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Midweek Market 4 Jul 2019

Jul 4th, 2019

Executive summary

Donald Trump and Chinese President Xi met at G20 this week and agreed not to increase tariffs as they attempt to restore trade relations: Equities, bonds, and the dollar strengthened while gold corrected down. But gold reversed up again within days and has closed the month and quarter above $1385 and is holding the majority of its recent gains. That does not guarantee continued strength but it is a good sign.


Gold’s technicals and fundamentals are finally in place. It is outperforming all major currencies and the US Federal Reserve is weeks away from beginning a new cycle of rate cuts. The US Dollar has lost its uptrend. The near-term outlook is very strong and if the US Fed cuts rates three or four times and Gold strongly outperforms equities then this move can go much higher, with very little resistance from $1420/oz to the low $1500s and strong measured upside targets of $1600/oz to $1700/oz.


To add momentum, equities are likely to peak very soon with forecast strong declines in the next 6 months.


If Gold is going to trend higher towards $1600-$1700/oz, then the gold equities will run even stronger. GDX is trading below $26. A break past $31-$32, would trigger a measured upside target of almost $50, with even stronger gains for GDXJ (Junior miners).
If the Fed does cut rates three or four times and either the dollar declines more or gold outperforms equities, then gold should be able to reach the $1700/oz target. If only one of those things happen then it still has a good chance of reaching $1550.


It is generally, if grudgingly, accepted that the “paper gold” market (trading in futures contracts and options such as Comex) dictates the gold price, and that this enables price manipulation in delaying gold’s inevitable real valuation. It is also generally believed that demand for physical gold will eventually overwhelm this false situation, sending the metal to its intrinsic value somewhere north of $10,000/oz.


The timing of this shift in market dynamics is impossible to predict, but when it comes its early stage will look a lot like what’s happening right now.


However, keep in mind the major dichotomy in the market with some calling a new gold bull market, whilst Elliott Wave theory calls this still only a bear market rally.

US Dollar

The dollar is rising to test the breakout and has broken up through 50-Wema (equivalent to 250 day moving average) in the process. It needs to secure higher ground otherwise will be subject to further declines. Both oscillators are declining, confirming the generally bearish attitude of price direction, with the negative divergence still active.

The 12 month daily chart illustrates recent dollar strength could void the H&S pattern which seems likely with both oscillators rising.


There are rival propellants acting on price with strong resistance just above plus negative divergence and breakdowns through the rising wedge and H&S pattern on the one hand, with penetration through 200-Dema plus rising oscillators on the other.

The short term 3 month chart illustrates recent strength from the G20 trade announcement, as the dollar increases to test resistance. But, price needs to penetrate $96.42 otherwise declines will continue.

Japanese Yen

The dollar / Yen negative chart bias continues as dollar weakness / Yen strength is evident with price dropping down from the top of the reducing wedge: This is spite of recent dollar strength. Both oscillators are also rising reluctantly.

US Treasuries

US Treasuries continue to rally as the yield on the US10 year continues to decline, closing at 1.96%. Yield was this low last in Nov 2016, being a strong indicator of the forthcoming rate cut/s in the US. This is now very close to completion of the countertrend reversal in US Treasury yields.

Gold

The decisive breakout through the massive 6 year basing pattern in the gold market is holding above the neckline. The strength of the breakout is supported by increasing volume, surpassing volumes over the 6 year period, and especially those of the last gold peak in Aug 2011.


Taking the price cluster during 2011 and 2012 as a guide as well as the depth of the basing pattern, it can be seen that potential price increases could well reach the ‘potential target region’ (blue), at rally peaks of $1600 or $1700.

The decisive breakout in the gold market is well evident, but one of the impacting negative factors remains the non-conforming silver price. There is still a persistently high gold/silver ratio which traditionally has a damaging effect on the whole precious metals complex.


It is a double-edged sword however in that a silver price breakout is long overdue, given the positive impacts affecting gold at the moment. But, either silver enjoys a breakout rally or gold and gold miners reverse to lower prices.

