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Gold is Now the Buying Opportunity of a Lifetime

Nov 26th, 2016 No comments

$ Gold price background and fundamental analysis

The gold price was always fixed at a US$ price until 1971 when Richard Nixon delinked the US$ from gold, after which the gold price floated freely in accordance with supply and demand. After 1971 it became evident that the gold price moved in cycles coinciding approximately with the US presidential elections, and although subject to the law of supply and demand, and although also affected by many other diverse impacting factors such as war and inflation, it has always remained true to its characteristic 8 year cycle patterns.

In spite of this, one such powerful impacting factor is gold’s dual role as a ‘store of value’ and its ‘safe haven’ status which has the effect of increasing demand during times of financial turbulence. The world is in trouble financially, and the 2007/2008 global financial crisis took the world to the edge of the abyss. The solution to the problem introduced:

  • Unprecedented money printing which flooded world markets with liquidity in an era that developed into the longest period of ‘easing’ in history;
  • Interest rates that plummeted to historic lows with zero interest rate becoming negative in many countries that pertained to 35% of total global debt;
  • A concerted effort to avoid deflation and create inflation by stimulating consumer demand in the hope of creating economic growth;
  • An astronomical increase in total global debt which is unsustainable and now uncontrollable as debt increases beyond $230 trillion, which is already 3 times total debt during the 2007 global financial crisis;
  • Bubbles in the share markets, bond markets, property markets, etc., that are all vulnerable to collapse as the interest rate cycle turns up;
  • Massive devaluation of all currencies into ‘Monopoly’ money;

This has all not worked yet and the world still suffers anaemic growth rates, threat of deflation, low interest rates, and massive debt levels. This toxic cocktail destroys capital and threatens the banking system and in fact threatens the international monetary system itself. Just as Bretton Woods introduced the new international monetary system to the world in 1944 to establish the US$ as the international reserve currency, so the next global financial crisis will destroy it and trigger the creation of the next new international monetary system – because this one cannot survive much longer.

This is the financial turmoil that continues to propel gold on its ever higher price trajectory.

$ Gold price technical analysis

Consider the $ gold price chart from 1969 to today (courtesy of Stockcharts).

gold-1smalluntitled

Notice also the splendid blue support long term trendline increasing continually through time against the logarithmic Y axis.

Now consider the cycle low points in red with the number of years between, right up to Dec 2016.

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Consider also a fascinating aspect of the chart in that it always takes 11 years from each low point to a later significant high point. Notice also therefore, that the low point at Dec 2008 will herald a significant high point 11 years hence at Dec 2019: A mere 3 years from now.

gold-3asmall

The correction in the chart from the all time high in 2011 to the 8 year low at the end of 2016 has built a massive foundation to propel the next leg up starting in the new year to the new high in 2019.

There are a number of fundamental impacting factors supporting this view, and these include:

  • The Trump victory in the US election has now come and gone;
  • The Trump policies are regarded as inflationary and good for gold;
  • All the fundamentals responsible for the turmoil in the world’s financial system (illustrated in the first portion of this commentary) have forced the tipping point upon us in the next global financial crisis which will be more severe than the last;
  • All the bubbles in the various markets (share, bond, property, etc) are being pricked as interest rates in the bond market started to turn up in July 2016, and the US Fed is planning to hike rates in Dec 2016;
  • The close correlation between the Japanese Yen and gold is in correction mode with the Yen weakening against the US$ at present. History indicates the Yen is required to reach a cycle low that penetrates its 50 week exponential moving average for the bull market in both the Yen and gold to resume. This has now occurred: Observe the chart below.

japyensmalluntitled 

Timing and extent of the $ Gold price rise

The $ gold price cycle low and next significant high point will occur in the period during or soon after Dec 2016 (cycle low) and in the period during or soon after Dec 2019 (cycle high), all in accordance with gold’s performance dynamics described in the above narrative since floating freely in 1971.

This cycle low in Dec 2016 will be in the vicinity of the previous false cycle low in Dec 2015 in a price range around $1100, and the cycle high will be a much higher price than it is now. Estimates based on the various different criteria range from $5 000 to $10 000 per ounce in 2019 and well above $15 000 in the following cycle high in 2027.

The next cycle low and high will be 8 years hence at 2024 (low) and 11 years hence from 2016 in 2027, in accordance with this logic.

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The Aftermath of the US Election

Nov 17th, 2016 No comments

Background

Investment markets will not be buoyant much longer as many regard the Trump plan as flawed with expectations now dwindling with respect to a quick re-energised US economy.

