Buy Stocks on the Cyprus Dip

I?ll never forget the last time I was in Cyprus. I landed my twin Cessna 340 and asked for a fill up, hoping to make it back to Rome in one hop. An hour later, a truck dumped three 45-gallon drums of 100LL avgas on the tarmac with a hand pump, and asked to be paid in US dollars, cash.

When I asked how to get the fuel into the plane, the driver responded with a rotating motion with his hand, which I initially took to be an obscene gesture. In all, it took me about three hours to hand pump 135 gallons of fuel in the 90 degree heart. I vowed never to return.

I bet there were a lot of traders who wish they never heard of Cyprus this morning. Last night, news that the government there was imposing huge fees on all bank accounts to avoid a default heralded the second black swan of 2013. This triggered bank runs, caused global stock prices to collapse, sent Treasury bonds soaring, and cratered Dow futures as much as 155 points. The fees amounted to 6.75% for accounts under ?100,000, 10% on accounts from ?100,000 to ?500,000, and 15% for those over ?500,000. All of the country?s banks are closed until Thursday. Yikes!

Cyprus has long been the chancre sore of the international banking system, acting as the low-end, no questions asked, money laundering place of choice for decades. Their history of hiding assets for the Russian nobility goes back the czarist period. The money there was so dirty, I refused to accept any investors in my hedge fund with this home address. Mention a Cypriot connection with any financial transaction here in the US, and bankers have a heart attack.

Guess where the Cypriot banks invested a major portion of their deposits over the last several years? Greece, where there has been a major haircut on valuations imposed by the European Central Bank. Relations between the two countries go back 5,000 years. In fact, some of the Greeks returning from the successful sack of Troy in 800 BC were blown off course and ended up in Cyprus. Hence, the current crisis.

The is the second time this year that a foreign black swan flew over and pooped on our markets at home, first from Italy, and now Cyprus. The financial media seems to love throwing gasoline on the fire, predicting that debacles in Europe are a precursor to Armageddon at home, unless we immediately abandon our wicked socialist ways. Every dummy out there unloaded shares on these headlines, which in fact, turned out to be great long side entry points on every occasion.

The reality is that the goings on in Cyprus are so insignificant as to not even move the needle outside of their three-mile limit. Its $24.7 billion GDP ranks it smaller than any US state, and about on par with the city of San Diego, yet, they have been able to attract $65 billion in foreign bank deposits. Most of the deposits about to be assessed there belong to the Russian mafia. Other than raising goats, growing olives, and a few topless beaches, there is not a lot going on there. The bottom-line for we law abiding taxpayers here: who cares?

There is no doubt that the markets stateside were begging for a correction, and Cyprus looks like it is going to give us one. Too bad I dumped my 70% long exposure on Friday and went into Sunday night net short. But don?t expect this to last for more than a couple of days or for a couple of hundred Dow points. Buy the dip.

Guess what?s on the top of everyone?s ?BUY? list? Apple! For more on Steve Jobs? creation, click here for ?Has Apple hit Bottom?.? What are they selling to get there? Google.

My last trip to Cyprus got even worse. To enjoy the scenery, I flew across the Mediterranean at 500 feet and 220 kts. An hour out of Larnaca airport, an American F-16 fighter flew alongside of me and then edged closer, to just 10 feet off of my port wingtip. Then a second joined on the starboard side, and a third on my tail. I held up my New York Yankees baseball cap, to no avail. Finally, I hit the panic button I dialed in 122.50 MHz on the radio and put out a ?Mayday? call.

The British army base in Cyprus picked me up. He referred me to a US helicopter at an undisclosed location. Then a southern drawl came on the air and I asked what the hell was going on. Right then, through the heavy haze, I spotted the answer. A huge American aircraft carrier surrounded by 30 support ships was cruising into the wind. I had inadvertently flown a course that took me on a straight line from Lebanon, where terrorist attacks against US troops were occurring daily, to the heart of the American fleet.

?Don?t worry,? the radioman said. ?They?re just a little pissed off that you violated their restricted airspace.?

