF-17 is a medium-range system, with a range capability between 1,800 and 2,500 kilometers. The missile is expected to be capable of delivering both nuclear and conventional payloads and may be capable of being configured to deliver a maneuverable reentry vehicle instead of an HGV.
Most of the missile’s flight time during the November 1 flight test was powered by the HGV during the glide phase, the source said. The missile successfully made impact at a site in Xinjiang Province, outside Qiemo, “within meters” of the intended target, the source added. The duration of the HGV’s flight was nearly 11 minutes during that test.
The source told The Diplomat, this was “the first HGV test in the world using a system intended to be fielded operationally.” U.S. intelligence assessments indicate the DF-17 could be operational as soon as 2020.
China just showed its hypersonic-BGV in a vid on 08 Oct. Probably a test design model, but AFAIK this is first pics of an actual object 1/ http://pic.twitter.com/EXIMHkXTEA
— Raymond Wang (@soraywang) November 5, 2017
“Although hypersonic glide vehicles and missiles flying non-ballistic trajectories were first proposed as far back as World War II, technological advances are only now making these systems practicable,” Vice Admiral James Syring, director of the U.S. Missile Defense Agency, said in June, during a testimony before the U.S. House Armed Services Committee.
In 2015, Lockheed Martin, well aware of China’s HGV threat, dusted off their plans to upgrade its THAAD missile system to counter hypersonic weapons.
Lockheed Martin is hoping the maturing threat of hypersonic boost glide vehicles from ambitious adversaries will spark interest in the company’s dormant plan to design a more capable interceptor for the Terminal High-Altitude Area Defense (Thaad) air defense system.
Chinese officials confirmed they conducted a test last month of what they are calling a hypersonic strike vehicle. U.S. officials worry this missile could outsmart their defenses.
That said, China is not the only superpower in the HGV game, the United States and Russia are developing hypersonic weapons, as well.
And lastly, the Rand Corporation warns, “the trajectory and capabilities of HGVs provide them with some unprecedented attributes that may be disruptive to current military doctrines of advanced nations.”
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2017 saw global central bank balance sheets explode almost 17% higher (in USD terms) – the biggest annual increase since 2011 – and while correlation is not causation, one can’t help but see a pattern in the chart below…
Global stocks up, Global bonds up, Global commodities up, Financial Conditions easier (despite 3 Fed rate hikes), and Dollar down (most since 2003)…
As we noted earlier, Craig James, chief economist at fund manager CommSec, told Reuters that of the 73 bourses it tracks globally, all but nine have recorded gains in local currency terms this year.
“For the outlook, the key issue is whether the low growth rates of prices and wages will continue, thus prompting central banks to remain on the monetary policy sidelines,” said James. “Globalization and technological change have been influential in keeping inflation low. In short, consumers can buy goods whenever they want and wherever they are.”
Still, the good times may not last: an State Street index that gauges investor risk appetite by what they actually buy and sell, suffered its six straight monthly fall in December, Reuters reported.
“While the broader economic outlook appears increasingly rosy, as captured by measures of consumer and business confidence, the more cautious nature of investors hints at a concern that markets may have already discounted much of the good news,” said Michael Metcalfe, State Street’s head of global macro strategy.
As 2017 winds to a close, Bloomberg reports that a look at the winners and losers around the globe shows that, broadly speaking, the riskiest assets performed well, with bullish sentiment on display in stocks, emerging-market sovereigns and corporate debt. Securities generally seen as the safest and least volatile bets — think Japanese government bonds — trailed behind.
Here’s the best and worst performers in various asset classes over the past year:
Venezuelan equities soared 3883% in 2017 in USD terms (based on the ‘official’ currency), but that return is destroyed when one adjusts for the 3450% hyperinflationary surge in the number of ‘street’ bolivars needed to buy a USD…
The performance is likely a lot less since the noise in the index and the FX rate is incredible.
While Mongolian stocks were best in USD terms, bulls in Ukraine had a good year after the International Monetary Fund said in May that it sees “welcome signs of recovery” for the economy and “a promising basis for further growth.” It was part of a broader rally in emerging markets as investors flocked to developing nations in hopes of higher returns.
It wasn’t a good year, however, to have bet on stocks in Qatar, UAE, Russia, or Pakistan. The Persian Gulf country was thrown into chaos mid-year when Saudi Arabia, the United Arab Emirates, Bahrain and Egypt cut diplomatic and transport ties. In Pakistan, the index was coming from a high base, but also suffered from foreigners pulling money out of the market.
In local currency terms (excluding Venezuela), Argentina, Turkey, and Hong Kong outperformed while UAE and Russia lagged…
As Bloomberg reports, the three-decade bull run for fixed income rolled on in 2017, defying yet again predictions that faster inflation and tighter monetary policy would bring it to an end.
