Gold Market Update: Breathtaking Reversal to the Upside?
The world suddenly finds itself tipped into the gravest crisis since the 2nd World War, and with respect to the global economy it is actually far worse, because the financial system was teetering on the verge of collapse even before the coronavirus epidemic surfaced as a result of the exponential growth of debt and derivatives - so the virus epidemic and the reaction to it has simply acted as a catalyst to bring the whole house of cards down.
The current situation where countless millions of people are sat at home twiddling their thumbs and scared to go out is untenable. The economy is coming to a dead stop and if it continues the result will be anarchy - mass unemployment, privation and even starvation and eventual widespread civil unrest. The government can send out all the welfare checks it likes, but if nobody is producing anything, where is all the food and stuff people consume going to come from? So, regardless of whether a cure to the virus is found in the foreseeable future or not, and regardless of the risks to individuals, the majority of people are going to have to be allowed to return to work and normal social discourse restored, and who dies, dies. Since the vast majority of people who die from this illness are old and / or have their immune systems compromised, they are going to have to be sacrificed, and there is no choice about this - even if they stay at home, the people they see, family and carers etc. will carry the illness to them. It is an open question whether the coronavirus is a bioweapon created in some germ warfare laboratory and then strategically deployed, or whether it arose spontaneously on its own.
If you were to set up a printing press in your backyard and churn out dollars, you would be able to live a life of luxury, doing nothing and living off the labor of others. In a fiat money system that is exactly what the Federal Reserve Bank of America, and other Central Banks around the world, are doing on a vastly grander scale. However, if you try it yourself, you will be summarily branded a "counterfeiter" and be marched off to serve a lengthy jail term. They do it and get away with it "scot free". Furthermore, the more they do this the more they like it, because it involves no effort on their part, beyond reaching out to their keyboards and adding a few more zeros to the end of a number. Unless the money they create in this manner is gifted, as in the case of the paltry checks being sent out to American workers furloughed by this crisis, in a cynically calculated effort to stop them reaching for their pitchforks and taking to the streets, the recipients of the money, or counterparties, are then obligated to pay it back or at least service the debt, and become vassals or slaves of the Central Banks. When you understand this you comprehend that these Central Banks are the biggest parasites the world has ever known - none more so that the Fed.
So what was the game over the past couple of weeks, and especially last week, with the Fed intervening directly in the stockmarkets to generate a reversal and get them moving back up? To understand this you have grasp that the Fed has a cozy relationship with the Wall St elites and the elites in various huge powerful corporations, who are their crony pals. So, just as in 2008, the name of the game is to privatize the gains, and socialize the losses. When the market keeps rising, year after year, CEO's are able to buy back their own stock, driving the stock price higher, collectively driving the whole market higher. This enables them to justify big fat bonuses for themselves. When this is eventually pushed to its ultimate extreme and the whole thing breaks apart and comes crashing down, they then, in ritual fashion, go cap in hand to the Fed "Oh, it wasn't the fault of our years of corruption and mismanagement, it was the fault of that nasty coronavirus - if you don't bail us out thousands of workers will be out of a job" The Fed of course is only too happy to step in and help its pals in their hour of need - after all it involves no effort on their part, and the cost - someone has to pay - will be borne by society as a whole in form of a weakening currency and accelerating inflation. This is why they spirited trillions into existence just over the past couple of weeks to throw at the markets and why the dollar suddenly took a nosedive.
The central problem here with regards to the Fed and other Central Banks "saving the world" with their largesse is that waving your arm gracefully over a keyboard to spirit a few trillion more dollars into existence does not actually produce anything and it will not stop the real world economy from dying. Corporate earnings are cratering right now, and "bottom line" earnings of many companies are set to drop off the bottom of the page. The Fed can attempt to "goose" stock prices by creating trillions to throw at the market all it likes, but it won't alter the fact that production is collapsing, so this stance will rapidly become untenable as the flood of increasingly worthless dollars crashes the currency. Holders of stock will increasingly "call the Fed's bluff" by selling onto rallies, so that eventually the Fed becomes the dominant holder of stocks - this of course may be its ultimate objective - to become the owner of the world, and in the meantime, until people are allowed to return to work, the State is being granted a golden opportunity to dry run its Martial Law techniques - they militarized the police some years back in the US in preparation for just such a situation.
Now, after this slightly longer than usual introduction, and doubtless to the relief of some of you, we will turn our attention to the charts, and today it is appropriate, in light of what we have been discussing above, to start with the chart for the S&P500 index.
As you probably saw the MSM (mainstream media) had its trumpets blaring last week "Biggest 3-day rally since 1933 - the coast is clear, roll up and buy (you suckers)". We saw this rally coming, as you may remember, and it doesn't change anything. All the market did was stage a classic snapback relief rally from a record by far oversold condition, so it was easy for the Fed to get it moving up by throwing a trillion or two at it. With corporate earnings set to crater it should soon start dropping again in earnest.
With margin call pressure easing due to the rally and the Fed's money factory taking it to the next level to fund its rabid buying spree, the dollar responded by caving in last week and giving back a large slice of its earlier spike gains...
