Aussie gold update

 Aussie gold update (click to enlarge)

It's only covid 19

We have been whipsawed again and I start thinking maybe I should zoom out a little and try to see a big picture again. What has happened with the gold sector in the last six months and what does it mean? Is it just the manipulation or there is something else to see?

I believe that the most traders interested in the gold sector, including myself, have been operating on the simple postulate that in an environment where unprecedented money printing is going on, gold should be the main beneficiary. Just look at what happened in 2008 and there is the proof, no? No, at the moment, that is obviously not true, so my only explanation is that people are ditching gold as the inflation protection monetary metal in favour of other commodities, in particular those perceived as potential beneficiaries of green energy policies being proposed by the new administration. In the Biden economy, there will be huge investments in the green energy sector and infrastructure reconstruction, the consensus bet is that the monetary risk emanating from the rising debt and rising trading deficit will be dealt with by the ensuing economic boom. 

Not that I agree with the consensus but this line of thought allows me to reconcile some discrepancies that we have seen recently in the commodities market. For example, monetary and fiscal easing should have resulted in inflationary pressure in the commodities market and it did with one exception, gold. But why? Shouldn't gold be leading the pack? The difference between gold and the rest is that the gold is a monetary metal and the rest is industrial metals/commodities. My conclusion is that the market participants bet on the inflation but they also bet that the inflation will be under control, therefore, there is no need for the monetary hedge. 

This theory is easily observable when we check the action of gold and other sectors since the March low. At the low, there was uncertainty about what will happen to the economy, therefore, when printing money started it caused the gold to fly out of the block before and faster than anything else. The difference between the 2008 crash and now is that in 2008 everyone believed that that was a genuine economic issue and now everyone believed that the only reason for the downturn was the covid 19. As soon as the good news started coming out about the covid 19 vaccines the gold turned around. On August 11th when the news about the covid vaccine came out of Russia GLD dropped 5.37%, more than any day during the March crash, people thought the danger had passed!

For gold, this day marked the top, for all other markets it marked the beginning of the acceleration phase. Cryptos, copper, lumber, oil, platinum, palladium, uranium, Russel 2000, S and P 500 etc all gained tremendously and when Biden won the elections they all accelerated further in anticipation of more printing and huge government programs to jump-start the economy. So, as I noticed in one of my previous blogs the whole March debacle feels like random noise in the continuing bull market, no one believes that there are underlying issues with the rising debt and trade deficit. The MMT prevails, the problems are blamed on covid 19.

All other discrepancies in the markets can be explained with the same reasoning, the belief that despite the unprecedented printing the inflation will be under control. For example, gold and dollar declining together since August. Gold is unwinding the gains because no need for a monetary hedge in controlled inflation and dollar is declining steadily because of monetary inflation. 

Another thing, gold miners in Australia have been reporting stellar financial results one after the other one but they are relentlessly sold off regardless. The only explanation is that the hedge funds are leaving the sector for sectors that they perceive as the growth sectors for the next year or two therefore using any strength to unload gold shares. The result is that all commodities rise but without gold.

Also, silver generated the bull signal but gold failed. Explanation, silver is an industrial metal that will be in the centre of the green energy boom, gold is just monetary. Same with platinum (industrial metal, green energy), it exploded to a new high in the recent weeks, while gold is struggling.

 Same with palladium, it generated a quadruple buy on Friday, etc...

Cryptos have, in my opinion, a little bit different dynamics behind them. I see cryptos as mainly millennials generation play. This generation understands technology and can see the benefits of adopting bitcoin as a crucial part of the new world the way they see it. I think they will never understand the gold, and vice versa, the older generation will never understand the bitcoin, in spite of the fact that bitcoin and gold are practically playing the same role in the old/new world. The main difference between the millennials and the boomers is that the boomers have trust in the system therefore they will never go for gold unless they lose that trust. All their money is in the S and P and real estate and will stay there until it all comes down crashing and burning in front of their eyes. The millennials do not have this trust in the system and do want to change it now, therefore, all their energy is behind cryptos and the result is visible. The smart money sees millennials as the future and it is starting to accept the inevitable, that is why we see institutions starting to pile into the bitcoin.

In the light of the above discussion and the ongoing melt-up in the general markets, the question is, is it really sustainable and if the answer is no, how long before the crash? 

I think that the current rally is not sustainable and the market will go into harsh correction sooner rather than later. Before the correction, I will rather be in commodities that will benefit from the current psychology than in gold which, even if rising, will underperform. If I had to guess I would stick to my projection that once the S and P 500 is above $4000 we will be in dangerous territory. Probably, it could go to $4400-$4500. At that point, gold might be at $2200-$2300 but silver might be at $40-$50. For this reason, I decided to move my attention away from solely the gold sector and diversify in other sectors, in particular silver, uranium, lithium, palladium, oil. I will also mainly be short term trading trying not to hold positions over the weekends. At the S and P over $4000, I will start building a short position in SandP and a long position in dollar. I will keep these over weekends with no hesitation.  

