As we go back and forth through the markets working on various relationships we usually (hopefully) end up with some idea of what we believe is going on. Since we tend to process information visually (hence the charts) our conclusion takes the form of a mental image. The challenge is to find one or more ways to communicate this image in the form of chart comparisons.

As we mentioned recently we have called at least 15 of the last 0 peaks for gold prices so our view is somewhat tainted by our working bias. What we will attempt to do today is show at least one version of our ‘mental picture’ with respect to where things stand with the precious metals.

We have always found gold fascinating because it is one of the true links between a number of markets. Gold is one part ‘metal’ and one part ‘store of value’ or ‘money’. It trends with the commodity markets while also trending with changes in the price of money (i.e. interest rates).

The chart just below compares platinum futures and heating oil futures from the end of 1979 through into June of 1981. We are using platinum futures for this analysis although the chart is virtually identical to both gold and silver. We are also using heating oil futures as a surrogate for crude oil. Once again the trends for heating oil and crude oil are typically quite similar.

Platinum futures prices spiked to a high into early 1980. The metals were the market that started the new decade with a price peak similar to the Nikkei in 1990 and the Nasdaq in 2000. What may come as a surprise to many, however, was the ‘lagged top’ for energy prices that was made close to a year later into the start of 1981. In other words there was close to a year between the leading edge of the negative trend for commodity prices (gold, silver, platinum) and the lagging end (energy).

We argued recently that short-term debt prices appear to represent the market that reached a cycle peak at the start of 2010. Below right is a comparison between the sum or combination of 3-month eurodollar and 3-month euribor futures and gold futures.

Our view is that short-term debt prices made a top in 2010 similar to the metals price peak in 1980 while gold represents the market that is lagging the trend change as it makes a heating oil-like peak into early 2011.  For good or for bad this is the ‘mental picture’ that we have cobbled together.



Equity/Bond Markets

Jan. 26 (Bloomberg) — Purchases of new houses in the U.S. rose more than forecast in December, propelled by a record surge in the West as buyers in California may have rushed to qualify for a state tax credit before it expired.
Sales climbed 18 percent to a 329,000 annual pace, figures from the Commerce Department showed today in Washington. The percentage gain was the biggest since 1992, and was led by a record 72 percent jump in the West.

We noticed with interest that new home purchases on a percentage basis were reported as the strongest since 1992. 1992 was (chart below) the year when the ‘laggard banks’ finally swung higher to catch up with the previously established positive trend.

It may be that recent cycle has been a mere mathematical anomaly. The bond market peaked in price in 2003 at the bottom for cyclical asset prices and three years later the cyclical trend peaked (i.e. copper and Japan) followed by a three year decline into 2009. The progression suggests either a 3-year cycle or… a 3-year lag.

Below is a chart of the spread between 30-year and 5-year Treasury yields from 2005 into 2008. Further below we have added a chart of the S&P 500 Index and the ratio between Japanese bank Mitsubishi UFJ (MTU) and the gold etf (GLD). This chart starts in 2008 and runs to the present day.

The idea was that if the cyclical trend was lagging the bond market and yield spread by 3 years then what was happening for the spread in 2006 should show up for the cyclical trend in 2009. And so on.

It was, we thought, a reasonable thesis. Using the SPX as our guide it even appears to have worked out quite nicely. What continues to vex us, however, is the sluggish response by the ‘laggard banks’ compared to gold prices. With the initial positive surge due for completion around the end of this quarter it appears that the parabolic rise for the MTU/GLD ratio that we had been looking for is running out of time. Either that, we suppose, or the next couple of months are going to be fairly exciting.