Gold Smells Trouble

Before I get into today’s Daily Reckoning, just a heads up about Bill Bonner’s essay today. It resonated with me because I’m currently re-reading Daniel Kahneman’s classic, Thinking, Fast and Slow, which points out the futility of making predictions in environments as complex as financial markets.

Yet predict we all do. And if we’re not predicting, we’re hanging off the predictions of others. That’s because, as the book points out, we’re hardwired to make sense of a chaotic and unpredictable world. It’s a survival mechanism. If we believed that the world is truly random and unpredictable, and chaotic and cruel, we’d be in a state of anarchy.

In his essay today, Bill explains why the forecasts of classical economists are almost always wrong. They use models that don’t work. If you’re sick of hearing about these forecasts emanating from broken models, you’ll love Phillip J. Andersons’ Cycles, Trends and Forecasts, which officially launches today.

Phil’s work — as far as we understand it — is not so much about making short term predictions as it is about following long term cycles…stuff that happens over and over again.

Well, that was some rally yesterday, huh? Clearly a lot of punters expected a different outcome from the US Federal Reserve’s two-day meeting on monetary policy. But what they got was more of the same. That is, interest rates will remain on hold until probably the next world cup…and so in the meantime, please keep speculating.

This seemed to catch traders off guard — in Australia anyway — and a round of short-covering saw the Australian stock market shoot higher for the largest gain in seven months. The thing to watch for now is follow through buying. I suspect it will be tepid.

Not so in the gold market though. Having had a day to reflect on Fed boss Janet Yellen’s comments, traders decided to dump the dollar and buy commodities. Gold surged, breaking through many layers of resistance. It’s up about US$40 bucks an ounce from this time yesterday.

Last week, in a report to Sound Money. Sound Investments. subscribers, your editor wrote that there was mounting evidence that the gold price was forming an important long term bottom. We recommended a little known gold stock with huge potential to take advantage of this view.

So far, so good on that call. But we’re under no illusions. It was just luck…

We could be about to get luckier though. Check out the chart below, which shows gold blasting through resistance. It’s now back above its 50 and 200-day moving average. And it happened on strong volume, which is a good sign. The RSI momentum indicator is about to move into overbought territory, so you should expect some sort of correction soon. But if gold can gain support above the moving averages, then the bottom of this long bear market may well be in.

Gold blasting through resistance

click to enlarge

Why is gold rallying though? In short, nervousness towards central bankers, and Janet Yellen in particular. Her comments yesterday indicated that the US Federal Reserve wasn’t too concerned about inflation.

Well, the market clearly didn’t think much of that.

I’ve said for some time that gold isn’t really an inflation play. It’s an anti-central banker play and insurance against a fragile financial system. This could merely be a case of short-covering, or it could be the start of growing wariness towards Yellen’s reign. Keep a close eye on gold to find out.

Read the rest of this article at The Daily Reckoning