The big issue for the S and P at the moment is that the 10 and 30-year bond yields are rising and threatening the whole narrative of the FED being able to manipulate the yield curve. I know that the FED is buying the treasuries at the pace of $80B a month ($1T a year!) but that is not enough because the current yield on the 30 years is 2% and rising. This level is the Fed's target for inflation, above this level and we might be in trouble, therefore they will have to step up now and push the yields down. When one looks at the SKI chart of the 10years yield it has generated a true bull signal back in Oct 2020 and is up 49% as of the last Friday.

This chart shows where the weakness of the system is. Many serious experts are predicting that the most likely scenario for the market crash will be a sudden spike in bond yields.

It will take a huge deflationary crash to damage the belief in our monetary system and the government's ability to control it. Only after this crash, the gold will become the leading factor in the fight against the raging inflation. 

I sold all my trading gold positions on Thursday and was happily watching them tanking on Friday for no particular reason. I kept all my silver positions and they held very well on Friday regardless of the drop in silver, so my analysis worked for the first time in a long time. I also bought some uranium stocks. I have tons of cash and am looking for viable short term trades in uranium, palladium, platinum and oil sector. 

I had to get this off my chest so I can recalibrate my mind but now I don't have the time for charts today. I promise I will try to post them tomorrow.

Please feel free to comment, I would like to know what other people think of the whole gold situation. 

Best luck to everyone,

Branko

The Impossible Route II

The price action during Thursday session and the Friday session in Asia/Europe was in line with negative signals generated at the beginning of the week but by the time the USA market opened the things have turned around. Many signals have been reversed and right now it seems like the last week action was a fake-out. 

In the week before Christmas, I wrote that "I would prefer a slow action, the wall of worry type, instead of a quick spike. I think that this would give us a more sustainable breakout sometime between the first week of January and the first week of February 2021". When I said I preferred a slow action I really didn't mean this slow but here we are, the first week of February is over and it seems we just barely made it, like in the last hour of the last day! If the slower means better this is as good as it gets. Having said that, we still need a follow-through next week to confirm the breakout. 

In the last hour of trading on Friday, I have established some initial positions in silver and gold in the FOREX market. My dollar position was taken out by a stop loss for a small profit. Next week, if no more surprises, I will start buying my trading positions back. 

Let's see the charts

USERX

USERX price has been oscillating around the green uptrend line since the November low. After a double fake-out, it has generated the 35-39 buy signal that together with the current 16-20 buy signal constitutes a bullish JPOT buy. The energy released by this buy signal should push the price further towards the 92-96 buy signal to complete a powerful double 35-39/92-96 buy. 

If the above scenario transpires, the momentum needs to be sustained at least till the first week of March. This is because there will be a period of two weeks while any prolonged weakness will lead to a double sell. Also, at the end of February, there is a small spike in the back prices which could lead to a quick sell/buy sequence that has the potential to transform current signals into a true bull signal. If it comes to this point it is again the best strategy to ignore these signals as long as the price stays inside the uptrend channel. 

HUI

I've been writing about the importance of the HUI $286 price area since early December. This is the area that was broken through in 2013 and also has marked the 2016 high before continuing years-long consolidation. Guess what, after dropping intraday on Thursday all the way to 273.1, on Friday price reversed and closed at $286.63! I hope this is the farewell touch before the lift-off. The HUI price needs to be over $330 to generate the double buy and I doubt it will happen in the next two weeks. On the other hand, the potential 92-96 buy signal is almost warrantied to be transformed into a true bull signal along the way. The only way this will not happen is if the price explodes to $350 in the next two weeks and then keeps rising. 

XAU

same as USERX but better. It has never seriously violated the uptrend. Even staying at the current level will produce the 92-96 buy signal in a few days.

GDX

Similar to HUI

GDXJ

Similar to HUI

GLD

GLD suffered from the last week 35-39 sell signal but it seems that it has found the support on Friday. Any further weakness would be a signal that something is very wrong. It is very important that GLD buys back the 35-39 and clears the overhead resistance. The first resistance for gold is around $1825-1830, that area is the neckline area of the head and shoulders pattern on 1h chart that was broken on Thursday. The next resistance is at $1860 the area that has been rejected many times in the last two weeks. 

For now, it is ok that gold is lagging miners because it usually does at turnarounds but any weakness that is not temporary would be a problem in the next 5 days. 

SLV

The SLV chart is the best looking chart of all precious metals right now. The price just generated a true bull signal which should mark the start of a long term rise. This signal has all the characteristics of a proper bull setup and if everything works out as it should I expect silver to catch up with gold and hit a new all-time high during this leg up. 

S and P 500

After touching the 16-20 echo the price of S and P bounced back and is at the new all-time high again. It seems that it is heading above $4000, as projected by the break of the cup and handle formation back in July 2020.

I'll add the chart of Russell 2000 to illustrate that since Biden has been elected the main action has moved from the internet and tech companies to wider USA domestic market. The Russell 2000 is up 34% since the election day.