Donald Trump won the 2016 US election mostly because US wage growth has been negative since 1973 for workers while the richest Americans enjoy indescribably huge gains. This of course is largely due to big business prepared to sacrifice US jobs for cheap foreign labour. More specifically though, some suggest it is because people reject being overtaxed, and the ‘Affordable Care Act’ (Obamacare) is one of the biggest tax increases in American history. Ordinary people feel abandoned and left behind, and Populism continues to grow with many more surprises anticipated worldwide.

The Trump factor jolted markets and the promises made have been heard by middle America who now await delivery on the promises. This is all actually business unfriendly although the stock market has initially seen this as positive. It will be fascinating to observe how delivery is actually made because there is no magic wand to rapidly spur growth.

  • Interest rates are starting to increase and increased mortgage rates are not positive for the middle class psyche;
  • The anticipated Trump spending program is inflationary and bond market unfriendly, which in turn is stock market unfriendly;
  • There has been a rout in the 3 decade long bond market bubble worldwide which started to turn down in Jul / Aug this year;
  • We have now just moved beyond a secular low point in bond yields and inflation with the concomitant future for the consumer about to turn negative;

This is not positive for increasing consumer spending, neither is it positive for the investment markets.

Currency values

The US$ has been very strong since Apr 2016 and after the election result catapulted up to the level of 100 to form a triple top stretching back to Mar 2015. This is certainly a key level which if penetrated on the upside will extend gains significantly. The upwards thrust is supported by the likelihood of the US Fed deciding to hike rates in Dec, plus decided weakness from the other currencies in the index – notably Pound Sterling, the Euro, and the Yen.

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General consensus is close to 100% that a rate hike will happen despite the fact that it is overdue, and given the actual state of the US economy and Trump’s preference, should perhaps now not happen. It may of course extend Gold’s retreat and extend the downwards correction. It is well to also remember that it was the last rate hike in Dec 2015 that coincided with the start of the Gold bull market.

The Japanese Yen has weakened since Aug this year to now complete a cycle low and penetrate the 50 week exponential moving average, which gold bulls have been waiting for to potentially confirm the end of the gold correction and resumption of gold’s upward trajectory.

usjapyensmall

The Bond Market

Bonds have enjoyed a 30 year bull market to the point where some yields have even gone negative in what many describe as a massive bubble. This was driven by:

  • Historic low interest rates;
  • Central bank inflation policies;
  • Unsustainable debt levels;
  • Unwinnable international wars;

Consider the US 20 year Bond yield since the start of 2011 (indicative of all treasuries)

bondust20ysmall

Yields have jolted up since Jul 2016 and bond values have plummeted worldwide. We are now at the crossroads of:

  • Interest rates beginning to rise;
  • The bond market beginning to collapse;
  • The share market holding its breath before turning down under the pressure of bond sales;
  • The US$ continuing its upward path with all the negative impacts on US trade and the anti-inflationary spur towards deflation, etc.;

There is no doubt the Trump administration will want all the impacts on middle America to be kind, and one can imagine his mandate to Janet Yellen will be for easing and printing more money.

The Equity Market

Equities remain vulnerable worldwide with huge top patterns on the charts stretching back a number of years. Ultra low interest rates and high liquidity remain the driving force to keep prices up, while the opposite will cause prices to drop. This is precisely what the falling bond market is now causing with the added impetus of bond sales bleeding across to the share market. The increase in bond yields is driving interest rate increases which is likely to tip the scales in favour of the US Federal Reserve hiking the rate in Dec 2016.

Many believe that, despite general consensus, the US Fed still cannot afford to hike rates and that this moment will again just fizzle out.

The Gold Market

The Gold market bottomed at $1045 in Dec 2015 at the start of the new bull market which peaked at $1375 in Jul 2016 and is currently in a major correction with the price at $1228. The cycle low in Dec 2015 was actually  one year too soon and that the 8 year cycle low should really be now at the end of 2016. There are a number of impacting factors which support this view and a number which do not.

Supporting view that the 8 year cycle low is now (end of 2016)

  • If the US$ index breaks up substantially above the triple top new high at 100.5 this will cause the gold price to break down below the support base at $1200;
  • Cycle low usually coincides with the US presidential election;
  • The Japanese Nikkei 225 is inversely correlated to the gold price and the index has just broken up through the resistance trendline;
  • The Trump victory has created a paradigm shift and a new consolidated low may have to be created for gold;

Non-supporting view that the 8 year cycle low was end of 2015

  • If the US$ index fails to break up substantially above the triple top new high at 100.5 this will assist the gold price in holding above the support base at $1200;
  • The Japanese Yen has a direct correlation to the gold price and has now weakened to a new cycle low penetrating the 50Wema which it needs to do for the gold price to have potentially completed its correction phase;
  • The Trump prosperity plan is quickly recognised by the market as being somewhat flawed and definitely inflationary and good for gold;
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