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Market Update

May 22nd, 2016 No comments

We re-visit the 4 principle developing patterns in the markets looked at 3 months ago (Feb 2016) to examine their current status, and how these might develop in the next period:

  • Global growth rates and inflation continue to remain anaemic, with central banks continuing to apply stimulus including negative interest rates in some countries;
  • The US Dollar continues in a declining phase, although correcting up at the moment with a more hawkish tone to the recent issue of the latest Federal Reserve minutes;
  • The Gold and Silver markets are correcting downwards as a consequence of the more hawkish Federal Reserve, together with a build-up of short ‘COT’ positions;
  • World general equity markets continue to display massive top patterns and appear to be fatigued;

Global growth

There is no real good news in all of this, although the US Federal Reserve’s slight hawkishness is based on a perceived improvement in the US labour market, whilst many still believe in the onset of recession. The debt levels continue to burgeon which the world cannot sustain and which prevent any real growth. The negative interest rate experiment in some countries appears to be a failure, and the IMF continues to caution with global growth prospects tilted to the downside.

US Dollar

The US $ Index exhibits a prominent double top on this weekly graph and has been in a downtrend since Dec 2015. It broke down through it’s 200 day moving average (dma) in March and below it’s support trendline towards the end of Apr 2016, and has been correcting up since. It is now approaching resistance, indicated by the red elipse, at the 200 dma and it’s inclined resistance trendline. This is now neatly positioned to break up or to continue down, and will be determined largely by the US Fed FOMC meeting in June.

 

US$ Index small

 

Gold and Silver Markets

The gold price broke up through it’s 200 day moving average (dma) and long term resistance trendline in Feb 2016, indicated by the blue square on this weekly chart below. It has since moved higher through an area of consolidation with higher highs and higher lows, indicating better things to come. However, it has been threatened by a developing head and shoulders pattern, indicated by the inclined support line in black, and peaked at the end of April.

 

goldprice

 

The build-up of short ‘COT’ positions and the unfolding rise or fall in the US$ value is now indicating a potential correction in the gold price into June which may penetrate the support trendline and approach resistance at the 200 dma, at a price range of $1200 in the area indicated by the red square.

Consensus does appear to suggest much higher gold prices once this technical correction is completed, with many commentaries in support of this. Some of these include the recent Sohn presentation by Stan Druckenmiller, George Soros now switching into gold increasingly, with increased clarion calls “to make America gold again”, which has been unheard of for ages. The general loss of confidence in central banks and the realisation of potential apocalyptic events that are threatening with the collapse of the international monetary system itself. This is patently not working and cannot survive.

The silver market is much in line with all of the above.

World Equity Markets

Most international stock markets maintain their broadening top patterns and the sideways movement continues with a slight downwards bias. New highs have not been reached for more than a year now and the markets look tired and fatigued. The illustration below is a weekly graph of the American S+P500 index with it’s prominent triple top and downwards bias, flirting repeatedly with the 200 dma indicated in blue. This is symptomatic of most world markets.

 

s+p500small

 

Taking all of the above evidence into account, in anaemic global growth, staggering debt levels, stimulus packages that have yet to succeed, etc., perhaps the likes of Stan Druckenmiller and George Soros are yet again correct, and the ‘smart money’ should move from general equities into gold.

Categories: Currency, Equity, Gold Tags:

Gold Market reaction to Fed Minutes

May 20th, 2016 No comments

Gold reacts negatively to the Federal Reserve FOMC meeting minutes that seems to indicate a possible interest rate hike as early as June. The price sank to $1,243.90 on Thursday, the lowest since April 28, as a resurgent dollar hurt demand. Although there has been a mild recovery in the gold price on Friday in the face of the stronger Dollar.

The odds of a rate increase in June or July have now increased as the Bloomberg Dollar Spot Index is set for a third weekly gain, whilst the gold price is now enduring the downwards correction anticipated for some while now.

Refer to the complete article on Bloomberg.

Categories: Currency, Gold Tags:

Market inter-relationship patterns

May 14th, 2016 No comments

The markets are interacting with each other in interesting patterns at the moment with the relationship between the Dow Jones Industrial Average, the US$ Index, and Gold all correlating quite accurately, as evidenced by the graphs below.

The US$ has been in a downtrend since end November 2015 and recently broke down below it’s long term support trendline. At the end of April 2016 it turned up and is correcting towards it’s downtrend resistance line, and beyond that it’s 200 day moving average (shown in the 2 red elipses). These might well be areas of resistance after which the downtrend could continue.

 

usdindexlongterm

 

The Gold price is correlating accurately with this having turned down from it’s recent high at $1306, also exactly at the end of April 2016 and is seemingly heading towards it’s support trendline and below that to it’s 200 day moving average, indicated by the red square at a price range of $1200.

 

Gold

 

That would be a strong correction of 9% with the threat of further serious downside if the 200 day moving average is penetrated. This is also supported by the substantial build up of COTs indicating huge short positions, however, the gold price seems to be resisting all of this and actually moved up on Friday to close at $1273.

The 3rd element in this grouped relationship is the US market as represented by the Dow Jones. This too peaked towards the end of April 2016 and is now indicated a threatening ‘head and shoulders’ pattern. The graph is by courtesy of Stockcharts which clearly indicates the H+S pattern, and you can easily link and recognise the relationship between the Dow, Gold, and the US$.

dowjones

 

If the H+S pattern is breached then the index could drop by the height of the head down to a level of 17000, but of course it all depends on the movement in the value of the Dollar.

