Gold’s Last Tango?

Loving the Tango

Something strange is happening in Comex Gold.

Gold and DX (US Dollar Index) have been locked in a loving embrace since at least March 2006, where they have glided across the dance floor in effortless harmony. As partners in the Tango, one’s step forward has meant the others’ retreat. The predictability of this relationship has allowed us to plunder both markets as a buy signal in one has almost inevitably coincided with a sell signal in the other, so Danielcode traders, the spectators to this enthralling dance have been grabbing the opportunities with both hands. In the following chart we see that relationship with the weekly chart, having Comex Gold in the top pane and DX below.

So intense has the Gold-DX relationship been that we have become used to taking the plethora of D2 or derived data signals that both the correlated and the “anti” trades have provided. To recap, the tight correlations between Gold, Silver and HUI means that for this group of markets, the proprietary T.03 signals for one of the group has meant that we expect, and have an extremely high probability of seeing, the same trade mimicked in the highly correlated markets, hence if we have a T.03 buy signal in Gold that is elected, we expect the same directional move in Silver and HUI. The correlations say nothing about quantum so we generally see the same move but of varying, non correlated momentum.

The size or momentum of the correlated trade is a function not only of buying power in the ascending market but also its ability to gain traction by getting into the area where stop loss covering will fuel the move. An outstanding example of this market behaviour occurred on 11/21/ 2008 when Gold, in response to its Danielcode derived T.03 Buy signal posted
for members at the DC website just 2 hours after the close of US markets on Wednesday 11/12/2008, made its turn the next day precisely at its DC number target and rallied for 9 trading days gaining 5 from its November low, taking out the old swing high at 778.3 and getting the boost from stop loss covering as it broke that price level.

Silver, by contrast, mimicked the Buy signal in Gold as we always expect, but its trip into the high of the move was much more muted as it failed to take out its swing high at 1080.5 and missed the opportunity to savage the shorts’ stops lurking just above that number. The following chart with Comex Gold in the top pane and Silver below demonstrates the trade graphically.

Moving along the time line of the Comex Gold chart (below) we see how the correlations in the precious metals group and the “Anti” trade in DX have allowed us to capture almost every turn in Comex Gold. The rewards for diligent members have been vast. This is not an exclusive list of signals in this market but you will get the picture.

Is the Dance Over?

Today, for the first time since we called the tops in Gold and Silver and the corresponding low in DX in a Financial Sense article from February 2008, we are seeing a breakdown in the specific negative correlation of Gold and DX. Looking at the daily chart we can see a number of divergences in degree of market moves since the March turns but the essential counter relationship has been maintained. The following chart, again with Comex Gold in the upper pane and DX in the lower pane highlights the most prominent divergences.

For the past week we have seen the strange spectacle of both Gold and DX rallying at the same time. Admittedly, we are in a holiday shortened week and 4 days trading does not a new market characteristic make, BUT...

It is a noticeable change in the character and relationship of these markets and for Gold buffs, that should be a matter of great interest.

Fundamentally, there are plenty of good arguments to support higher prices for both Gold and DX. The carnage in global credit markets, serial bank and financial institution failures
and bailouts, shrinking confidence in regulatory and prudential standards everywhere, AIG, Lehman Brothers, Citibank, Merrill Lynch, the Iceland Banks, the UK Banks, Irish Banks and Indian IT companies, are enough to send shivers down the spines of the bravest savers and investors alike. The Sovereign wealth funds who jumped into equity and bond markets in March last year, thinking that they could time the market’s bottom, have been handed their heads. More nuanced thinkers still realise that the flow of toxic debt has not been disclosed, marked to market or contained. Royal Bank of Scotland’s surprise announcement that it had lost another 28 billion pounds since the UK governments bailout last year shows the reality of bad debt exposure in previously impeccable names.

There’s quite enough bad news in financial markets to frighten many into hiding their money under the mattress, a sure fire bull signal for Gold. Indeed if there is anything in the old mantra of Gold being a safe haven in times of trouble then arguably the Gold price should be very much higher than the mid 0s. Given the disastrous management practices that have decimated banks and the broker dealer base, and governments’ hapless response, the question for Gold is really “If not now, then when?”