The daily 12 month chart illustrates not only the breakout but also gold’s chart structure which promotes another upward penetration for the next leg up.

The short term 3 month chart illustrates gold correcting down to $1385 before a bullish Engulfing candle which could provide the energy for additional upward penetration. However, it closed yesterday on a bearish Evening Star candle which has the opposite effect.

South African Rand

The South African Rand continues to strengthen against the dollar as it drops further down the falling wedge pattern. This will have the effect of an eventual breakout to Rand weakness which is supported by both oscillators declining to the bottom of their range.


Price has penetrated through 200-Dema after 18 consecutive closes below 10-Dema which presupposes further dollar declines and Rand strength.

HUI / Gold Ratio

US miners continue to outperform an increased gold price during this rally as the ratio consolidates after the recent increases. The consolidation is taking the shape of a pennant which is a continuation pattern, for more of the same. Both oscillators are coming off the top of their range though which presupposes some downward correction first.

GDX US miners ETF

The GDX breakout above the 2½ year range-bound region is holding, and could still thrust higher after correcting. There appears to be much upside in the MACD still.

The daily 12 month chart is in an expanding wedge formation which could still thrust higher after correcting. But both oscillators are overbought and indicate a correction first.

The long term 8 year GDX chart illustrates the breakout potential to the next strong resistance at about 31.50 if gold continues higher towards $1600-$1700/oz. This will propel gold equities to run even stronger, and GDX would trigger a measured upside target of almost $50, with even stronger gains for GDXJ (Junior miners).

Silver

Long term silver is constructing a bullish W bottom as it prepares to breakout of the bull flag. This will provide the energy for a meaningful silver rally, and needs to be watched carefully.

The daily 12 month chart is consolidating at the top range of the bull flag and a breakout will result in a rally for the next potential leg up. So, silver is finally indicating some positive energy.

The short term 3 month daily chart illustrates continued advance into another consolidation. A bullish breakout will provide the next leg up, but any decline below $15.06 will threaten the structure and any potential.

Silver Miners

Silver miners are enjoying a strong advance and any potential push up through resistance could ignite silver itself. Price is now above all the MAs, but must avoid dropping below 25.75 if it is to maintain its potential. Both oscillators are at the top of their range and this could affect negatively.

USLV US Silver Miners Bull Index

Another silver trigger could be provided by the silver miners bull index (USLV). The index is looking constructive for silver with a pullback to 50-Dema followed by a bullish Engulfing candle. Both oscillators are drifting and not obviously negative.

Gold : Silver Ratio

The gold / silver ratio continues its relentless rise, closing slightly higher again at 92.65. This continues to reflect the silver underperformance of gold which is negative for the whole precious metals complex, seemingly endlessly.


But silver is finally indicating some measure of positive potential and may surprise on the upside soon. Either silver generates a meaningful rally soon or gold and gold miners drop prices.

General Equities
Divergence in US indices continues with attendant loss of momentum, as they approach final new highs before the forecast major trend change which will witness a probable 20% decline during the rest of 2019.

Our view of US equities, using the Dow Jones as a proxy, illustrates the continued enormous topping pattern end play towards a final market top in the next year or two. We will use this template as a guide against which to measure ongoing performance which at the moment is exactly correct.

The market (Dow Jones Ind Ave) is at the moment moving up to complete a new high at D very soon. It is forecast to traverse the complete ABCDE pattern to complete a decline phase at E(4) by the end of 2019 at an index value of approximately 20 000. Thereafter, the Dow will enjoy an increase through 2020 to yet another new high at approximately 28 000 at (5) which is likely to be the final market top before a serious decline starts in early 2021.


A more detailed view of this is illustrated below.

  1. Dow rises to D very soon (early Jul) at a new high of approximately 27 000;
  2. Declines to E (4) by Dec 2019 at approximately 20000;
  3. Advances to (5) by Dec 2020 at approximately 28000;
  4. This is the final market top;
  5. Start of major collapse in early 2021;
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