The bond world’s best performers were yesteryear’s losers, with Greece and Argentina among the standouts.
It took effort to lose money on bonds this year — the Japanese central bank’s stitch-up of its government-debt market, and Venezuela’s economic collapse made those two the worst performers in the developed and emerging categories, respectively.
Tiny Belize earned top marks in the emerging government-debt category after an upgrade from Moody’s Investors Service in April.
Turning to the corporate-debt world, U.S. high-yield securities saw a wide dispersion of results, from high-flying food-and-beverage, retail and transport companies to trauma for holders of bonds sold by commercial printer Cenveo Corp.
In the emerging-market corporate debt category, an Indonesian energy company topped the list, while securities tied to Brazilian construction giant Odebrecht SA — which is embroiled in a corruption scandal that stretches across South America — proved to be ones to avoid.
Palladium, which is typically used in pollution-control devices for gasoline vehicles, led gains in precious metals this year by climbing more than 50 percent as investors bet on increased usage in vehicles. Copper and aluminum bulls also had a great year. Those gains were largely tied to better economic prospects across the globe, which would mean higher usage of industrial metals.
On the down side, sugar and natural gas had a bad year. The sweetener has been falling on concerns of a global surplus, while natural gas recently hit a 10-month low following two warm winters that left stockpiles at high levels.
The biggest gainer in the currency space is a bit on the obscure side: the Mozambique new metical. The East African country has struggled to control inflation following a debt crisis, but the central bank has said it wants to achieve a lower and more stable rate.
On the down side, the Uzbek soum tumbled after the gold-rich republic removed the currency’s peg to the dollar.
And finally…
Of the largest cryptocurrencies (there are over 1300), while Bitcoin had a great year (up over 1400% in 2017), it was Ripple that was the undoubted winner – rallying almost 28000%!!
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Authored by Damir Mujezinovic via Inquisitr.com,
Ron Paul does not believe the U.S. will break into separate countries, like the Soviet Union did, but expects changes in the U.S. monetary policy, as well as the crumbling of the country’s “overseas empire.”
The godfather of the Tea Party movement and perhaps the most prominent right-leaning libertarian in America, Ron Paul, believes the economic boom the United States experienced under President Trump could be a “bit of an illusion.”
Mr. Paul sees inequality, inflation, and debt as real threats that could potentially cause a turmoil.
“the country’s feeling a lot better, but it’s all on borrowed money” and that “the whole system’s an illusion” built on corporate, personal, and governmental debt.
“It’s a bubble economy in many many different ways and it’s going to come unglued,”
In a recent interview with the Washington Examiner, Paul said,
“We’re on the verge of something like what happened in ’89 when the Soviet system just collapsed. I’m just hoping our system comes apart as gracefully as the Soviet system.
We have ownership of these countries, but it’s not quite like the Soviets did. I think our stature in the world and our empire will end, and that’s when, hopefully, the doors will be open.”
The crumbling of America’s “overseas empire,” as Mr. Paul calls it, could be a chance for the libertarian movement to captivate the country’s imagination by 2020.
The fact that the system is coming apart could be a big opening for the libertarians, Paul claims. However, it is not just Trump administration’s foreign policy that could play a part in this.
“I think the foreign policy is a total disaster. Trump’s approach sounds good one day but the next day he’s antagonizing everyone in the world and thinks we should start a war here and there,” he said.
The former politician and host of the popular Ron Paul Liberty Report podcast has been a vocal critic of the NSA’s surveillance program, the USA PATRIOT Act, the War on Drugs, and the government’s fiscal policies as a whole. Interestingly, the topic of one of Mr. Paul’s recent podcasts was bitcoin.
“The government, for its own reasons, monopolized the creation of money. Money originated in the marketplace. Let people sort it out,” he says.
Apart from criticizing Donald Trump, the “Tea Party’s Brain,” as some journalists have called him, criticized Attorney General Jeff Sessions. Mr. Paul considers Sessions to be a threat to civil liberties. According to Paul, Trump’s foreign policy is a “total disaster,” as well as the war on terrorism and the “war on immigrants,” as Mr. Paul puts it. He went as far as calling these policies authoritarian-fascism.
The former U.S. Representative, author, and physician is cautiously optimistic about the future of the libertarian movement. Although he sees Trump’s policies and what he predicts to be the imminent crumbling of the American economy and the country’s overseas empire as an opening for the libertarians, he admits that the movement has a lot of work to do before American voters accept a true libertarian. Still, Paul thinks having a popular candidate in 2020 is very possible.
“We as libertarians have some work to do before [voters] are going to accept a true-blue libertarian,” he said, “but I think moving in that direction and having a popular candidate [in 2020] is very possible.”
