How To Separate Price Action From Noise

–Boom goes the dynamite! That’s another way of saying the markets have reversed course sharply and headed up, up, and away. But why?

–Accounts differ. Yesterday, we wrote that some kind of bogus deal on American debt would lead to a correction in gold. Bingo!

–August gold futures on COMEX fell $13 and about one per cent on the day. That ended gold’s 11-day power-kick. The Dow Jones Industrials were up 200 points. Aussie stocks have opened the day by following the US’s lead, with a tailwind from BHP’s production figures (more on that in minute).

–We recite the daily liturgy of price action in gold stocks as if it matters. But does it? Or, to ask a more useful question: is it telling you anything new, or confirming what you already know?

–Well, prices – when they are not horribly disfigured by the effects of reckless monetary policy—communicate valuable information. They represent the prevailing sentiment between buyers and sellers over the value of companies, commodities, or securities. That information is your basis for deciding what to do about the future.

–The fact that the gold price has put on about $1000 since we first moved to Australia in 2005 is telling us something inescapably simple: money backed by the full faith and credit of a government in huge debt is headed for the rubbish bin of history. The means you, US dollar. And probably you too, Euro.

–In the context of a historical disintegration, then, one day’s price movements are just a bunch of noise. Which is a roundabout way of saying that even though yesterday’s price action looks pretty positive; keep your eye on the long-term historical ball.

–Speaking of the price action, Murray’s latest look at the action on the ASX/200 and the S&P 500 has now been posted on his YouTube Channel. Go on. Have a look.

–We cajoled Murray into extending his analysis to a single share this week: BHP Billiton. Mind you, his analysis does not constitute a recommendation. But BHP has been in the news quite a bit lately, what with its second big US shale gas acquisition and its production announcement today.

–Those news items tell you about the cash flows being generated by BHP’s core business. They tell you where the company thinks the biggest future earnings growth will come from. And provided BHP doesn’t take on too much debt to finance its future earnings growth—and provided China doesn’t crash—you can imagine investors liking the story.

–But why imagine when the price action can tell you exactly what to expect? Okay…it can’t tell you EXACTLY what to expect. Nothing can ever tell you what’s going to happen in the future. But Murray’s whole theory is that prices in a given security tend to revolve around a centre of gravity, or what he calls a Point of Control. But we won’t say any more about it here. That’s why he recorded the video. So go watch it here.

–One final note. Don’t be deceived by the debt negotiations in the Western Welfare States. It is all a theatrical sideshow to distract from what must eventually happen. The latest news in America is that a bi-partisan proposal from six US Senators will avert a mini US debt default. It will trim trillions from the deficit over 10 years and raise taxes by a $1 trillion.

–Meanwhile, the news from Europe is that the European Central Bank may permit some kind of Greek debt default as a way out of that country’s crisis. ECB Council Member Ewald Nowotny told CNBC that the ECB is considering a, “full range of options and definitions, from a clear-cut default, selective default, credit event and so on.”

–And so on.

–This is a departure from the previous ECB position put forth by Jean-Claude Trichet. He’s insisted there can be no “credit event” or “selective default”. This would result in the ECB taking losses on its own portfolio of sovereign bonds. And it would preclude it, in a voluntary way we assume, from accepting sovereign bonds as collateral for more loans.

–This is really the issue here, articulated by Jim Grant in an interview on Bloomberg: are sovereign government bonds going to remain good collateral in Europe? If the ECB won’t loan money to Europe’s governments because it won’t accept their bonds as collateral, Europe’s experiment in currency unity is cooked. And now you know why gold is travelling so well.

–The really appalling aspect of the debt negotiations in America and Europe is the presumptuousness of the politicians. They are behaving as if it is their God-given prerogative to foist massive debts on the public—debts that will never be paid off and must result in lower standards of living and a currency calamity.

–Government has gotten so big, so parasitic, so bombastic, and so self-righteous that it is barely tolerable. It is one thing for someone in the private sector—like your editor—to be bombastic, self-righteous, and generally grumpy. But it’s a whole other thing altogether when people with the power of the purse use it to sell your financial future down the river.

–That phrase, “sell down the river”, comes from American culture. Slaves who displeased their master or who could simply fetch a good price were sold and transported down the Mississippi river. It’s what happens when people are treated like commodities to be exploited.


Dan Denning
Markets and Money Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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