If the Fed continues to churn out trillions of new dollars, then we can expect the dollar index to tank, unless that is, they can get the subservient vassal Central Banks (who they are flooding with dollars) such as the ECB and the BOJ to do likewise, and that seems likely given that they are faced with a similar crisis. The key point for Precious Metal investors to take away from this is that, no matter how the dollar performs relative to other currencies, money supply in all countries will be ballooning at a fantastic unprecedented rate as they struggle to meet obligations and maintain liquidity, which means that, measured against real money, which is gold, they will be cratering. On its 11-year chart we can see that the dollar index has been in an erratic holding pattern for 5 years now, and the next stockmarket hit should see it again try to break out of the top of this pattern, unless it is swiftly countered by another tsunami of Fed largesse. The dollar is often strong during market crash phases, which is one reason Precious Metals often drop hard during this phase before recovering quickly when the crash phase is over.
There are a number of reasons to believe that gold and silver will get taken down again once the market starts to plunge again, despite the increasingly acute shortage of physical. PM stocks are underperforming gold right now, which is viewed as a warning, and the silver chart continues to look awful following its recent severe breakdown. That said, there is light at the end of the tunnel, as we can see with the silver to gold ratio shown below being at levels that strongly suggest that a humongous sector bull market is brewing, and not far out, which is hardly surprising given the chronic shortage of physical metal, and silver's COT (shown in the parallel Silver market update) is rapidly improving. Thus, what is expected is another drop in sympathy with a crashing stockmarket, and then, immediately the crash phase is over, or even before, a scorching rally, as happened from the 2008 - 2009 crash low, only this time much stronger.
A subscriber wrote me early last week essentially saying "Maund, what the hell do you mean? - you say that the PM sector is going to rally, then drop more, then rally again - I'm confused, what are you talking about? So, in an effort to clarify this prediction I present the following prediction chart for GDX...
The minor rally that was expected has occurred and we traded this successfully, buying silver ETFs and Calls, and taking profits several days later, selling highly leveraged USLV for a 55% gain in four days. We would have made a similar amount in NUGT had the management of this ETF not moved the goalposts, so we escaped with only about an 8% gain before it started to drop back, resolving never to touch this one again. This is why we generally much prefer options to leveraged ETFs. With options you can't be swindled out of your gains to anywhere near the same extent - they don't need to swindle you because they make enough out of eroding time values and spreads. GDX started rolling over again beneath resistance after we cleared out and now looks set up to drop hard as shown, in sympathy with another severe decline in the stockmarket, but after that it should take off like a rocket as the physical shortage of metal really starts to bite.
Here is the normal 7-month chart for GDX which looks bearish. We had a breach of very important support earlier this month that was followed by a savage drop. Then it bounced back in tune with a rising stockmarket and falling dollar last week, but the rally was capped by the earlier support that has become heavy resistance and it is now rolling over ominously again, and as mentioned above is expected to drop hard with the stockmarket. This is made more likely by the bearish cross of the moving averages now occurring. Needless to say, this does not bode well for gold and silver near-term.
On gold's latest 6-month chart we can see why it looks like it will drop back again over the near-term, as it has stalled out at a clear resistance level at earlier highs. Moving averages are still in bullish alignment so at this point it looks likely that it will drop back again to the quite strong support in $1450 area that arrested the sharp drop in the middle of the month, but probably not further. However, on this drop, because of the falling stockmarket, PM stocks are expected to be harder hit, and to drop back below their mid-March lows.
On gold's 11-year chart we can see that its rally of the past 10 days or so has given it sufficient "wiggle room" to drop back quite hard near-term without violating the supporting Saucer boundary which is later expected to slingshot it to new highs.
Unlike silver's COT, gold's latest COT chart has not improved enough to avert another sharp drop over the near-term, which would actually be a good thing if it cleared out some of these stubborn Large Specs...
Now to look at the latest 1-year chart for the Gold Miners Bullish % Index, which shows that in as short a time as about 2 weeks, PM sector investors have gone from being almost universally bearish, to very bullish, in classic manic-depressive fashion. Since they are, collectively speaking, never happier than when they are part of a crowd, and always wrong, it's not hard to see why we dumped our long ETFs on Thursday and why we are now negative on the sector for the near-term.
The crowd - you gotta love 'em - what would we do without them?
Finally, the most important thing for Precious Metals sector investors, or would be Precious Metals sector investors, to keep in mind is that if we do see a short sharp selloff across the sector soon as looks likely, it is expected to be the last and to be followed by a dramatic and possibly breathtaking reversal to the upside, as per the scenario shown on the 2-month GDX chart shown above, and this accords with Larry's amazing gold chart shown below. On the chart it looks like a drop now will violate the chart, but as Larry himself clarified recently "Note: I am beginning to suspect that there may be one more outside rounding line to add later. The reason I suspect this is the inner line only touches in the center. I may be way off on this - but the suspicions are there."
Click on chart to popup a larger, clearer version.
Clive Maund