Welcome back, everyone. How was your three-day weekend? It looks like some people are mentally making it a four-day weekend, as today's action was lethargic, and on low volume. Still, even lethargic days mean something in the grand scheme of things, so we'll do our usual thing. First though, we want to answer a reader question about gold, and we want to answer it with the data we didn't have in hand at the end of last week.... the Q4 gold supply/demand report from the World Gold Council. Gold is Still Tarnished We mentioned this to you in Friday's newsletter, but it's worth repeating now - we read every e-mail you guys send us, whether they're compliments, complaints, or questions. In fact, after answering one question about our stance on gold in Friday's edition, we got another question about gold that's worth answering publicly today. Alan writes: How can you be long term bearish on gold given the staggering growth in the US money supply, along with the historic levels of debt in the world, and the (reported) low inflation? I understand that your emphasis is on technical analysis, but should your outlook not be tempered with some fundamental analysis? Have you looked at the correlation between gold and the money supply over the last century? Thanks for the question, Alan. It couldn't have come at a perfect time. First and foremost, though we don't have time and room to get all the way into it every time we talk about gold, our technical emphasis on gold's behavior only applies to its short-term ebbs and flows, which are largely sentiment-driven. Friday's look at gold, for instance, was a short-term, technically-driven look. When you're talking about the long-term trend for gold, though - as in several months or more - we are more fundamentally-driven. The challenge with that long-term, fundamental mindset is that we rarely get any true fundamental data. In fact, the only true supply and demand data we get comes from the World Gold Council, and we only get that once per quarter. The good news is, we got the most recent batch of fundamental data on gold this morning, so we can make a well-supported fundamental argument in today's edition. As they say, read 'em and weep. Last quarter, demand for gold (all purposes) fell to 857.8 tonnes. That's yet-another multi-year low. It's 2.0% beneath Q3's consumption, and it's 28.7% below demand seen in the fourth quarter of 2012. And, the weak demand came despite the fact that Q4's average price of gold was the lowest it's been in several quarters, meaning even with drop-off in demand, the supply-demand equilibrium is still at lower prices from here... even if gold prices are up nearly 10% for the current quarter. The bulk of the decline in demand stemmed from continued selling from the ETF industry. The fourth quarter was the fourth straight quarter fund companies were net sellers of gold, telling us that the average investor is still dumping the stuff regardless of what the headlines imply. Although central banks/government banks are still technically net buyers, their pace of buying continues to dwindle. Last quarter's 61 tonnes bought by government banks was the weakest buying we've seen from them since 2010. Folks, you can slice and dice it as many ways as you want to, but you can't escape the bottom line reality... demand (and I mean actual "putting money on the table" demand, and not just a theoretical demand) for gold is falling. It has been for a while, and I don't see much on the horizon to change that. Now, getting back to the part of Alan's question regarding U.S. money supply, global debt levels, and reportedly-low inflation, we believe all of those factors are either reflected in bond yields and/or in the strength of the U.S. dollar, which is part of our routine analysis. While it would be easy to look at the growing amount of increasingly-worthless U.S. greenbacks and presume it would be bullish for gold because it should be bullish for gold, it should have also driven inflation to sky-high levels by now. But, it hasn't. It should have also pushed the U.S. dollar to frighteningly low levels, and it hasn't done that either. There can be a short-term disconnect between a cause and effect, but we're now several years into a period of cheap debt and a weak U.S. dollar, and we've yet to see inflation or bond yields race out of control. There has to be a reason... a proverbial "more to the story". And there is more to the story. Part of the story is that a lot of other key countries' currencies are also fairly weak, making the sawbuck's weakness a little irrelevant. Another part of the story is that even with all the stimulative effects of cheap and easy dollars, it's still barely enough to keep the U.S. economy and the global economy afloat. More important to us than anything else though, gold's fundamentals are reflected in the World Gold Council's quarterly report, which is a report of what people ARE doing with gold rather than what they theoretically should be doing with gold. And, nothing has a bigger impact on gold's price than its actual buying and selling. Could that supply and demand dynamic for gold change? Sure, and it could change in an instant because of a change in the debt levels or inflationary pressures Alan mentioned. But, if and when it changes for the long haul, that will be reflected in the WGC's quarterly report. We haven't seen that shift yet. Don't worry about missing the first part of any new trend for gold. If gold's demand does take a turn for the better, it should remain in that trend for several quarters. As for the stock market.... The Bulls Still Don't Fully Believe Ho-hum. Yeah, the market may have made progress today, but it wasn't gangbusters-like action. Volume wasn't all that impressive either, especially considering it was the first day back from a long weekend. There should have been an extra day's worth of pent-up demand unleashed. The lack of interest today is an indication that traders are committed to the rally up until a point. After that point is reached, then most players are adopting a wait-and-see approach. Well, it looks like we're getting near that point. The S&P 500 - along with all the other indices - made higher highs today. But, none of them made any real breakthrough progress. Take a look. Now what? For now, don't sweat it. Be content to wait until we get some more clarity here. For the S&P 500, that clarity will still either come in the form of a break above the ceiling at 1850 (and/or the upper Bollinger band currently at 1862, but falling), or in the form of a key bearish reversal bar that sends the S&P 500 back under a key floor at 1812. Anything in between, and we're still on the fence. And yes, I still think the VIX is going to use all the room it has between today's close of 13.88 and its big floor around 12.4 - or even 11.3 - before staging a reversal effort. That could buy the S&P 500 itself just enough time to test one or both of its current ceilings. I wish there was more to say, but it wouldn't do you or me any good to make something out of nothing here. The smart money is currently on the sidelines waiting for everyone else to show their hand. We'll do the same. Again, it's a day-to-day dance. We could switch gears as early as tomorrow, so stay tuned.