?Where is their restricted air space?? I asked.?

?That?s top secret,? he answered.

As I passed over the carrier, I saw their deck was a hive of activity, with several jets getting refueled and rearmed. My three jets peeled away and disappeared.

Like I said, I?m not going back to Cyprus anytime soon.

Oops!

Taking Profits on Stocks

Diary, Newsletter

With the (SPY) approaching an all time high, there are just a few pennies to go, I am going to take the money and run on my position in the SPDR S&P 500 (SPY) April, 2013 $145-$150 deep in-the-money bull call spread. At $4.97, there is only 3 cents left in potential profit, and I would have to run the position for another month to get it. We have already captured 93% of the potential profit in this position. The risk/reward here is no longer attractive.

The market is now up ten days in a row, the most since 1996, and has gained every day in March. Will it shoot for 11? It looks like it. By freeing up cash here we gain some dry powder to use on any market dips. That is, if they haven?t made selling stocks illegal, which the market apparently thinks they have. It also means you don?t have to rush out and change your underwear every five minutes if one of my predicted black swans comes in for a landing.

There is also the matter of being up 31% so far this year, I have outperformed virtually everyone in the hedge fund industry, except for maybe David Tepper (Thanks for the heads up, David!). With this trade, I have closed out 15 consecutive profitable trades. I have another six moneymakers still on the books, taking my own hot streak up to 21. The only trade I have lost money on during 2013 is with Apple (AAPL).

That means I no longer need to swing for the fences to make my year. Instead, I can settle back into the sort of ultra cautious, scaredy cat, type of trades typical for an investor of my advanced age. That is, unless, we get a 5% dip in the market, in which case, it will be pedal to the metal once again.

That?s My Kind of Trade!

The Elton John Market

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I remember 1997 like it was yesterday. Bill Clinton was president, the US government was running a balanced budget, and the Dotcom IPO bubble parties in Silicon Valley were happening almost every day.

The Florida Marlins beat the Cleveland Indians in a seven game World Series, where the last game went to a heart stopping 11 innings. Elton John scored the top hit of the year with ?A Candle in the Wind.?

1997 was also the last time that the Dow average closed up for nine consecutive days. Sure, the market only managed to eke out a 5.22 point gain. But hey, up is up.

The market was on its way to losing its winning streak until hedge fund legend, my old buddy David Tepper, spoke to the press. He mentioned that the Dow could end up 20% in 2013. That means we still have another 9.5% to go, potentially taking the Dow as high as 16,000. Warning: David has a long history of being right, with his own long-term average annualized return nearly matching my own at 38%.

One could easily imagine a course of events that gets us there. The Republicans and Democrats kiss and make up and produce a budget acceptable to both sides that cuts our deficit over the long haul. The sequester ends. China stops double dipping. Europe gets its act together, with ECB president, Mario Draghi, finally cutting euro interest rates. Oil prices collapse.

There is another big factor that could keep driving share prices higher. Ben Bernanke could keep the pedal to the metal and maintain the present rate of monetary easing. March is turning into one of the most fascinating months in the history of the bond markets. For the first time ever, The Fed is buying more bonds that the Treasury is issuing, with the excess demand getting soaked up in the marketplace.

Without a doubt, the most underestimated, misunderstood development of the year was when the esteemed Fed chairman told us that they may never sell their $3 billion plus stash of Treasury bond holdings, but hold them until maturity instead.

This is huge. It means that the Armageddon predicted by everyone when the Fed unwound its massive bond position is never going to happen. Instead, we will see a slow grind higher in yields and lower in prices. I have been expecting this all along, warning readers in my own forecasts that we may never get the bond market crash they had been hoping for, and that they should avoid high cost of carry short bond plays, like the (TBT).

As a mathematician, I have to assume that Chaos Theory is going to kick in here pretty soon and force the indexes to revert back to the mean. This is another way of saying the longer the market moves in a single direction, the greater the probability that it will reverse.