TRAN - transport index ETF

Transport index recovered from the bearish double sell and is again above the necessary level to start the new leg up and confirm the bull market in Dow and SandP. The trend is intact but this time chart doesn't have the weaknesses that it had back in January. 

UUP - dollar ETF

UUP bullishly bought the 35-39 echo above the resistance but it showed some serious weakness on Friday. Nothing has been reversed yet but it will be if the weakness continues. I'd personally like to see it reach the 92-96 echo before turning around because, if the gold does the same, that would be a potent fuel for the Aussie golds to catch up with the American counterparts. 

TLT - long bonds ETF

As I said last time this chart looks bad. The bonds continue the fall and the price is currently almost as low as at the March bottom. The price turned down in August around the same time as the gold and we might now need a trend change again for the gold to finally bottom. The current price pattern is 1 up 7 down. I do not have a longer-term stats but the last two times that 1up 5+down pattern was formed it did mark the exact June 2020 low and the exact Aug 2020 high. Hopefully this time it will mark a trend change again.

Bitcoin

The 16-20 buy marked the exact bottom 17 days ago and on Friday the price generated a 16-20 sell. We will see if this signal is going to stop the rise and lead to touch/sell of the 35-39 echo which is now on the 116 days long buy signal. I think the odds are good for an interaction with the 35-39.

It seems that, after all the drama, the price targets for the renewed precious metals bull market will be achieved but we still need, this week, all the necessary confirmation signals to be generated. 

I have started accumulating FOREX positions for silver and gold and will start buying back my trading positions in Aussie stocks next week.

For now, the stop loss is USERX 35-39 sell signal. 

Good luck everyone.

Branko

Danger!

Some interesting signals have been generated and it is important to direct our attention to the way they shape the big picture.

I urge everyone to go back and read the intro of my last blog to understand why I am sending this update in the middle of the week. Markets are interconnected and it is important to see the big picture.

The most important thing first, GLD

GLD

GLD generated the 35-39 sell signal to join all other indices that already have sold. The only thing holding this chart from falling quickly is the support line but that support is getting thinner and thinner. If gold breaks $1800 then, in my opinion, a quick $100 move down will ensue. Every time gold makes a move to break through the resistance, the resistance reasserts itself. $1860 seems like a much tougher obstacle than $1800. To buy back the 35-39 echo, which is necessary to flip the picture to bullish, gold needs an instant surge of 1.98%. That would be around $1880. In my opinion, given the signals, the chances of that are much less than breaking $1800.

Here is the one-hour gold chart. If the neckline on this chart breaks hold your hat.

UUP - dollar ETF

Since March 2020 dollar is officially in a bear constellation (sold 92-96). During this time it couldn't manage to break the downtrend line but now it is one day from buying the 35-39 index on the path, not xxed while breaking this resistance line. Combine that with the 35-39 sell signal across the gold sector and you get two pictures telling the same story. 

Here is a 1-hour chart of USD/EUR, which looks like a breakout from the 2 months long inverse head and shoulders. Pretty strong bullish alignment that already broke out.

Often to get a better perspective of one chart I go to the chart that represents the opposite asset. In the case of the UUP that would be the UDN, dollar bear ETF. That one sold the 35-39 today. Fits the overall picture.

So, it seems that dollar and gold are falling in line, what about bonds and broad markets.

TLT - bonds

I described last time how this chart is very bearish. A further decline will increase the bond yields which is then the pressure on the S and P 500. The SandP is ignoring this for now, but it seems that the gold is not. Probably, the perception is that the FED will intervene if necessary but for now the TLT chart keeps deteriorating. What if the assumption that the FED is going to intervene wrong. Maybe they will let it bleed first and then intervene? Is that what this chart is telling? I do not know but to stop this chart bleeding the intervention is necessary and quickly. 

The mirror view of this chart is TBT bonds bear ETF. It has been on a true bull signal since Oct 2020! That should not be ignored.

S and P 500

SandP rallied the last two days but it didn't generate any signals, therefore, the SKI configuration is still bullish. This chart might be the last chance for gold and dollar to reverse their signals but I think it will need the SandP price to hit a convincing new all-time high to have such an impact.  The momentum is slowly waning. 

To shed more light to this situation lets involve the transport index. Transport index has generated its unwanted double sell index and is now trying to recover but for now, the sell signal is surviving.

Given the bonds situation, the SandP chart and the TRAN chart I would say that the overall bias for the broad markets would be slightly negative for now. Outside intervention is needed to push this thing upward again. 

That is it for now. Time is quickly running out for gold and gold stocks to reverse the action of the last two days. The charts are, for now, favouring the downside.

I am sitting on my core position and will establish a trading position if the charts generate buy signals. I have transferred all my ETF holdings to physical metal. I have established a small long position in the dollar (USD/EUR) and will increase it next week if the signals are not reversed. 

Good luck everyone,

Branko