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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Canaries

Commodities / Gold and Silver 2011 May 14, 2011 - 06:37 AM GMT

By: Barry_M_Ferguson


Investors are always on the alert for a sign that a trend is changing. Investing is like being deep in a mine shaft. It is dark and dangerous and there are a thousand things to focus upon. Perhaps most importantly, we should focus on the canary.

Yes, if the canary falls over, the gas level has increased to a dangerous point and it is time to find the exit. But where is the canary in the stock market?

Let me bring the reader’s attention to a canary candidate. The chart below is the Dow Jones Precious Metals Index over the past 5 years. The index is weighted at the top with companies like metals (including gold) miners Barrick Gold and Goldcorp. Regardless of the holdings and regardless of the opinions, the important thing is the chart. What does the chart say?

Obviously, the Fed has engineered a market rally over the past several years. Well, to be clear, the Fed has engineered a rally in everything including precious metals. The rally has been a wonderful diversion from the process of stealing money from the oafs to enrich the big banks in the name of economic recovery. Nevertheless, everything has rallied. As we can see from the chart, the precious metals index (DJGSP) started to rally before the Dow started to rally back in late 2008. Now, the DJGSP seems poised to surrender some gains while the Dow is still clueless. The DJGSP may be our canary.

We must accept that the gains in the Dow (and everything else) have been on the wings of inflation. The US dollar decline has been instigated by the Fed and spend-a-holic administrations. The weak dollar inflated everything. Now, at this moment in time, it would appear that the Euro is coming under selling pressure because the Greek debt problem cannot be resolved. (This is really only a problem for the banks in Germany and France that hold the credit default swaps tied to the Greek debt.) The ECB is going to have to print more bailout Euros and the US dollar will therefore strengthen. In turn, commodities will weaken. And yes, Virginia, I think if we were all honest we could now view the Dow Jones Industrial Average as a commodity too! Of course, the leading edge of commodities is the metal world.

I have drawn a blue line on the chart to approximate the area of support/ resistance for the DJGSP. Coincidentally, it works rather well with the Dow as well. Our focus for the next several days should be on this blue line area. Should the DJGSP continue to deteriorate below the blue line, the Dow and other indices will surely follow. We do not need to debate whether or not the canary is sick or just taking a nap. If it falls over it falls over. Run for it! The DJGSP is losing the line of support.

This could all be by design. I suspect the Fed has a plan to gain even more dominance. Yes, they are ending QE2 in June. With the Dow trading over the 12,000 level, there is no appetite on the part of investors for a QE3. Everyone wants the Fed to stand down at this point. However, I suspect if the Dow were to take a several thousand point tumble, those same investors would be begging for a QE3. I also suspect this same canary would give us an early indication of that scenario. Keep your eye on the gold canary.

Chart 1: 5 years - Dow in gold, Dow Jones Precious Metals Index in red/black
Chart courtesy

Barry M. Ferguson, RFC
President, BMF Investments, Inc.
Primary Tel: 704.563.2960
Other Tel: 866.264.4980
Industry: Investment Advisory

Barry M. Ferguson, RFC is President and founder of BMF Investments, Inc. - a fee-based Investment Advisor in Charlotte, NC. He manages several different portfolios that are designed to be market driven and actively managed. Barry shares his unique perspective through his irreverent and very popular newsletter, Barry’s Bulls, authored the book, Navigating the Mind Fields of Investing Money, lectures on investing, and contributes investment articles to various professional publications. He is a member of the International Association of Registered Financial Consultants, the International Speakers Network, and was presented with the prestigious Cato Award for Distinguished Journalism in the Field of Financial Services in 2009.

© 2011 Copyright BMF Investments, Inc. - All Rights Reserved
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented.

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