Not to do so will really tempt fate. That is why I picked up a modest short position in stocks today, selling some short dated, deep out-of-the-money, calls on the S&P 500 (SPY). I am also deliberately dragging my feet in adding any new longs to the Trade Alert Service model-trading portfolio.

Even if Tepper is right and we blow through the top end of the most wildly bullish forecasts for 2013, we need to have a pullback first. Yes, it has been a long wait. But nothing goes up forever, trees don?t grow to the sky, yada, yada, yada.

When the hiatus begins, there should be room to make some money through the type of short position which I tacked on today. David did not say he expects the market to rise to 16,000 by the end of this quarter, which is already on track to deliver the best stock market performance in history.

If the Dow closes up again for a 10^th day in a row, it will be the longest string of wins since 1996. What was the number one hit that year? The ?Macarena?? Can you hum a few bars for me?

Shall We Go For 10?

Black Swans Are Circling

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Basking in the glow of my 31% gain so far this year, I have to start wondering what could go wrong. Call me a pessimist, a paranoid, and worrywart, but whenever things got this good in the past, they were about to turn very bad. It is not my intention to ruin your day. But I may well do that if you read the rest of this piece.

Traders are piling on new longs with reckless abandon, gushing about the sweet spot for equities, Goldilocks, and how different it is this time. Retail flows into equity mutual funds have turned positive for the first time in years.

However, I am hearing a rising tide of negativity from the jungle telegraph. Don?t forget to sit down when the music stops playing. This is just a trade, not a new golden age. There are ?black swans? circling out there everywhere, and the risk is that they alight upon us in great unexpected flocks, like a scene out of Alfred Hitchcock?s classic film, The Birds.

Let me give you a list of things that can still go wrong this year:

*The ten year Treasury bond spikes to 4% and money finally gets expensive. About one third of present day corporate earnings are coming from assorted forms of financial engineering, like share buy backs and refinancing?s, that disappear when money becomes dear. This is why you are getting profit growth against no top line growth.

*The sequester looks like a big nothing now, but could develop into something much more serious in six months when the federal funds in the pipeline dry up. Don?t forget the reverse multiplier effect.

*Falling disposable incomes created by this year?s tax hikes on earners over $450,000 haven?t yet translated into falling consumer spending. But it will, as it always does.

*A Middle East flare up causes crude to soar to $120 a barrel and gasoline rises to $5 a gallon, putting the brakes on an already low economic growth rate.

*Europe blows up again, sending the dollar through the roof. Better keep taking those Italian lessons to get a head start on the next ?tape bomb.?

*Seeing stock prices soar and the jobless rate fall, Ben Bernanke ends QE3 early, paring it down to maybe QE 1 ?.

*China?s weakening data flow persists, and the country falls into a double dip recession. Weak commodity and precious metals prices tell us this has already started.

*High frequency traders and quants, starved for a big mean reversion, smell blood in the water and trigger another ?flash crash.? Volatility goes through the roof. The short vol crowd in Chicago gets wiped out.

*Retail investors conclude they were right to stay away and bail on what they have remaining.

*A giant asteroid hits the earth and destroys all life as we know it, except for cockroaches and Twinkies.

And here is the scariest thing of all. All of these black swans could hit at the same time and reinforce each other, possibly around May or June. Could this be the fifth consecutive ?sell in May and go away? year?

This conjures up the vision of a ?ground hog year?, where 2013 is a carbon copy of 2012.? A strong first quarter is followed by two dead quarters, and then a strong year-end finish. This is what ?lost decades? look like. Look at the 30 year chart of the (SPX) below and tell me this isn?t happening.

Of course, this is just one of many possible scenarios that could play out this year. As for me, I?m booking my chalet in Zermatt in the Swiss Alps now to beat out the rest of you.

I Said Black Swans, Not Crows

See You Later

Why the Stock Market is Still Going Up

Diary, Newsletter

I have had an extremely hot hand this year, pushing the 2013 performance of my Trade Alert Service above a stellar 30%. So I am going out on a limb here and predict that the S&P 500 is about to grind up to a new all time high.