For DX the bullish arguments are equally strong. Over the next 2 years, US Treasury will have to sell an unprecedented amount of debt to foreigners, to fund its current deficit, plus TARP, auto lifelines and other fun parties that outgoing Treasurer Hank Paulson was happy to subsidise. The rise of the Democrats, by nature, spenders of the public purse will add vast amounts to US indebtedness with President Obama signaling trillion dollar deficits for years to come. And the pending appointment of Timothy Geithner, presently head of the New York Fed, to become the new Treasury Secretary is a sure sign that Paulson’s “save them whatever the cost” spirit lives on. Geithner, more than others is recognised for working closely with Paulson on the TARP program, mistakenly applauded by those who have, or who stand to benefit. As the President of the NY Federal Reserve, Geithner had the prime responsibility to oversee the regulation and supervision of financial institutions in his district. The mission statement on the NY Feds website states “Our primary objective is to maintain a safe and competitive US and global banking system!” On that evidence Mr Geithner has been a conspicuous failure and arguably is the prime suspect for the most sensational oversight failure in banking history, although UK officials may give him a run.

What is it in this performance I ask, that makes this guy a suitable candidate for any senior government position let alone Treasury Secretary?

With bond yields at record lows and massive issuance of US Government securities a given, the question is whether creditor nations and those savings rich Middle East and Asian countries will be as willing to fund the US financial system and economy as they have been to date.

Country 2008

China, Mainland 681.9
Japan 577.1
United Kingdom 360.0
Carib Banking Ctrs 220.8
Oil Exporters 198.0

A cursory look at the Treasury figures for November above, tells you that UK and Caribbean Banking Centers, code for hedge funds and off balance sheet entities, accounted for almost 0 billion of the total and given the present banking plight, neither of those entities are going to be strong players going forward (I am ignoring the unspoken conspiracy theory that Caribbean banking centers include US agencies); that makes China and Japan vital to the forward funding of US debt. With the historically low yields on US Government debt, are those countries going to continue to buy Treasuries and Bonds at the required level and take the risk of a rapidly devaluing Dollar? I think not.

At the least, we can say that Treasury policies will demand a stable or stronger Dollar. More extreme intelligence (which may not be intelligent at all) claims that the “Paulson Put” will be just as important as the Greenspan Put was for many years, the implicit reasoning being that Paulson gave assurances to China’s hierarchy about the trading range of DX.

In the end, weight of money will determine the outcome. All the hyperventilating from the Gold bulls will sucker in a few small players. Perhaps more than a few have already been seduced, but ultimately, weight of money always wins.

It is not impossible for Gold and DX to abandon their reciprocity and chart parallel tracks, but on the monthly chart going back to December 1986 we can’t find a sequence of more than 3 months where Gold and DX rallied together, and each of those occasions have resolved with a significant reversal in one of the partners, more usually Gold, although the last occasion on which this divergence from the norm occurred, September-December 2005, resolved itself with a 28 month capitulation of the Dollar. With that savage move in mind, perhaps this possible decoupling presages much more important shifts in the future course of these important markets.

In the following chart I have omitted the 2008 top in Gold to give more definition to the earlier years’ moves which are dwarfed by the current crest. If we are to see a sustained rally in both of these markets it would be a considerable change to the historic relationship. Perhaps we will see more Jitterbug than Tango!

For traders, Tuesday’s gap up day in DX denotes strength and the old swing high at 87.70 is not far away. To answer the challenge, Gold made an outside up day on Tuesday, usually a sign of new buying coming into the market.

Danielcode traders know that our T.03 time turn signals always need confirming price action to validate the trade. T.03 trade signals must be “elected.” To explain that concept more fully there are written and video presentations available at the Danielcode website. Today’s price action in DX gives me a chance to renew an old trading axiom that may have slipped your notice of late, and that is the concept of “true” highs and lows on charts. A chart gap sets up the necessity to identify the true high or low of the bar.

