Tuesday, November 19, 2013

More Caution Buying All That Glitters (Gold)

Having got caught up in a number of other projects in the last two weeks, there just was not enough time to provide you an update on the latest machinations in money supply, gold prices, and gold/precious metal equity prices. That is in regards to my timing models. With gold prices moving below $1,300 per ounce and money supply continuing its march up, I have no doubt you could guess as to what happened with the timing models. Nonetheless, there are a few points I think are important, which I will detail for you below.

First, lets look at M2 money stock. For the latest reported week, non-seasonally adjusted M2 money stock increased to just below $11 trillion at $10.94 trillion, as near-term growth rates re-accelerate. In fact, the the rolling 2-month percentage change in M2 money stock, as shown below, has been running ahead of the long-term seasonal trend.
Money Supply

As money supply growth re-accelerates and gold prices have declined, the various timing model results have improved in the last two weeks. More so, all three timing model calculations have moved deeper into the buy territory, i.e. below 0 and noting that lower timing model results historically suggest better future equity price appreciation potential. I present the most recent updated timing models below.

6-month calculation, current -1.5 vs. -0.9 last month

1-year calculation, -1.3 vs. -1.22

Long-term calculation, -1.9 vs. -1.8

But hold your dollars, the risk measure I began employing a few months back has turned towards a high risk reading.

Risk measure, currently below the 0 demarcation and lower than -0.01.

The risk measure coming in below -0.01 holds significant importance. I have stated publicly that a risk measure below 0 tends to suggest a heightened risk environment, or said more plainly a greater chance for lower precious metal equity prices. What I have not stated until now is that the measure becomes more powerful as a matter of degree above or below the zero demarcation. In fact, the historic better-than-average gains following buy-indications on the timing models almost completely evaporate when the risk measure is at or below -1. Although I am not selling, I think the current results augur some caution with any near-term purchases of precious metal related investments.

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