Income and Prices Heading in Opposite Directions

It seems that the month of April is exposing markets to some brutal truths as reality bites. As Bill Blain wrote, “The bottom line is that if incomes are falling and prices are rising, something has to give.” And David Stockman reported today that the Commerce Department report showed that real disposable personal income in March came in at -19.9% versus March 2021. Key market metrics for this week reflect a major deflation of financial markets. And yes, gold and silver took major hits this week as well, which sent this letter’s portfolio scorecard down to a mere gain of 0.91%; still, better a mere gain, especially when contrasted with the S&P loss of 13.31%. At age 75 I have witnessed several financial market deflations so I’m not surprised by gold’s decline this week. When the margin clerk calls, investors sell what they have to sell to meet their debt obligations. Gold gets whacked at first but then spirals to much higher levels. I think it likely that as soon as the Fed does its inevitable 180-degree turn to QE, we will see new highs for gold with the yellow metal potentially rising to levels even the most religious gold bull can’t imagine.

Given this week’s painful market for precious metals investors, I thought I would pass along a few words of wisdom from Michael Oliver, who wrote a short note to his subscribers on Thursday, titled, “The silver ‘route’! But no gold rout?” 

In our weekend report we used a somewhat cautionary tone and noted that while silver was threatening a level that we preferred not to see closed below on a weekly basis (that being $23.90), gold had a different temper and was not close to any comparable level of breakage (speaking of quarterly momentum in both cases, not annual momentum which is a fair distance below these markets and not being threatened).

We think the silver drop probably needs to be followed by a comparable drop in the dominant market (gold); otherwise, there’s something wrong with what silver is trying to tell people via its price action. It’s screaming global deflation, commodity collapse, etc., yet gold and the Bloomberg Commodity Index are definitely not screaming such a story. 

We suggest to the silver bears that they’d better get gold into some sort of screaming decline—and soon—or their downside gains on silver will constitute a slingshot situation that flips back to the upside for silver quickly. 

Here we update short-term charts of silver and gold on the next page. Daily momentum has created a clump of ink all submerged below the zero line/3-day avg. Similar clumps of ink have been generated on both sides of that zero line over the past few months and each tends to produce a move the other way—even if short term—once that clump of ink is either broken out above or below.

And frankly we don’t think the silver bears can withstand a dollar or more of a move back to the upside, as that will indicate that this “collapse” (their hope) is not a collapse, but just another drop that does not gain traction. 

Also watch gold. We like what it just did in this particular selloff (the third redundant/overlapping selloff since its March 8th high). Especially the last two days. 

The daily price drop was large after the March 8th high. Within six trading days gold dropped into the $1890s. Then it rallied up to $1967, followed by another drop below $1900—to $1888. 

Then that second rally carried up to just below $2000. It has since been followed by a selloff low that took out that prior pair of lows by enough to trigger any major sell stops. Even those keeping a $20 x 3 point-and-figure chart saw that set of lows taken out in this drop—reaching$1880 (actually just above $1870). Today’s close puts gold where it was trading six days after that March 8th high! Where’s the sustained downside. Six weeks spent?! 

If gold (June future) settles tomorrow above $1888.20 (the 3-day avg. is dropping daily, and for tomorrow it’s below today’s close), then daily/short-term momentum will close over the zero line, ending a likely basing action by momentum that has involved eight days submerged below the 3-day avg./zero line. 

The zero line has been a pivotal structure going back to early April. 

Again, the significance of such an upturn? Obviously, it says that while gold had a chance to jump off the cliff, as so many expected, it instead got just low enough to blow out price chart sell stops—so far with no follow-through. (Momentum was not making new lows like price when that occurred.) A daily upturn says that the bears had their chance.

That was written by Michael on April 28 and that if the June gold futures finished above $1888.20, it would likely end basing action. So, I checked the June futures. They closed at $1911.70! 

I’m displaying the monthly average gold chart here as of the month of April 2022. I like to look at monthly average data points because it provides a better view of the longer-term trend. While the average for the month of April fell to $1,933.81 from a March average of $1,947.83, it can be seen that it remains above the 20-month average ($1,834.73) and the 40-month average of $1,677.31. Gold clearly remains in a very strong bull market. 

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.