On the following DX futures chart, we see the gap up bar for Tuesday with its daily low at 85.93, but that is not the true low of the bar. Genesis charts mark the gap with a green tail to visually alert you to that gap. To make the apparent daily low on Tuesday, the market had to travel from the previous close at 84.49, also marked, so that is the “true” low of Tuesday’s bar and the number that interests us for the latest T.03 signal in this market which has not yet been elected.

For those of you who are interested in financial markets, the present almost daily exposures of chicanery, deceit and in most cases the sheer incompetence of those that handle OPM (other people’s money), should be motivating you towards investing some time in your own financial future. The greatest gift that you can give yourself is to learn to trade financial markets.

At the Danielcode, many are learning to trade without paying exorbitant fees, in fact, without paying any fees at all. The DC Trading Manual is free to all and I provide the T.03 turn signals to all members as my personal gift. For those who find the analysis of the DC number sequence too demanding or time consuming, the T.03 signals highlight most of the DC setups in advance and I have distilled them to be simple and functional. Take a few minutes to watch the T.03 tutorial video under the “Videos” tab at the DC website. It may change your life. It has already done so for many. William J, a Financial Sense reader and Danielcode member wrote to me on behalf of his family last week. He had this to say:

I just read the latest post “Anthem for a working man” and as usual you’ve provided another installment of service to humanity and common sense in an arena sorely lacking in both. I want to thank you personally for what the Daniel code information and the insightful financial sense articles have done for my understanding and my bottom line. I’d had some successes with the code and some index trades, but the crude oil call (T.03) was like manna from heaven – truly amazing.

Needless to say, it’s worked better than anything I’ve ever used before. Again, what a wonderful gift for all of us – to control our own financial destinies in such treacherous times – you should be immensely proud of what you’re accomplishing.

And that my friends, pretty well sums up the trading approach of Danielcode members. To control your own financial destiny in such treacherous times is a rare gift. Despite the false advertising beloved of the spruikers that “trading is easy”, it is not. It takes application, knowledge, and a degree of determination.

The greatest insult that an Australian can bestow is “can’t bowl; can’t catch,” a parody of Aussie cricket great, Shane Warne’s comment to welcome a new member of the England cricket team. No doubt a variation applies to baseball but it is certainly true of trading. Last week no less than Deutsche Bank reported a huge loss. Hidden in the announcement is the acknowledgement that their proprietary trading businesses took a major hit, so you can see that not many prosper in bear markets. Perma bull seems almost the trade mark of institutional traders where they get a sliver of advantage and leverage it to the hilt, but regrettably Deutsche’s traders apparently can’t bowl and can’t catch. So don’t be overawed by institutions and names. I have written for the past year that bankers of every ilk are shifty and not to be trusted. It’s all smoke and mirrors as the banking index shows us every day. Trust yourself and keep your money only in your own hands. That is the best advice I can ever give you.

FRANKFURT / LONDON - Deutsche Bank, Germany’s biggest bank, reported a loss of about 4.8 billion euros (.3 billion) in the fourth quarter after debt and equity trading suffered amid the worst financial crisis since the Great Depression. Frankfurt-based Deutsche Bank said yesterday the loss also reflects increased provisions for debt backed by bond insurers and "other exceptional gains and charges."

The losses reflect "exceptional market conditions, which severely impacted results in the sales and trading businesses, most notably in credit trading including its proprietary trading business, equity derivatives and equities proprietary trading," the bank said.

For those who are already traders, the Danielcode and its attendant T.03 time turn signals will make you better traders. For those who are committed to learn, we have all the tools including free trials of charting software and free practice accounts in futures and forex. I will get you there if you have the desire. Unlike the hapless English cricket team, you can learn to bowl and catch in all markets, bull, bear or sideways!

I invite you to visit the Danielcode Online where there are many archived articles and videos highlighting our adventures in these and other markets. The T.03 time turn signals I provide, give our traders a significant edge, and in trading the edge is everything.

Mat 13:13 Therefore I speak to them in parables, because seeing they see not, and hearing they hear not; nor do they understand.

Copyright © 2009 John Needham

About the Author

Lawyer and Financial Consultant
jneedham [at] thedanielcode [dot] com ()