Since 2009, Federal Reserve governor, Ben Bernanke, has clearly made our central bank?s top priority jobs and growth, at the eventual expense of a higher inflation rate. The higher stock and home prices, a vast monetary expansion enabled, has also created a huge wealth effect. This is spurring newly emboldened investors to pour more money into risk assets everywhere, save commodities and precious metals. This creates more consumption, and, in the end, finally, more jobs.

Thanks to Ben?s efforts, stock prices have financially reached what most traditional analysts consider ?fair value? after a long four-year slog. The historic 50 year range for price earnings multiples is 9-22, and here we sit today, dead center at 15.5, assuming S&P 500 earnings of $100/share.

But this time, it?s different. Ten year Treasury yields at 2.05% today, are about 400-500 basis points lower than seen during past stock market peaks. Even after the $85 billion sequestration hit, Washington is still pumping $800 billion a year into the economy, even though the recovery is four years old. And Ben Bernanke shows no sign of taking the punch bowl away anytime soon.

This is why, having failed to break 1,485 of the downside on the heels of the Italian election disappointment on February 25, the index has little choice but to gun for the upside target of 1,585.

Health of this market top is vastly more robust than previous ones. Currently, 85% of the stocks in the (SPX) are trading above their 200 day moving averages, compared to only 50% when markets peaked in 2007, when the market actions was far more concentrated in a handful of stocks.

Such a broad base suggests that a lot of managers are still underinvested, and that the pain trade is to the upside. This is why the February correction that everyone was waiting for never came, and why we saw an incredibly bullish ?time? correction instead of a ?price? one. I was expecting as much.

Indeed, the technical outlook for the market is becoming increasingly positive as is obvious from the charts below. We have seen several successive new highs for the Dow transports for many weeks now, an index of a much more economically sensitive group of stocks.

Look at an equal weighted index of the S&P 500, like the (RSP), and it has already hit a new all time high, a huge plus. Finally, the NASDAQ (QQQ) looks like it is, at long last, putting its lost decade behind it by breaking to new ten-year highs.

Still, there are some qualifications here. The Dow needs to stay above 14,198 for the rest of March for this breakout to be valid. So far, so good. The capitalization weighted (SPX) is also approaching its high in the most overbought condition since 2007, with RSI?s well into the 70 territory. That means a round of profit taking will hit once we do hit a new high.

Another development that has technical analysts extremely excited is that many leadership stocks are catapulting off of bases that took 10-12 years to form. The number of new decade highs greatly exceeds the new lows. This has many chartists calling for a further move in the main indexes up another 10% from here.

Every bull market ends in overvaluation, often an extreme one, and sitting here at fair value, we are not even close for this cycle. Not a day goes by now that I don't get emails from readers asking what to do with cash here. I think the safer bet will be to go with high quality, high growing names where a hefty dividend gives you a cushion against any short-term volatility.

That list would include KKR Financial (KKR) (7.4%), Atlas Pipeline (APL) (7.7%), Linn Energy (LINE) (7.7%), and Transocean (RIG) (4.2%). You could also do worse than American Express (AXP), (1.30%), and Bristol Myers-Squib (BMY) (3.80%).

Party on!

Party On!

The Death of Gold, Part II

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I have been pounding the table trying to get readers out of gold since early December. Now, my friend at stockcharts.com, Mike Murphy, has produced a stunning series of charts showing that this may be more than just a short-term dip and another buying opportunity.

Mike explains that a number of traditional chart, technical, and intermarket signs are flashing serious warning signals. At the very least, we are going to test $1,500 an ounce sometime soon. If that doesn?t hold, then $1,250 is in the cards.

To make matters particularly fiendish for traders, we may see a false breakdown through $1,500 first, well into the 1,400?s, that sucks in tons of capitulation sellers before an uptrend resumes. It is a scenario that will be enough to test even the most devoted of gold bugs.

At risk is nothing less than the end of a bull market that is entering its 12^th year. The shares of gold miners suggest that the demise of the bull market is already a foregone conclusion. The index for this group (GDM) has breached major support once again and is looking for a new four year low. Since this index usually correlates very highly with the barbarous relic, the grim writing is on the wall.

