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Midweek Market 31 Jan 2019

Jan 31st, 2019

Executive summary

The counter-trend rallies in world equity markets continue for the time being, energised somewhat in the US by the dovish US Fed rate decision and commentary yesterday. Market interpretation is ‘dovish’ with, for example, a Goldman Sachs report forecasting the likelihood of a rate hike in Mar 2019 at less than 5%. This is potentially a decisive moment which could possibly be a reversal in US Fed policy from ‘tightening’ back to ‘easing’, especially if US markets continue to collapse in the coming period. It is this potential that caused the gold market to ratchet up which is dealt with in more detail later in this commentary.

The US$ index moved down decisively, and this could be the start of a more significant decline in the next period, with a similar (but in reverse) ramping up in the gold market together with the whole precious metals complex including all the ancillary elements (namely the miners). If this is in fact the end of the US Fed rate hike cycle it will provide the structural mechanism for the start of the long-awaited bull market in gold. Despite any delay in the final recognition of this structural change, the gold price is nevertheless likely to enjoy a stronger 2019 with final acceptance of the eventual bottom in the gold market before the start of the next gold bull market is actually confirmed.

Four weeks ago we looked at the arrival of the new credit crisis and how it is likely to wreak financial havoc as it bolsters the gold market, and today we look at another 10 (ten) critical impacts that are likely to drive the gold price in 2019.

US$
Analysis of the US$ will be done in reverse this week, looking first at the longer term overall picture followed by the shorter term elements.
The long term 40 year chart illustrates a clear 16 year cycle pattern during which the dollar enjoys peaks and suffers troughs. This is roughly the opposite of what happens to the gold price in dollars. Also, the sequential peaks and troughs are lower in value than the preceding peaks and troughs, and based on this it can be seen that the US$ is now in a down trend which is likely to end in 2024 at a value in the low $60s. This is also irrespective of short term gyrations in value.
A drop below roughly $88 will confirm the dollar bear market, irrespective of exactly when that occurs.

The shorter term 3 year weekly chart illustrates dollar value rolling over. The chart structure is supported by Elliott Wave analysis indicating the down phase starting at (C) with the i (circle) and ii (circle) in place, with the longer and stronger iii(circle) to follow which will drop dollar value down to a new low below C (B).
Both oscillators are dropping in support.

The 12 month chart indicates the resumption in dollar decline, propelled by the multi-month negative divergence. Both oscillators are dropping in support.

The very short term 3 month chart illustrates the strong decline down to 200-Dema after the dovish US Fed announcement yesterday. This is also likely to continue down as the extreme tensions between the US$ (higher rate) and mainly the Euro and Jap Yen (lower rates) start to unwind.
Both oscillators are dropping in support of this, together with other corroborating data such as still extremely positive investor sentiment and bearish Cots data.

Investor optimism remains strong together with negative Cots data which both indicate more dollar weakness. The continued wide dilation in the graphic (red circles) supports dollar weakness ahead.

Japanese Yen
The US$ / Jap Yen currency pair value is rolling over to Yen strength within the continued US$ bear flag and Yen bull flag. This, technically, normally precedes a drop in dollar value and an increase in the Yen. The chart structure therefore supports a yet stronger Yen, weaker dollar, and higher gold price, together with oscillator support.

US Treasuries
The benchmark US 10 year Treasury yield has changed trend from down to up, which is in line with higher yields and a continued collapse in US bond prices. From a Elliott Wave point of view, the 2C(circle)(v) yield bottom has developed a new (i)-(ii) with all options pointing to yet higher yields at (iii).

Gold
Continuing on with our series of examining what ‘other’ factors are likely to drive the gold price in 2019, today we look at 10 (ten) critical impacts, divided into 2 broad groups namely: Economic developments, and factors directly affecting gold. Once again, this is adapted mostly from original thoughts by Alasdair Macleod at GOLDMONEY.

Economic developments

1 It is late in the credit cycle with an end to the expansion phase in sight. Therefore, government deficits are going to increase, due to lower tax receipts and higher welfare commitments as economic activity contracts. This has to be financed by increased monetary inflation, which is already evident.
2 International trade has slowed sharply, as can be seen in China’s reducing demand, and the US induced tariff wars could end up having a catastrophic effect on international trade, in an already clear signal that the global economy is in trouble.
3 Contracting world economies due to increasing trade and budget deficits will need to be financed increasingly by increased savings rates, which is probably impossible, or there has to be a contraction in bank credit. This is all expected to propel world economies into a slump.
4 This will provoke central banks into yet more QE.
5 There is an increasing profound effect on central bank US$ reserves as more are turning their backs on the dollar for trade settlement, notably main economies in Asia (China, Russia, India and Iran), but elsewhere as well. Russia has already replaced all US$ reserves with gold.
Foreign selling of dollars and dollar assets (US Treasuries) will increase massively as the dollar and US securities markets begin to fall in earnest.

