No.30 – January 2015 Atlas Pulse Gold Investor Report
See the facts, trade the action, ignore the noise
Recent recommendations: Gold: Jan 2013 Feb 2013 May 2013 July 2013 Nov 2013 Sep 2014 Dec 2014 Crypto: Dec 2013 March 2014 downgrade to bull market at $1,675 downgrade to neutral at $1,663 downgrade to bear market at $1,476 bear market rally with range $1,180 to $1,400 expect new lows into 2014 silver smash bear market rally, $1,350 is possible initiating coverage on bitcoin. Price to fall between 65% to 85% buy bitcoin The Gold Investor Report No.30 – January 2015 Summary
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Gold -­‐ second best in 2014 •
Weighing the factors for 2015 •
Short-­‐term technical •
COT, flows, 3x and sentiment •
China matters •
The bitcoin wave count revisited Gold -­‐ second best in 2014 For several decades, currencies have been measured against the dollar. When the dollar rises, everything else tends to fall. Gold closed at $1,205.65 in 2013 and 1184.86 in 2014, so it was down 1.7% over the year. By contrast, the other major currencies fared far worse: US DOLLAR 0.0% GOLD -­‐1.7% INDIAN RUPEE -­‐2.1% CHINA RENMINBI -­‐2.4% STH KOREAN WON -­‐3.8% SINGAPORE DOLLAR -­‐4.8% BRITISH POUND -­‐5.9% AUSTRALIAN DOLLAR -­‐8.4% CANADIAN DOLLAR -­‐8.6% SA RAND -­‐9.3% SWISS FRANC -­‐10.3% BRAZIL REAL -­‐10.8% MEXICAN PESO -­‐11.6% EURO -­‐12.0% JAPANESE YEN -­‐12.0% SWEDISH KRONA -­‐17.5% NORWEGIAN KRONE -­‐18.5% SILVER -­‐19.3% ARGENTINE PESO -­‐23.0% RUSSIAN RUBLE -­‐43.3% BITCOIN -­‐57.5% Poor bitcoin. For us crypto fanatics, even the Russian Rouble was a safe haven of sorts. Of course in 2013, the Rouble was down 7% when bitcoin was up 55 times (or 5547%), so they’re hardly comparable. Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 2 The Gold Investor Report No.30 – January 2015 Gold’s ability to keep up with the dollar made it the second best store of value, in currency terms, in 2014. Gold therefore gained in most currencies, but investors wherever they live, would have been better off in US dollars. The strength in the dollar has finally arrived and so far, it has been rational. In mid-­‐
2014, the world woke up to realise that the US economy was stronger than many had previously thought and the dollar rallied in the expectation of higher interest rates. The US Dollar Index -­‐ since 1970 160 150 140 130 120 110 100 90 80 70 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 Dollar Source: Bloomberg Chart note: Looking at dollar rallies since the 1960s, there was a 100% move in the 1980s and a 50% move in the 1990s. The recent 25% rise is therefore modest by historic standards. Standard currency valuation models still rate the dollar to be slightly below fair value on a purchasing power parity basis. These models are useless in the short-­‐term but very powerful over the longer-­‐term. The dollar index is heading for 100 over the next few months. The implications are far reaching. Capital moves to the place where it feels most welcome. US interest rates are likely to rise before they do elsewhere due to the relative economic strength and this in turn, will attract more capital. The S&P 500 returns over the past six years, including dividends, are 26%, 15%, 2%, 16%, 32% and 13%. That adds up to 160% whereas gold returned 34%. Global stocks fell well short of that, and since 2009, have returned a modest 70%. Non-­‐US stocks are still 25% below their 2007 peak. Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 3 The Gold Investor Report No.30 – January 2015 I’m a sceptic on US equities, but there again, so are most people. That’s probably one of the reasons why they have done so well as it was the path of least resistance and markets love to makes fools of us all. They are one standard deviation above their long-­‐term fair value. That’s punchy but not quite bubble status yet. Gold doesn’t seem to like a strong US stock market. In fact, over the last 45 years, the S&P 500’s ten best years saw gold, on average, return -­‐4%. In contrast, the S&P’s worst years saw gold return 11%. 2014 was another good example of this phenomenon. When stocks are doing well, investors don’t feel the need to diversify away. That’s why the direction of the gold to S&P ratio is so important in weighing the potential for gold. When shares are beating gold, that is normally a long-­‐lasting trend that goes on for several years. In stark contrast, gold responds well to rising inflation, whereas equities don’t. Many people think equities like inflation but they actually detest it. As inflation rises, the valuation of equities falls rapidly and they only start to behave like real assets when valuations reach extremely low levels. Equities and gold are therefore naturally uncorrelated over the long-­‐term for these reasons and gold is generally a reassuring lifeboat when the equity ship sinks. But that doesn’t mean they are uncorrelated over the short or medium-­‐term. Indeed, when gold is in play, it becomes a risk asset and correlation to equities becomes high, just like it was between 2003 and 2007. Weighing the factors for 2015 The Atlas Pulse three core models are gold vs equities which we have already discussed. The other two are gold in global money and real rates. Gold’s return in most currencies was positive last year but the trend still hasn’t turned upward. Gold in global money since 1984 140,000 120,000 100,000 80,000 60,000 40,000 20,000 1984 