 John Eyre

14 May 2016

Categories: Currency, Equity, Gold Tags:

Stan Druckenmiller delivers his Apocalyptic “End Game” Presentation

May 9th, 2016 No comments

On Thursday 4 May 2016 Stan Druckenmiller delivered his apocalyptic presentation at the Ira Sohn Conference in New York suggesting:

  • everyone should liquidate their equity holdings;
  • buy gold;

He is the legendary who while managing the George Soros Quantum Fund made $1bn betting against the British Pound in 1992 (allegedly in 1 day): He is the most illustrious investing mind of any generation (with a 30% average return from 1986 through 2010).  Below are some key points from his presentation.

The Endgame

When he founded his Duquesne Capital in February of 1981, the risk free 5 year treasuries rate of return was 15%, and it was the pre-cursor to one of the greatest bull markets in financial history as assets were also priced incredibly cheaply to compete with risk free rates. This forced corporations to invest capital wisely during one of the greatest investment environments ever, which is exactly the mirror image of where we are today. The best is behind us.

By most objective measures, we are deep into the longest period ever of excessively easy monetary policies. Simply put, this is the biggest and longest dovish deviation from historical norms I have seen in my career. The Fed has borrowed more from future consumption than ever before”.

The Fed has no end game. And smoothing growth over a cycle should not be confused with consistently attempting to borrow consumption from the future. The Fed’s objective seems to be getting by another 6 months without a 20% decline in the S&P and avoiding a recession over the near term.

Most of the debt today is used for financial engineering, not productive investments. This goes toward stock buybacks and mergers & acquisitions. The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins, and growing indebtedness.

A second source of myopic policies is now coming from China. In response to the global financial crisis, China embarked on a $4 trillion stimulus program. However, because they had engaged in massive infrastructure investment the previous 10 years, and that was the primary stimulus pipe they chose; this only aggravated the overcapacity in the investment side of their economy. Not surprisingly, this only provided a short term pop in nominal growth. While we were worried about bank assets to GDP in 2012, incredibly, credit has increased by 70% of GDP in the 4 years since then. This is an extremely toxic cocktail.

As a result, unlike the pre-stimulus period, when it took $1.50 to generate a $1.00 of GDP, it now takes $7. This is extremely rare and dangerous. Two years ago, we had hope the Chinese were ready to accept a slowdown in exchange for reform. Unfortunately, with the encouragement of the G-7, they have opted for another investment focused fiscal stimulus which may buy them some time but will exacerbate their problem. They do not need more debt and more houses.

Without Chinese restructuring, the engine of global investment will not return

Central Bankers have no end game, they stumble from one short term fiscal or monetary stimulus to the next, despite overwhelming evidence that they only grow unproductive debt that impedes long term growth. The continued decline of global growth despite unprecedented stimulus suggests we have borrowed so much from our future for so long that now the weight of the evidence suggests limits to further easing and excessive borrowing from the future with the result that the bull market is exhausting itself.

Finally, what was the one asset you did not want to own when I started Duquesne in 1981? Hint…it has traded for 5000 years and for the first time has a positive carry in many parts of the globe as bankers are now experimenting with the absurd notion of negative interest ratesSome regard it as a metal, we regard it as a currency and it remains our largest currency allocation.

gold_bars

 

 

 

 

 

 

 

 

 

 

 

 

Policymakers have no endgame, markets do

Categories: Equity, Gold Tags:

US Jobs Report affects Market

May 7th, 2016 No comments

There has been some minor movement in international markets this week with the Dow coming off marginally and Europe and the far East slightly worse off. This is all seemingly caused by the currency skirmish triggered by the Japanese holding their rate unchanged during the previous week. The US$ has been in a down trend since end November 2015 and this Japanese move caused it to move yet lower, below its long term support trendline. This week has seen the Dollar correct upwards to test this trendline from below with the US$ index just below 94, together with some commentaries now suggesting that this upwards correction will gather steam and arrest the gold price rise.

Yesterday the US jobs report come out indicating the fewest number of jobs added in the past 7 months at 160 000 which probably means that a US rate hike at the next FOMC meeting (14-15 June) is now less likely, as well as reducing the likelihood for the rest of 2016. As usual, the US$ value bounced around immediately after what most agree is not a positive report, and by close on Friday the gold and silver prices had increased appropriately.

Most of the international stock markets maintain their broadening top patterns and the sideways movement continues although now with a slight downwards bias, more pronounced in Europe and the East. The JSE Alsi 40 is no exception although the weaker Rand is assisting all the Rand hedge stocks. The gold market continues with an upwards bias, although some commentaries indicate a downwards correction is still to come. But this seems to be less likely now with the US$ behaviour and US rate hike potential.

The markets are definitely poised and influenced by the US$ which itself is poised at a key point. Below is a daily graph of the US$ index over the last 5 years indicating the support trendline at about 93.25, together with moving averages for 1 year in blue and 2 years in green. It has now reached a  powerful confluence area with the potential to continue down below the trendline, and having crossed down below the 1 year moving average to also next cross down below the 2 year moving average. Below this area of confluence, there is no support until down in the area of 80-83: All as the US moves steadily towards recession.

US$ Index

Categories: Currency Tags: