Sentiment extremes: Gold and Los Angeles real estate

I have been commenting recently on the bubbles forming in stock markets. But unlike stocks, other assets, such as gold and crude oil, have signally not been beneficiaries of the Fed’s largesse.

The gold price has been under severe pressure in recent months as pundits cannot see any bullish story at all. So while bullish sentiment for stocks has been off the scale, bullish sentiment for gold has been scraping along the bottom.

Today, I want to update my gold coverage and then offer a ‘Friday Funny’.

Did the gold price make a bottom?

In my last post of 14 November, I asked: Is gold making a bottom here? This was the hourly chart then:

Gold price spread betting chart

I could count the 7 November low of $1,133 as the end of a fifth wave down with a positive momentum divergence. That was likely to be the blow-off selling climax prior to a major advance (only 3% bulls, remember).

The market had rallied and then retreated to the Fibonacci 62% level at $1,150, and if that support could hold, the next move was likely to be up. This is the aftermath:

Gold price spread betting chart

The test of the Fibonacci level was successful and the short squeeze I had expected was on. There were several good long entry points along the way.

What the long-range charts are telling us

So here we are near the $1,200 level – what are the longer-range charts telling us?

Gold price spread betting chart

 

The rally off the $1,133 low is helping confirm that the five down is complete. The next challenge is the upper tramline in the zone of truth.

Normally, I would expect a hit on that upper tramline to be met with heavy resistance and to induce a good-sized dip at the least. But with the important Swiss referendum on Sunday looming, all bets are off for Monday.

If the result triggers selling, that could be a good opportunity to position long. But if the referendum is unexpectedly passed, the market will probably gap open by tens of dollars.

Meanwhile, crude oil is collapsing and this will have severe repercussions on all financial markets – stocks included.

Friday Funny – A Los Angeles story

As a light-relief post – a Thanksgiving treat – I thought I would offer this little real estate story that amused me.

I once lived in Los Angeles and can vouch for the occasional eruptions of buying mania there. House prices have always been subject to extreme boom and bust – it must be something to do with the smog, I believe.

House for sale in Los Angeles

 

Source: Redfin

This Los Angeles mansion in a very exclusive area (Culver City) has two beds, one bath and is a generous 80 square metres big.

The asking price? A steal at $550,000 (no, that is not a misprint). But they do throw in the wheelie bins and the bars on the windows – and the post-modern landscaping. And I thought the London market was nuts. As the locals say – only in LA!

In reality, this is another vivid symptom of what happens when central banks offer free money to all and sundry. Asset bubbles of enormous proportions are blown, inflated as they are by the dogs of greed that always run amok when the juicy treats are on offer.

And when those dogs have gorged and lie sleeping, the dogs of fear will emerge hungry for some of the action!

This little example is the result of quantitative easing (QE) and zero-interest rate policy (Zirp) – one more mal-investment. Does the buyer of that home at that price believe they are making a wise purchase based on sound principles? No – they are probably a flipper, hoping to find another sucker to pay even more down the line.

The funny thing about string

Do crazy prices, such as the ones seen in the LA housing market, have a trickle-down effect, making the economy somehow stronger? This is, after, all the line pushed by the Fed.

Will the seller, who now has much more capital, suddenly blow it all in the mall to juice retail sales, or even suddenly start a productive business employing people to help grow the real economy?

What is more likely is the seller will either buy another home to flip, or sink part of his windfall ‘wealth’ into financial investments, both of which will keep the bubbles inflated. This is what I call the ‘unintended’ consequences of central bankers – aka the string pushers. It’s a funny thing about string – no matter how hard you push, the other end hardly moves at all.

Why is there little enthusiasm for taking on more debt? Could it be that consumers and business are maxed out on loans and see no productive use for the extra funds?

Will we see a ‘Santa rally’?

Meanwhile, the sentiment of the US consumer has risen off the floor but is still much lower than before the credit crunch. Naturally, the bulls only choose to see the rise in the last four years. Nice tramlines, by the way.

spread betting chart

The peaks of sentiment in 1999 and again in 2007 coincided with the two major stockmarket peaks. This is yet more proof – if any were needed – that it is sentiment that drives asset prices. And when bullish sentiment is extreme – as it is today – stocks tend to peak.

Everyone expects a ‘Santa rally’ – does this mean we won’t see one?