A strong dollar does not auger well for gold either. Look at the chart below, and you see the dollar basket (UUP) has punched through to an eight month high. Until two weeks ago, this was primarily a weak yen story. But since then, both the euro (FXE) and Sterling (FXB) have collapsed, adding fuel to the fire. And it is not just gold that is feeling the heat. The entire commodities space has been the pain trade, including oil (USO), copper (CU), and other hard assets.

There are a host of reasons why the yellow metal has suddenly become so unloved. The largest holder of the gold ETF (GLD), John Paulson, is getting big redemptions in his hedge fund, forcing him to sell. This is why the selling is so apparent in the paper gold markets, like the ETF?s, but not the physical.

India has suddenly seen its currency, the rupee, drop against the greenback. That reduces the buying power of the world?s largest gold importer. With years of pernicious deflation ahead of us, who needs a traditional inflation hedge like the yellow metal?

Here is the final nail in the coffin for gold. Look at the last chart of the Federal Reserve Bank of St. Louis?s measurement of the broader monetary base. It shows that it has exploded to the upside in recent months. In the past, gold matched the rise in the money supply step for step. Now it?s not. If a market can?t rally on fabulous news, which it has obviously failed to do since the last QE was launched in September, then you sell the daylights out of it. That is what most traders believe.

The screaming conclusion here is that traders are pouring their money into stocks instead of gold. Now, paper trumps gold. Conditions for the barbarous relic will, therefore, probably get worse before they get better.

Ben Bernanke affirmed as much last week when he told Congress that quantitative easing would continue unabated for the foreseeable future. That means rising stocks and flat bonds, all of which are bad for gold. The bottom line here is that when gold makes its first run at $1,500, I am not going to jump in as a buyer.

Weekly December, 2011 to February, 2013
Adjusted Monetary Base
Reserve Bank of St. Louis

Suddenly Going Out of Style

Suddenly Those Italian Lessons Are Paying Off

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Welcome to the first black swan of 2013!

You couldn?t mistake the meaning of the cries of topless female protesters as they flung themselves at police guarding Italian polling stations on Monday. Basta! Basta! Enough! Enough! The purpose of their demonstration was visibly scrawled in large letters across their nubile bodies in black ink for all to see. Mille grazie Profesoressa Francesca for being my Rosetta Stone!

Global equity investors could well be screaming enough, enough as well. Right when it became clear that the Italian election was not going according to script, the major indexes rolled over from substantial gains to even more impressive losses. The Volatility Index (VIX) blasted 35% to the upside, the biggest move since November, 2011, the last time the Land of Julius Caesar threatened a meltdown. The Italian Index ETF (EWI) really got decimated, posting an intraday fall of 18%, while the Euro (FXE), (EUO) took a two and a half cent dive against the greenback.

Up until today, the smart money was betting on a win by socialist Pier Luigi Bersani and some continuation of the recent reformist policies. What we got was a much stronger than expected showing by Silvio Berlusconi, who is using his billions of Euros to get elected to avoid going to prison. His platform is to undo all of the reforms of recent years, and basically send Europe back to the crisis days of 2010, when the European currency traded as low as the $1.17 handle. Note to self: the smart money isn?t always right.

Of course, I have been warning anyone who would listen that something like this was headed our way (click here for ?Is the Party Over? ). I was even so precise in my predictions that I said the trigger might come from the next leg of the European financial crisis.

To see the exact levels where major support kicks in on the charts for this selloff, please follow the link above. For the Legions who follow my market beating Trade Alert Service, take solace in the fact that our entire portfolio expires in just 13 trading days, and these levels only need to hold until then. After that, we want everything to go to zero, where we can buy them cheap.

Unhappy Italian Voter

Long Time No See

How This Bull Market Will Die

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The universal question in the market today was ?Why is it down? when all the news was good? The weekly jobless claims dropped 5,000 to 366,000, near a five-year low, confirming that the jobs recovery is still on track. Activist shareholder, David Einkorn?s, lawsuit against Apple (AAPL) to unfreeze its cash mountain should have boosted the market?s major buzz kill.