“If they only hear our message, I know they would choose liberty and sound money and freedom and peace over the mess we have today,”
In the 2016 election, third parties faded to the background. The Libertarian Party nominee for President of the United States, Gary Johnson, won 3 percent of the vote, outperforming the 2012 results when he won 0.9 percent.
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Two California Professors claim that farmers markets racist “white spaces” because they promote “gentrification” in poor neighborhoods where the “habits of white people are normalized.”
This, according to a new book by San Diego State University geography professors Pascale Joassart-Marcelli and Fernando J. Bosco entitled “Just Green Enough,” an environmental anthology focusing on urban development.
“Farmers’ markets are often white spaces where the food consumption habits of white people are normalized,” the SDSU professors write, according to Campus Reform.
[F]armers’ markets are “exclusionary” since locals may not be able to “afford the food and/or feel excluded from these new spaces.”
This social exclusion is reinforced by the “whiteness of farmers’ markets” and the “white habitus” that they can reinforce, the professors elaborate, describing farmers’ markets as “white spaces where the food consumption habits of white people are normalized.”
This is a paradoxical outcome, since farmers’ markets are often established in the interest of fighting so-called “food deserts” in lower-income and minority communities. Since grocery stores in low-income communities often lack fresh quality produce, the professors say that in some cases, farmers’ markets may be only source of quality and affordable produce for locals.
The researchers claim that 44 percent of San Diego farmers’ markets are located in wealthier parts of town, which “attract households from higher socio-economic backgrounds, raising property values and displacing low-income residents and people of color” (except, perhaps, wealthy people of color?).
The professors feel that “curbing gentrification” may be a difficult task, however “strong community involvement” is needed to ensure that the “needs of the poorest…residents are prioritized,” while local governments can choose to enact “equitable zoning policies, rent-control laws, and property tax reforms in favor of long-time homeowners.”
“Ultimately,” conclude Joassart-Marcelli and Bosco, countering gentrification “requires slow and inclusive steps that balance new initiatives and neighborhood stability to make cities ‘just green enough.’”
Considering the typically liberal membership among farmers’ market collectives, it will be interesting to see if there’s any response from hard working farmers given this opening salvo in the granola wars.
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Authored by Pater Tenebrarum via Acting-Man.com,
Another recurring pattern consists of the seasonally strong period in gold around the turn of the year, which is bisected by a mid to late December interim low in the gold price. An additional boost can be expected in January and Feburary from the strong seasonal uptrend in silver and platinum group metals as well (to see the seasonal PGM charts, scroll down to our addendum to this recent article by Dimitri Speck).
10 tola cast bar made in Switzerland for Asian markets.
Rallies in silver tend to be quite supportive for precious metals stock indexes, as silver stocks have an even higher beta than their gold brethren (note in this context that the XAU is the more broad-based of the two indexes these days and contains far more silver stocks than the HUI – see these lists of the current XAU and HUI constituents for details).
Below is the 20-year seasonal gold chart, with the period from the December 20 interim low to the late February peak highlighted. Note that the statistical data shown on the chart refer specifically to the highlighted period, which in turn is an average of the action at this time of the year over the past 20 years.
Obviously, there are years in which no gain is achieved in the seasonally strong period, but over the past 20 years the probability that prices would rally was 70% (14:6 = 7:3). Moreover, while the gains in profitable years ranged from +8.52 to +17.98%, losses were much smaller, confined to a range of just -1.60 to -3.30%.
Interestingly, even if one averages only the performance of bear market years (i.e., years which close at a y/y loss), the period of strength still shows up during January. We suspect this is due to the exceptional seasonal strength in silver during this time period, gold probably tends to rise in sympathy.
Gold, 20-year seasonal chart with all relevant statistics. The December interim low is close to the mid December Fed meeting, i.e., in recent years the seasonal pattern and the “FOMC relief rally” were going hand in hand – click to enlarge.
The 20-year seasonal chart of silver exhibits even more strength over a slightly longer time period starting on the same date: the probability of a rally is 80%, and the average gain is 9.39% (profits ranging from +12.90 to +42.92%), which is a stunning 58.70% annualized.
Note: regardless of how long the period chosen for the calculation is, the seasonally strong period in silver is always clearly visible and exceptionally large; it is even noticeable if one averages only bearish years. Apparently industrial users traditionally stock up at the beginning of the year. Strength in silver tends to particularly helpful for the performance of the XAU and HUI indexes – click to enlarge.
By coincidence, a 13 ½ month gold time cycle discussed by Tom McClellan in this article also aligns very closely with the seasonal trend this year, as it bottoms in December. Here is a chart that shows this cycle. Note that both full and half-cycles apparently often tend to align with lows and occasionally consecutive lows “surround” the projected cycle low. In short, this is not the most precise of cycles.