Factors directly effecting Gold

6 Geopolitics – Asia, and Russia especially, have swapped US$ reserves for gold. Russia is the world’s largest energy exporter, and therefore will continue to have dollars to sell for gold. China is the world’s biggest oil importer and now pays in Yuan convertible into gold. You can add other nations to that list (eg Hungary and Poland, and many more) who are accumulating gold reserves. It is obvious what Asia thinks and they know gold is America’s weak point.
7 Gold flourishes on inflation, and US price inflation has been badly misrepresented by published CPI which has actually been averaging closer to about 8% annually since gold peaked in August 2011. Since then the purchasing power of the dollar has declined by about 43%, and inflation is forecast to accelerate into the future.
8 Monetary inflation after the 2008 global financial crisis has not been fully absorbed, and is still over $5tn above the pre-crisis long-term expansion trend. The US Fed is unable to bring it down, and is rather likely to increase these levels to save the government from having to borrow at market rates as the recession bites.
9 These are exactly the conditions faced by the German government between 1918 and 1923, although the US has a stronger tax base than Germany had at that time and therefore the rate of monetary expansion relative to the size of the economy will be less. The likely response by the Fed will be the same however: Print money to fund government deficits with the result of wealth transferred from the productive economy to be destroyed in government spending. So, the US is on the slippery slope to currency destruction and it will take much more political courage to address the inflation issue than the current political class appear to be capable of.
10 Gold is massively under-owned in the west.

Circumstances such as these will bolster gold and the whole precious metals complex during most of 2019.

Our normal gold analysis follows.

Gold
As with the US$, analysis of gold will be done in reverse this week, looking first at the longer term overall picture followed by the shorter term elements.
The 5 year chart illustrates the gold 6 month cycle lows, down to the Dec 2015 low, and up to the present moment. It can be seen that the next 6 month cycle low is due very soon, and by definition will drag the gold price down accordingly. This of course may be protracted and distorted depending on US$ behaviour.
Note also how volumes are trending down and this will have a negative effect on price.

The shorter term 3 year chart illustrates how the gold price has powered up into resistance by the weaker dollar. Although gold is likely to enjoy a strong 2019 the current rally is also likely to end somewhere in the resistance zone (blue) before correcting down. It may be that the rally does continue a while longer, but it will correct at some stage before resuming a stronger advance towards the $1400-$1450 region later in the year.
Gold has prepared a multi-year basing pattern which is likely to propel the gold price higher, but serious price advances will only occur once the US Fed has ended the rate hike cycle. This is also all linked to the declining US bond and equity markets, which will be the driver of an end to the rate hike cycle.

After 2019 gold is likely to decline to lower lows and an eventual bottom before the start of the next gold bull market.

The 12 month chart illustrates the strong gold breakout up into resistance which is propelled by the multi-month positive divergence. This positive divergence is also evident on a number of ancillary charts later in the document, which collectively supports higher gold prices despite a potential correction down.

The gold short term 3 month chart has a breakout to a new high, although ending on a threatening reversal candle. The oscillators are mixed adding to the indecision displayed by the closing candle.

The gold COTs data indicates the start of dilation but it is still early days and the gold price rally to higher levels is likely to continue.

South African Rand
The South African Rand has strengthened on the weak dollar in a breakout through 2 key strength levels, dropping down into support to close at $13.32. This is all propelled by the dovish US Fed pronouncement yesterday which will probably sustain yet lower dollar values. The process has moved the oscillators to the bottom of their ranges which presupposes the Rand will not strengthen further by much.
Fundamentally, the struggle continues between expected dollar weakness (stronger Rand) and expected South African political and economic trauma (weaker Rand), especially with elections looming and ever-present potential downgrades because of structurally weak conditions at ESKOM, et al.

HUI / Gold Ratio
The ratio has moved up strongly as US miners start outperforming gold. The next key breakout levels are near as the ratio is poised to move up further into resistance. The oscillators are rising with further increases imminent.

HUI Index
The HUI index itself has a breakout as it moves closer to resistance, propelled by multi-month positive divergence. The HUI is more positive than the HUI / Gold ratio, in a chart structure that has a positive bias, which promises better times ahead.
The oscillators are rising in support.

GDX US miners ETF
The GDX chart is similar to the HUI Index chart except it is more positive in a strong breakout propelled by the multi-month positive divergence. The oscillators are mixed though with the Slow Stochastic turning at the top of its range.

DUST US Gold Miners Bear Index
The Dust chart has similar commentary, except in the opposite direction being a US miners bear index. There is a breakout as the index powers down through support levels with a correction likely soon.
The Slow Stochastic is turning up at the bottom of its range in support of a correction.

Silver
The silver 5 year weekly chart illustrates the overall long term picture of a multi-year base at about $14 with a solid mid-range resistance zone between $16.00 and $17.50, which the silver price is nudging from the bottom. Together with penetration of the diagonal resistance it would appear that a break through 200-Wema will provide a major multi-year breakout opportunity at a price above $17.00.

The shorter term 12 month silver chart illustrates a breakout as the multi-month positive divergence kicks in. Momentum plus additional energy in the oscillators indicates some further price increase possible before a correction sets in, soon.

The silver COTs data remains very positive although the convergence pattern is beginning to dilate slightly. Because it is still early days the silver rally is continuing.

Gold : Silver Ratio
Silver is beginning to outperform gold as a down-sloping trendline develops together with a H&S pattern which would complete and activate at a ratio of about 81. The ratio closed at 82.60 with both oscillators relatively positive.

General Equities
The Dow Jones countertrend rally of 5 weeks gained some added energy from the dovish US Fed pronouncement yesterday, and in accordance with Elliott Wave analysis the wave ii(circle) has therefore still not completed. A completed wave ii(circle) leads to the longer and stronger wave iii(circle) which is a more powerful wave 3 of 3 which will propel strong meaningful surges to the downside in the Dow, taking price well below Dec 2018 lows.

A large bear flag is evident in the Dow 12 months chart and once this activates it will propel the Dow down by the height of the flag. This in turn will activate the trigger point level of 22638 at the Jan 2019 low, which in turn will be assisted by the added weight of the major negative divergence which is still active. The next decline wave will take prices below the Dec 2018 lows.

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