1988 1992 1996 Gold price Atlas Pulse Gold Report – January 2015 2000 Exponenial 2004 Simple 2008 2012 www.AtlasPulse.com 4 The Gold Investor Report No.30 – January 2015 Source: Bloomberg Chart note: I have shown gold in global money with two moving averages. Both are 35 months but one is exponential and the other is simple. They are very similar when the market is trending, but the exponential moving average is more responsive at turning points. I also prefer to use gradients as opposed to crossovers because they are more stable. Whichever moving average you choose, the trend is still downward. I analyse gold in global money as opposed to gold in dollars because it trends more smoothly. Gold generally rises during dollar bear markets, but that’s only interesting if it is appreciating by more than the dollar is falling. If it is, it will show up on the previous chart. Gold is currently rising moderately in dollar terms but more so in other currencies. This is mildly bullish. The Atlas Pulse Rates Model The final core model is rates and I covered this in detail in November 2014. Essentially, investors have a choice. When the bank pays more than inflation, gold is less attractive than when they pay less. Furthermore, gold is more attractive when inflation is rising rapidly than when it is falling. I made a radical shift in the Atlas Pulse core philosophy by moving from cash rates and historic inflation, used by most analysts, to long-­‐term rates and inflation expectations. This leap into the future makes good sense and you may recall that this was inspired by a narrative as to what gold actually is: A zero-­‐coupon, irredeemable, inflation-­‐linked bond issued by god. That means it pays no interest, lasts forever, matches inflation (golden constant) and has no risk of default. When I have shared that idea with knowledgeable people, most agree. The diehard gold bugs, however, don’t like the idea that the price of gold has nothing to do with the money supply. I have read countless column inches on this thesis but disagree with it all. The bad news on the Atlas Pulse rates model is that the available data is limited. Inflation expectations have only been recorded since 1998 in the USA, and slightly earlier in the UK. As the issuance of long-­‐dated inflation-­‐linked bonds grows, wider geographical data sets will come. Over the next few decades, this approach will likely become the primary valuation measure for gold. Imagine, for modelling purposes, if all the major currencies were measured against gold by using their yield curve* and inflation statistics. We could then construct a weighted, fair value gold-­‐rates model across the globe. That would not only help to value gold, but foreign exchange rates as well. You heard it here first. *This analysis must only consider local currency debt. Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 5 The Gold Investor Report No.30 – January 2015 The Atlas Pulse rates model – since 1998 100 80 60 40 20 0 1998 -­‐20 2000 2002 2004 2006 2008 2010 2012 2014 -­‐40 -­‐60 Gold over or under valued % Source: Bloomberg, Atlas Pulse Chart note: Last time I showed the gold price against the rates model. This time I have attempted to calibrate it by assuming the history of cheap/dear analysis sums to zero. Naturally 16 years isn’t enough time to be certain, but it’s a good start. Essentially gold was extremely cheap in 2005 at around $500 when this model suggested the fair value would have been closer to $750. By 2011 when gold touched $1900, the model rated it to be overvalued and should have been closer to $1200. There was a spike in 2008 during the crisis. Gold ‘should’ have fallen further because inflation expectations collapsed at that time, but gold held up which suggests that the market correctly foresaw that the deflationary forces were temporary. The current reading tells us that gold is 12% overvalued and should be approximately $1100. I reiterate that 16 years is not enough time to fairly calibrate this model. That said, 12% is not a large number and so the price is not wildly out of kilter with the bond market comparison. Falling bond yields are supporting the bond price above and beyond the damage caused by falling breakeven rates (inflation expectations). The golden constant The other sanity check we have on the gold price comes from price comparisons with other price series. I consider this to be a ‘fundamental moving average’ that gauges the purchasing power of money independently from public inflation statistics. One input is oil and that has taken its toll in recent months. On the subject of oil, you may recall the great work I highlighted from Paul Hodges from International eChem who correctly forecast that oil would fall to $50 in October. Hats off to you sir. Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 6 The Gold Investor Report No.30 – January 2015 The Atlas Pulse fair value model – since 1970 1800 1600 1400 1200 1000 800 600 400 200 0 1970 1974 1978 1982 1986 1990 Gold price 1994 1998 2002 2006 2010 2014 Atlas Pulse fundamental fair value Source: Bloomberg, Atlas Pulse Chart note: This fundamental model attempts to measure the fair value of gold against a basket of comparisons including wages, houses, off-­‐exchange commodities, oil and food. The current fair value has fallen to $1134 as oil has slipped back. We’ll find out later in 2015 whether the black line has turned down or is merely taking a break. I suspect that it has, and that means gold will struggle to maintain its premium throughout this year. Gold versus commodities In fact, gold trades at a significant premium to commodities in general and that won’t last forever. This may be well deserved during a period of financial repression, but at some point in the future, it will disappear. Over the next ten years, commodities will beat gold as they are undervalued on a relative basis. In the mean time this premium could just as easily expand further before it ultimately contracts. It is logical that gold should currently command a premium during these times. The global economy is slowing down, particularly in China, which dominates commodity consumption. High commodity prices over the past decade, has led to oversupply and now demand is falling. Gold, although very much a commodity, has a large ‘above ground’ supply. That’s normal as it is stored in vaults and is never intentionally lost or destroyed. The output from the mines has a materially lesser impact on the price than for industrial commodities. Gold is the investors’ commodity and a natural safe haven during uncertain times. Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 7 The Gold Investor Report No.30 – January 2015 The gold premium will vanish once commodities become too cheap or the supply/demand imbalance sorts itself out. Given that China is unlikely to go back to prior levels of consumption, this is more likely to be resolved by the closure of mines and wells. Gold valuation versus commodities – since 1984 80 1,800 1,600 60 1,400 40 1,200 1,000 20 800 0 600 400 -­‐20 200 0 1984 -­‐40 1988 1992 Gold price 1996 2000 2004 2008 Premium or discount to commodiies % 2012 . Source: Bloomberg Chart note: The long-­‐term mean for each major commodity versus gold has been averaged since 1984. Gold was cheap versus commodities from the late 1990s to 2008. Since then it has been trading at a 40% premium. To put it another way, corn, soybeans, wheat, silver, platinum, copper, gas and oil have fallen considerably more than gold over the past few years and gold is now 40% more expensive than its friends. Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 8 The Gold Investor Report No.30 – January 2015 Short-­‐term technicals -­‐ gold daily past year Source: Bloomberg Chart note: Gold remains in a medium-­‐term downtrend but is rising in the short term. The gradients of trend line A falls -­‐11% per year, B -­‐15% and C rises 18%. Lines A and C converge and will meet in the middle of April. A break in either direction will bring more clarity by that time. That’s convenient because the Atlas Pulse BOSEQ* concept highlights that the second quarter is seasonally weak. Perhaps gold will meet resistance before then. A bullish scenario would need gold to break above line A, and then above $1357 which would be a 20% rally. Every 20% rally in history has signalled the end of a gold bear market. *BOSEQ stands for buy even, sell odd quarters. It has a great record. Q2 is historically weak. Q3 is strong. Q1 and Q4 are normally in the biggest movers in the direction of the prevailing trend. COT, flows, 3x and sentiment COT stands for commitment of traders; it is the data series from the Chicago exchange that shows the positioning of speculative, as opposed to commercial, investors. Those are typically hedge funds. ETF stands for exchange-­‐traded fund. These hold physical gold and silver and are mainly traded by institutional and retail investors. The number of ounces of gold or silver that they hold is reported on a daily or weekly basis. All holdings are shown in million ounces (MOZ) on a like for like basis. The ETF movements tend to be slow, the COT longs faster, whilst the COT shorts move very quickly. 3x refers to the leveraged exchange-­‐traded notes that are used by investors to express a strong view. The daily returns are 3 times (hence 3x) the daily percentage move of the underlying asset either long or short. These funds are highly speculative. Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 9 The Gold Investor Report No.30 – January 2015 Gold COT and ETF flows in million ounces (MOZ) – past five years 90 80 70 60 50 40 30 20 10 0 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Gold ETF holdings COT long COT short Source: Bloomberg Chart note: The gold price is rallying but the big money doesn’t believe it. The yellow line, that shows the number of ounces in the ETF vaults, is still falling. The futures market tells a different story. Gold broke down in November and touched $1132. At that time, the world saw $1000 as a dead cert, but it never happened. Perhaps the market just ran out of sellers. The shorts continue to close their positions which are now back below 10 MOZ. These could fall further and drive gold up into resistance. The longs are stable. Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 10 The Gold Investor Report No.30 – January 2015 Silver COT and ETF flows in million ounces (MOZ) – past five years 700 600 500 400 300 200 100 0 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Silver ETF holdings COT longs COT shorts Source: Bloomberg Chart note: Finally, the silver stackers are losing faith. The grey line is falling as investors are selling, but prices have remained firm due to the massive drop in the shorts. They have bought nearly 200 MOZ, but the fact of the matter is the huge bear closing has done little for the price which is still a long way below $17.70, the Atlas Pulse choke point. That is the level whereby the silver ETFs will have made a profit since their inception. The longs are drifting lower from what is still an elevated level. The longs and the ETFs are becoming more correlated. All in all, gold is in a rally within a bear market. It is trading at a premium to commodities, bonds and money itself. My best guess is that this technical rally goes on for a while longer before reality sets in. One factor that could surprise is if the dollar rally runs out of steam. Under this scenario, gold could spike higher quite rapidly. However, even then, a break above $1350 will be a tall order in the absence of rising inflation. China matters What happens in China matters. The Chinese economy is slowing from double digit growth to something above 5%. We’ll never really know what that number is as Chinese GDP statistics famously have lower volatility that Bernie Madoff’s fund. The Chinese slowdown is spreading deflation around the world. What does this mean? Buy Chinese equities. Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 11 The Gold Investor Report No.30 – January 2015 Stock markets, even in the USA, will probably run out of steam in 2015. Europe and the commodity markets are troubled. The USA may go higher, but widening credit spreads are an early warning signal that something is wrong. The Japanese strength in equities is largely a mirage fuelled by a weak Yen. Yet the one place where we may see great things happen is in China. China is the world’s second largest economy yet the stock market hardly reflects that. The freely traded H shares, listed in Hong Kong, are worth just half a trillion dollars, or less than 1% of global market capitalisation. Yet the local A share market is much larger at 7.8% or $5tn. In other words, global institutional investors are structurally underweight Chinese equities by a factor of 10 times and will have to invest $4.5tn in order to rebalance their portfolios. Shanghai Composite Index – since 1990 7000 6000 5000 4000 3000 2000 1000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Shanghai Composite Source: Bloomberg Chart note: Chinese equities have done relatively well since 1990, and as of the past month, are now slightly ahead of the USA. That said, it’s been a roller coaster of a journey. The rallies have been strong and the bear markets, devastating. Most people believe that the Chinese economy will collapse because it is slowing down. However, the banks are strong, the market is cheap (PE 8.5 years) and the earnings are growing. The chart has broken out and is a buy. It amazes me how many investors shy away from rising markets and instead, try to guess the bottom for the likes of Russia. The trend is your friend. There is much scepticism surrounding the Chinese economy. People talk of a slow down or a hard landing. Debt is too high and the authorities will make a policy error. Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 12 The Gold Investor Report No.30 – January 2015 That may all be true, but the market is cheap by international comparisons and the last time it broke out from a sustained consolidation, the market rose six-­‐fold. The local A shares will respond well to economic liberalisation, which is a stated aim of Chinese government policy. It is inevitable that the global indices will be slow to adapt to this inevitable development. This catch up trade will last for several years and prices will rise sharply higher in the process. What’s not to like? The historic parallel is with Japan in the 1980s. The economy grew after the war to become the world’s second largest, yet the best days for the stock market didn’t occur until the 1980s when growth was already slowing down. Japanese equities rose 4 times in the 1970s and then by ten times during the 1980s, when growth had already slowed. Who said capital markets had to make sense? Source: Marcus Nunes Chart note: Japanese growth averaged 9.5% in the 50s and 60s only to slow to 4.2% in the 70s and 80s. The stock market didn’t truly take off until the late stages of Japan’s growth miracle. A similar scenario may occur in China over the next few years, despite slowing growth. The Chinese market offers value and growth at a time of liberalisation. Global investors are significantly underweight and as the indices reflect the domestic Chinese market, there will be a buyers’ stampede. The notion of emerging markets needs to move on. China qualifies as an emerging market due to capital controls, but in reality, it is an economic continental giant in its own right. Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 13 The Gold Investor Report No.30 – January 2015 Bitcoin When I initiated coverage in December 2013, my initial prediction was a bitcoin price fall of between 65% to 85% based on the Elliott Wave. The great surprise is not that this turned out to be right, but that I used Elliott Wave in the first place. It’s subjective but is a useful way for plotting speculative cycles and let’s face it, bitcoin is the maddest asset any of us have ever seen; one of many reasons why it’s so captivating. I published this table at that time with a recent update. Original bitcoin wave count table Source: Cryptocomp.com The odd numbered moves are the bull moves during bull markets and the even numbers are bear moves during bull markets. The letters A and C are bear moves during bear markets and B is the bear rally. Whilst I was right about the scale of the correction, I was wrong about the timing. What’s troubling me the most is that this was supposed to be a wave 2 bear within a bull market. Now that this move is 401 days old, that’s too long to be a bull correction, and to state the bleeding obvious, bitcoin is in a bear market. This means my initial wave count was wrong. 