Sure, ECB president said that European growth would continue to slow. No news there, and certainly not enough to prompt a triple digit decline in the Dow.

The harsh truth is that after the near parabolic move we have seen since the beginning of the year, you don?t need a news event to trigger a market sell off. The mere altitude of the (SPX) at 1,515 should, alone, be enough to do it, a mere 3.8% off the all time high.

The fact is that almost every manager has seen the best start to his track record in decades. Prudence requires that one book some profit, deleverage, reduce risk, and take some money off the table at these euphoric highs.

That especially applies to myself. If I make any more than the 22% I have clocked so far in 2013, nobody will believe it anyway. So why risk everything I?ve made just to make another 20%. Who wants to start over again if the wheels suddenly fall off the market?

That is what prompted my flurry of Trade Alerts at the Thursday morning opening, which saw me bail on my most aggressive positions in the (SPY) and the (IWM), taking profits on my nearest money strikes. I did maintain the bulk of my portfolio, which is still in much farther out-of-the-money strikes, and in short positions in the Japanese yen. I also added to my short positions, buying out-of-the-money bear put spreads on the (SPY), betting that even if we continue up, it won?t be in the ballistic, devil may care fashion that we saw in January.

There are, in fact, real reasons out there for the market to fall. You need look no further than the calendar, which I eloquently outlined the dangers of, in my piece ?February is the Cruelest Month? (click here).

On March 1, the sequestration cuts hit. The 2% increase in payroll taxes has yet to be reflected in slower consumer spending. Federal income taxes have already gone up on those earning over $450,000 a year. This is important, as the top 20% of income earnings account for 40% of consumer spending, and consumer spending delivers 70% of all consumption.

Although it has been postponed by three months, we have a debt ceiling crisis looming that will have to result in spending cuts across the board. My favorite stealth drag on the economy, the paring back of major tax deductions, will be the next big issue to be fought over publicly (the oil depletion allowance versus alternative energy tax credits, and so on, and so on).

All of this adds up to a 1.5% reduction in US GDP growth this year. When you are starting with a feeble, tepid, and flaccid 2% rate, that does not leave much for us to live on. This is how disappointments turn into recession. IT is no empty threat, as many US corporations are seeing earnings slow, and could well disappoint with the next quarter?s results.

This is why I predicted an ?M? shaped year in my ?2013 Annual Asset Class Review? which I am still standing by (click here). We are already well into the heady run up to construct the left leg of the ?M?. Next comes the heart rending ?V? in the middle. Some analysts are amazed that we have gone this far in front of such daunting challenges and haven?t already collapsed. I think that is going to be April or May business, given the humongous cash flows we have witnessed.

This Bull May Not Have Long to Live

February is the Cruelest Month

Diary, Newsletter

Actually, it is the second cruelest month. September is the worst, as indicated by the table below, put together by my friends at Stockcarts.com.

I think you have to get some sort of pullback between now and March 15, like of the 2%-4% range. It?s not that we are without fundamental reasons to do so. Don?t forget, we have a sequestration deadline looming on March 1, when the world as we know it is supposed to end. However, what is more likely is that Wall Street calls Washington?s bluff, since the last several Armageddon?s have failed to materialize.

Another possibility is that it grinds sideways in a narrowing range with diminishing volatility, because there are still so many investors trying to get in. If you believe, as I do, that markets will do whatever they have to do to screw the most people, then this is your scenario.

The only choices are down, or sideways. Trees don?t go to the sky, and markets don?t go up forever. I think long side plays in equities from here on will be a story of diminishing returns.

This is why I started selling short out of the money calls and call spreads on the S&P 500 (SPY), (SPX) first thing Monday morning. In either scenario these expire at their maximum point of profitability on March 15. These will help hedge, and lower the average breakeven points of my remaining long side plays in the market.