A gold time cycle followed by Tom McClellan – its 2017 trough is in the last week of December – click to enlarge.
Such “fixed” time cycles generally have less validity than seasonal patterns, but we thought it was interesting that this particular one happens to coincide with the December turning point in the seasonal trend and the other data points pointing to a December trend change this year.
Regarding sentiment, we want to mention two data points that stood out around the time of the mid-December low: a) just ahead of the FOMC meeting the second-lowest DSI reading of the year occurred (DSI= daily sentiment index of futures traders: 13% bulls – the lowest was 10% at the July low), and b) at the same time the sentimentrader Optix indicator (which combines positioning data in futures and options with the most prominent surveys) fell to 31 points – the lowest reading since early January of 2016.
Gold Optix – not only was the reading of 31 points the lowest since 04 January 2016, it also indicated that bearish sentiment became more pronounced despite gold trading at a higher level than on previous occasions when the Optix reached short term lows this year. This can be interpreted as a bullish divergence. In fact, gold price/ Optix level divergences at lows are quite a common feature (interestingly, they are not as frequent at peaks) – click to enlarge.
Sentiment data follow prices, which tends to limit their usefulness, especially in strongly trending markets. We have noticed that depending on whether a strong overarching uptrend or downtrend is underway, the range in which the Optix moves will shift up or down. Once one has a good idea of what this range is, one can expect that readings near its upper and/or lower bounds will at least lead to short term counter-trend moves, regardless of the primary trend.
If the gold market moves sideways – as it has done over the past 1 ½ years – the Optix tends to be quite reliable as a short term contrary indicator. An extremely low (or high) reading that occurs near the boundaries of a sideways price range is usually associated with a medium to longer term opportunity.
We have kept the best for last – this may well be the most interesting and encouraging of the data points we have discussed. As our friends at INK Research in Canada recently reported, lately insider buying at gold companies has basically “gone off the charts” compared to historical standards.
The spike in insider buying in the gold sector this fall (which went hand in hand with the decline in prices) was already the second one this year, but it attained extraordinary proportions. – click to enlarge.
There are several things worth noting here: first of all, insider buying in the gold sector is rare, especially outside of the exploration/ junior sub-sector. When exploration company insiders buy, it signals that they are confident in discoveries they have made and believe that investors have yet to realize what their true value is.
While explorers no doubt benefit from rising metal prices, they are not a sine qua non for their success – it is enough if prices manage to remain fairly stable. By way of example, if a company starts out with nothing but a hunch about where to drill, and it suddenly finds a million ounces of near-surface high-grade gold, it won’t matter much whether gold trades at $1,200 or $1,300 – a re-rating of the stock is certain to happen either way.
Two things were remarkable about the recent surge in insider buying: for one thing, it was the biggest since the fall of 2015 (which was one of the most noteworthy such buying sprees in a long time as well). Secondly, it was quite broad-based: there was a lot of buying from insiders at senior and mid-tier producers. As an example, numerous Barrick Gold (ABX) insiders purchased sizable amounts of stock in the public markets (n.b.: it is best to consult Canadian filings, a number of US data providers are silent on the matter).
ABX, daily over the past two years. The chart pattern is of course reminiscent of the HUI pattern, only it looks actually a bit weaker. Since April the declines seem to be a lot more vigorous than the bounces. Insiders have bought the stock hand over fist between late November and late December though – presumably the chart will soon improve – click to enlarge.
Keep in mind that gold mining insiders have no special insight in future gold price trends. So what is the message when insiders at senior and mid-tier producers buy stock in the companies they run? Obviously their buying has to be based on what they do know and have control over. We would take it as a sign that the trend toward better cost control and improving margins continues apace, and insiders evidently believe the market is still underestimating it.
Lastly, gold mining insiders have definitely proved savvy with respect to their timing in recent years. Their purchases from mid to late 2015 were certainly amply rewarded, and they actually happened to catch at least a short term low this summer as well. In any case, it is definitely worth paying heed when they buy as much as they recently have – one would normally expect this to be at least of medium term significance.
To summarize: chart patterns, seasonal trends and cycles, sentiment and insider buying all paint a fairly positive picture for the gold sector at the moment. This should at least be good enough to support a short term move higher, and perhaps more.
However, as we noted at the beginning of Part 1, things are never as clear-cut as one would like. One fly in the ointment is the fact that the major fundamental gold price drivers are not exactly bullishly aligned right now. Similar to what we observed earlier this year already, they are at best in a neutral or slightly bearish position.
That said, they are pregnant with possibilities (i.e., they all could quite easily turn bullish in view of the increasingly hostile monetary backdrop). We will discuss fundamentals and inter-market relationships relevant to gold in a follow-up post shortly.
Moribund gold bug hoping for better times.
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