Tuesday, March 5, 2013

Gold, the Gold Lease Rate and the Fed Balance Sheet

I remain bullish on gold. Yes, I realize bullion recently registered a Death Cross (50-dma crossing down through the 200-dma), however I have found in general moving averages to be less effective for commodities than for equities. That's not to say I don't respect commodity price action around key moving averages, just less so than I would for stocks and other vehicles.

I find the gold lease rate to be a helpful input when it comes to assessing gold. 

                                                                                                                 Source: Bloomberg

Note that when the lease rate rises, gold tends to decline, and vice versa. As you can see, the lease rate has more or less been in an up-trend since gold's peak last October (again, lease rate rises, gold falls). The lease rate is currently at an elevated level that has historically often coincided with a bottom for gold. In fact, I have found that when the lease rate moves to an extent where it meets its Bollinger Band, it often indicates the trend is getting stretched and a reversal is likely imminent. Over the last few weeks, the lease rate has risen with and pressed its upper Bollinger Band.

I would also point out that gold, shown in the lower inset in the chart above, has held at or above the support line (in red) that spans back to 2011. This line resides around the 1550-1560 level.

I would further state that when one considers that Ned Davis Research (NDR) recently released a report showing the sentiment for gold is at an extreme low, with sentiment on the metal excessively pessimistic and bearish, the chart for gold looks even better. NDR regards anything below 35% as bearish sentiment and currently the reading is just 7% (!), but with that in mind I would've expected to see a chart that looked much worse than what we see for gold. To me that says that despite such washed-out, negative sentiment, gold is hanging in there fairly impressively, suggesting while psychology is very bleak, actual selling has not been nearly as bad (i.e. if this is what the chart looks like with near rock-bottom horrible sentiment, I'll take it!). And as is the case with sentiment, it's a contrary indicator, so extreme pessimism is very bullish for the near future.

Finally, take a look at gold (GLD, red line) versus the Fed balance sheet:

                                                                    Source: Bloomberg

It's not surprising to see such a tight relationship between gold and Fed action as conveyed by its balance sheet ("follow what they do, not what they say"). It's interesting to observe that from the summer of 2011 to September of last year, the Fed's balance sheet more or less remained flat -- no growth, zilch. And not surprisingly, the price of gold more or less went nowhere.

However, you can see in the chart that since October 2012, the Fed's balance sheet has been growing in impressive fashion. Historically, that's bullish for gold. But also note that when the Fed balance sheet is growing/rising and gold is not, instead either traversing sideways or even declining (blue squares), more often than not we've seen gold revert course and rise in price, getting back in synch, so to speak, with the Fed. There are no guarantees we'll continue to see this tendency hold, but you can see a significant divergence currently developing, with gold declining as the balance sheet expands.


  1. To me that says that despite such washed-out, negative sentiment, gold is hanging in there fairly impressively, suggesting while psychology is very bleak,

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