2014 can’t have been a wave 2 correction and instead, the wave A low must have been in April, B marked the summer high and we are looking for a final low at wave C. If this is true, the end of the bitcoin bear is imminent. Bitcoin price – since 2010 Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 14 The Gold Investor Report No.30 – January 2015 1000 100 10 1 0.1 0.01 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Source: Cryptocomp.com Chart note: I based the first count around the two obvious bear markets in 2011 and 2013. Now that 2014 is quite obviously a bear, the 2013 fall was probably a correction as opposed to a bear. If this is true, the three stages of the bear in 2014 are on target to end relatively soon. The price is currently $275 and the next major support comes in at $200. That could be the final low. On that basis, the new wave count is as follows: Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 15 The Gold Investor Report No.30 – January 2015 Bitcoin Elliott wave count (revised) If this is true, Bull one returned 531 times and Bull two 567 times from the low to the high. The corrections were -­‐93% and -­‐75% (so far). The time horizons also have a neat symmetry about them and so if bitcoin is here to stay, the next major low will be the buy of a lifetime. I suggest the 34 and 46 simple moving average combination; something that has worked well since inception. Wait for them to both turn positive and then back up the truck. Much has happened recently. Bitstamp, a leading exchange, was hacked but they are now back up and running. Innovations and new apps keep on coming. The number of transactions is rising but the total fees earned are falling, meaning that users are getting savvy. I estimate that two million people own at least a small amount of bitcoin, but it’s impossible to back that up with hard facts. I recommend the coindesk.com state of bitcoin report that was released last week. It’s full of useful statistics so you can draw your own conclusions. I am most excited about the brilliant people in this space who have a bold vision. Have a look at Bithalo.org. David Zimbeck, its creator, is a grandmaster FFS. Summary Having upgraded gold to a bear rally in November, I remain comfortable with that for the time being. But the gravitational pull is southbound so reality will set in at some point. Perhaps gold fights off the bears for much of the first quarter before the $1000 question resurges. The ETF investors are selling and there is so much that could go wrong. The bond market is gold’s friend but for how much longer? Gold Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 16 The Gold Investor Report No.30 – January 2015 trades at a premium to commodities that is unsustainable. The dollar is rallying and if that continues, it’ll bite down hard. Enjoy the strength whilst it lasts. Silver has some incredible properties. A friend of mine had facial burns and was treated with a silver-­‐lined bandage. It was developed by a military burns unit and has done a remarkable job. Solar, electronics and other applications also have great promise, but the speculative nature of silver is likely to unsettle industrial buyers. Being sandwiched between industry and investment is not the best place to be. The gold silver ratio is steady at 74 but still looks like it is rising. I see strong overhead resistance for silver at $17.70 and when this bear market finally comes to an end, there’s a good chance that silver will touch its 2008 low below $10, even if only for a brief period. Silver’s time will come, but it’s not quite yet. Cryptos are in the doghouse. The Elliot wave model is just a handrail to help us understand where we are on this great journey. If wave C marks a major low in the next few months, and the price holds above $200, then no damage will be done. Bitcoin will have flushed out the bears and be ready for a new bull market. 2014 started in a frenzy of great promise but instead it was a year of disappointment with a successive stream of bad news. I remain hopeful that 2015 will see all the hard work by developers come to fruition. If we get the ‘killer app’, expect the next high to be multiples of the current price. Twitter: @AtlasPulse The gold thermometer remains in a bear market (the enemy are exhausted, but will return by the spring). The Crypto thermometer is neutral (We’ve been captured and are under interrogation by a ruthless enemy. Keep the faith and say nothing). The information and materials in this document are an expression of opinion and do not constitute financial or other professional advice. You should consult your professional adviser if you require financial advice. We try to ensure that the information in this document is correct, but we do not give any express or implied warranty as to its accuracy. We do not accept any liability for error or omission or for any damages arising in contract, tort or otherwise from the use of the information provided. Atlas Pulse Gold Report – January 2015 www.AtlasPulse.com 17