Watching These Gigantic Plates Grinding Out a Tectonic Shift

“Gold vs. stocks—an asset class shift in progress” – That’s how Michael Oliver headed up an August 14, 2015, missive he sent out to his paid subscribers. I expect to have Michael on my radio show this-coming week to talk about what he sees for the equity and gold markets, but with his permission, I am passing along his August 14 wisdom to you as follows:

“Momentum nearly always leads price by enough to provide a lead?in for potential buyers or sellers. It certainly provided one massive lead?in to last year’s upside explosion in the Shanghai Composite Index. In fact, the Shanghai charts that filled MSA’s pages from early 2014 until the breakout in July were overlays of the momentum chart below (charts of Shanghai available by e?mail request). A flat, protracted basing process with overhead structure defined by repeated rallies to the same level. Once a rally overcame the momentum structure, a beast was born.

“Expect the same out of the gold/S&P500 spread when that red line comes out. Meanwhile, the price spread of gold vs. the S&P500 continues in a now gradual downtrend, no doubt comforting to those who think equities will always trump gold.

“The momentum of the gold/S&P500 spread, however, is clearly bottoming, and is now again making a move towards the key pending breakout structure overhead. The zero line/40?wk. avg. of the spread has capped the action since 2014. Close out a week on the spread that pushes momentum credibly above the zero line, and you can then assume a major line of defense has been overrun ? gold will have shifted its performance trend. The spread will follow and probably with a whoosh. Like some beach ball held below water level, and then released.

“The 40?wk. avg./zero line of the gold/S&P500 spread will be at 57.1% next week. Each week it drops about 1/10th of 1%, so that by late September the average will be around 56.6%. The spread is now at 53.5%. Therefore, about a 3% advance in the spread will once again have momentum action bumping up at the horizontal resistance line (zero line). Get much above there and the tables turn.

“I realize that many pro?gold analysts are looking at presumably valid metrics such as contrary opinion, retail gold sales in India, China purchases, and no doubt fifty other newsy items that they see as potentially bullish for gold. But all those variables, valid as they may be, are part of the larger mix, with not a single one of them being the pivotal factor. And remember, many of the above “reasons” to buy gold have come and gone repeatedly in the last few years. It’s easy to forget that.

“MSA asserts that the tactical fundamental for gold is the investor preference shift out of stocks into gold. And that tipping point occurs with both moving parts, not just one. The spread and the momentum of the spread include (by default) all of these fundamental factors and data points and merge them into one grand momentum structure. The charts on the prior page in effect boil it all down. Simplicity. Momentum factors during the past few years have built that pending breakout structure (red line). It wasn’t for naught, as such structures rarely evolve without future exploitation. Sometimes thinking too hard and getting all lathered up in anticipation is a waste of time. Calculate and measure instead. Be chill.

“MSA argues that when that red line goes ? then boom. An asset class shift will have begun in earnest. Until then let the meaningless debates fill the CNBC screen. You do not need to keep track of the weekly spread measurements. MSA will monitor and advise.

“The long?term context is more than shown in the charts on page one. The large drop in gold performance vs. the S&P500 since the 2011 peak has driven the gold/S&P500 spread to 52%. If one had gone long gold in 2000 and simultaneously shorted the S&P500, the spread was at 19%. Even at recent lows in gold’s performance, your preference for gold would still be profitable by some 2.7 times. This despite the rise in the S&P500. And if this spread momentum breakout occurs, that longer?term trend favoring gold will reassert itself for yet another up?leg.”

Once in a while, I pass along Mi¬chael’s wisdom to you, and whenever he and I both are available, he is a welcome guest on my radio show. Like an engineer, Michael examines the structure of market and then looks to his own momentum measures to determine a possible good time to go long or short the market in question. Given the nature of this letter, I mostly pass along Michael’s ideas on gold and equities. But to show you that he covers a whole lot of markets beyond those I watch most closely, above is a list of the missives that showed up in my inbox from the start of this month through the wee hours of this morning. This is just a small sampling of the markets Michael watches. One of his most spectacular calls over the last year was his call to go long Chinese equities just before their massive rise last year. Michael now makes his service available to retail investors. You can learn more by visiting his Web site at Olivermsa.com.