The move we have seen in stocks this year has been one of the most extended in 18 years, since back when the Dow was trading at about 3,000. These positions will partially hedge the remaining long positions that currently bulk up our portfolio. There is absolutely no way that we will repeat the January performance in February.

Yes, this is a short position. Warning: I have issued so many Trade Alerts for call spreads in the past two months, about 60, that readers forgot what bearish trades looked like. When I issued my Trade Alert on bear put spreads this morning, some readers went ahead and bought the call spread anyway.

Advice: for these alerts to work, you have to read them first.

Looks Like Another No Show

Why Gold is Dead

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It certainly has been a year of gnashing teeth and tearing hair for inveterate gold bugs (GLD). They got everything they wanted on the fundamental side. Runaway printing presses from the Federal Reserve, profligate spending from the US government, and a series of unending crises threatening our oil supplies in the Middle East.

Yet, the barbarous relic has barely budged. It is down 4% year on year, and has been in a full-scale bear market for the past 18 months, stuck at $250 off its peak price. This flaccid performance is particularly egregious in the face of? a torrid stock market, which has seen the S&P 500 soar 13% from its November bottom. What gives? Is there no value in a financial panic anymore?

To paraphrase Winston Churchill, the answer is ?a riddle, wrapped in mystery, inside an enigma,? which is a fancy way of saying there are more reasons than one can count.

No growth in the monetary base is the first answer that I give guests at my frequent global strategy luncheons. Over the last four years, the Fed balance sheet has ballooned from $800 billion to $3.6 trillion, and could be on its way to $5 trillion, thanks to QE1, 2, 3, 4, and infinity.

But the actual money in circulation in the broader economy, as measured by the Federal Reserve Bank of St. Louis, has flat lined for the past 18 months. No real monetary growth means no rising gold prices. Where did all that money go? On to the balance sheets of the big banks that refuse to lend, where it has sat, frozen in stone.

Gold in the past has been resorted to as a traditional inflation hedge. But look at the entire globe, and you can only find double digit price rises in sanction ridden Iran. They have been notable sellers of gold as they attempt to sell oil pay and for imports outside a US dollar based financial system. Look anywhere else, and deflation is the scourge of the day, from Japan, to Europe, to the US. Gold doesn?t fit in this picture anywhere.

Huge buying from China was a major factor in the golden age of the 2000?s, which enjoys a strong cultural affinity for all hard assets, especially gold and silver. A slower growing Middle Kingdom brings fewer buyers of the yellow metal. Sure, the post election (theirs, not ours) economy is recovering, but only to an 8% GDP growth rate, not the red hot 13% rate of past years. I can almost hear the air going out of gold.

The global bid we have seen for almost all risk assets has not exactly drawn buyers to the yellow stuff. Who needs an insurance policy when you are going to live forever. Gold used to be a ?RISK ON? asset, but underwent a gender change operation last fall. Now it goes to sleep whenever traders stampede into stocks.

Finally, gold has stopped rising because of the advanced age of the bull market. The yellow metal has been appreciating off its $240 bottom for 15 years now. It may have simply run out of steam. The last bull market, which launched when the US went off the gold standard in 1972, lasted only eight years. I remember waiting in line at a Johannesburg gold store to sell krugerands when it peaked.

It is an old trader?s nostrum that the cure for high prices is high prices. At least holders of bullion and coins have the consolation that they don?t own gold stocks (GDX), which have performed far worse.

I don?t believe that gold has entered a permanent bear market. Emerging market central banks still have to triple their holdings to catch up with the asset allocations of their western compatriots. That adds up to a lot of gold.

Individuals in emerging markets are still boosting gold holdings, although at a slower marginal rate than in the past. But for the time being, they seem content to sit on low bids around $1,500 and let the market come to them. I do expect a resurgence of gold?s best friend, inflation. But that won?t happen until we are well into the 2020?s, when a stiff demographic tailwind fans the flames.

Until then, the yellow metal could well stay directionless. That is a day trader?s or margin trader?s worst nightmare.

Flat Monetary Growth Means Flat Gold Prices