Market Demons

Background

The election of Donald Trump as the new American president created a market paradigm shift and interest rates have bottomed. It is as if tectonic plates in the markets are shifting, and we need to understand how all this will affect the gold price.

This article combines an analysis of chart patterns and gold cycles  which collectively now strongly indicate that the gold rally from the Dec 2015 low was a bear market rally and not the start of a new bull market.

Prices will continue to drop further before true bottom is reached which will then provide the buying opportunity of a lifetime.

Comparison between now and Dec 2015

The gold price behaviour comparison between Dec 2015 and Dec 2016 has not produced any possible upward bias but instead potential downwards bias, with the trading pattern now indicating weakness.

US$ Strength

The US$ is rampant in accordance with Trump euphoria and the US rate hike, and the chart of the US$ Index indicates further strength to potentially as high as 115. The inverse correlation with the gold price of course indicates further gold weakness.

Gold price 8 year cycle lows

There is now a strong indication that the gold price rally from Dec 2015 was only a bear market rally and the price is now moving down to its 8 year cycle low, exactly on cue 8 years after the Obama election in Dec 2008.

In moving down to true bottom in gold’s 8 year cycle low the price is likely to drop further to potentially somewhere between $1000 and $890.

This bear cycle has support and resistance trend lines which support the low at $1000.

However, when we observe a more macro view on the monthly chart the indication suggests a lower low at just below $900. In applying a Fibonacci  retracement to the previous bull market run from 1999 to 2011 when gold achieved a 600% gain, there appears to be a confluence area between the Fibonacci retracement of 61.8% and the 200 month moving average: The 61.8% Fibonacci retracement is usually a powerful trigger.

It is interesting to note that the false bottom at Dec 2015 reversed off the 50% Fibonacci which is also a powerful trigger.

Conclusion

Gold is likely to drop further before reaching true bottom at the correct 8 year cycle low approximately within the next 3 months. This is likely to occur at a price somewhere around $950, give or take $50. Also, as usual, silver will drop further and faster than gold. Gold miners will react to this in even more pronounced further and faster declines.

The jury is still out on actual improvements Trump might achieve in unravelling the deeds of the Obama administration, and the US$ at 115 will wreak havoc with US trade. The euphoria will pass into history and, as must happen, gold (and the full precious metals complex) will again soon provide the investment opportunity of a lifetime.

Gold Update

Background

The gold price seemingly bottomed in Dec 2015 at $1045 bringing to an end a little more than 4 years of lower prices in a major correction to the bull market peak at $1950 in Sep 2011, a drop of 46%. After this the price increased strongly to $1375 in Jul 2016, rising more than 31%, before weakening again to $1159 by close of trading on 9 Dec 2016.

The period since Jul 2016, and especially the period since the beginning of Nov 2016 has been difficult for traders and investors in the gold market with wild price swings in both directions, turning many bearish with worldwide withdrawals from gold positions and even suggesting widespread submission. The data has been difficult to decipher and many now question whether the low point in Dec 2015, a full year before the normal 8 year cycle low, perhaps should in fact become Dec 2016 which is right on cue and timed perfectly with the US presidential election.

Emerging Pattern

Nevertheless, in spite of all this disturbing conjecture, a most interesting and clear pattern has emerged providing powerful support for a potential low point for gold prices to turn up as soon as next week coinciding with the US Fed rate hike announcement on 14 Dec 2016.

The pattern that has developed since the beginning of Nov 2016 is absolutely similar to the setup we encountered in Nov/Dec 2015 and is comparable in time and depth to the previous low at $1045. Prices now could drop to around $1150 and create a significant bottom around the time of the US Fed pronouncement. This will clarify the doubts as to which Dec provides the cycle low point and confirm that it was actually Dec 2015, once and for all.

The drop into the December 2015 low is eerily similar to what we are now experiencing, with:

• an extended number of 24 consecutive daily closes below the 10-Dema;
• a bull flag downward sloping trading channel leading up to the Fed decision;

To confirm the significant price bottom and to signal the resumption of the upward price trend, we need the price to increase to $1180 to penetrate the upper trend channel and to penetrate the 10-Dema.

The gold price revival is also supported by the drop in COTs, plus the potential for the Japanese Yen to now start strengthening from its extreme cycle low at 115.235 to the USD. A negative impact is of course a continued strengthening US$ which will make it difficult for gold price increases.

If gold closes below $1130 this will void the upward potential and create a situation which would likely reduce prices below $1000 with the potential of perhaps even reaching below $900.

Gold Price Potential

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. Please refer to earlier articles:

• The Gold vs Japanese Yen correlation;
• Gold is now the Buying Opportunity of a Lifetime;

Background

The US$ gold price and the value of the Japanese Yen against the US$ has established a reasonably accurate correlation since the Global Financial Crisis in 2007. Consider the chart below.

This correlation provided a powerful advance warning of the low point reached in the gold price at $1045 in early Dec 2015, as well as the softening in the gold price which started in Jul 2016.

The pivotal question that needs an answer is whether gold bottomed in Dec 2015 or whether this is only to occur in Dec 2016, give or take a month or two.

Gold cycle theory

Gold cycle theory has it that the US$ price reaches a cycle low every 8 years on average coinciding with the US presidential election, and that Dec 2015 was a full year too early. However, because of the continued punitive destruction of the global financial system by central banks and especially the adoption of negative interest rates, along with all the other money value destroying mechanisms such as QE, etc., it was considered that perhaps it was entirely correct that the cycle low should occur earlier than 8 years. But because the softening in both the gold price and the Yen has been more severe and prolonged than it should have been, some market commentators now feel that the 8 year cycle will run its normal course and that true bottom will be reached in Dec 2016 / Jan 2017.

The Japanese Yen correlation

How is the Jap Yen to assist in answering this question of 7 year or 8 year cycle low? The Jap Yen has lost value against the US$ since Aug 2016 and in the process is now poised at the start of a strengthening phase because it has reached a:

• Fibonacci retracement level of 61.8%, usually a powerful trigger;
• cycle low which penetrated its 50Wema which it needs to do to continue its bull run;

Consequence

In support of this Eisuke Sakikabara, dubbed Mr ‘Yen’, indicated the Yen will strengthen to 90 to the US$ (>20% increase) within 6 months of Donald Trump’s election. He is one of the most senior figures in Japanese finance, a former deputy in the Ministry of Finance, and legendary in his many correct Yen forecasts going back as far as the 1990s. Read the Bloomberg article here.

https://www.bloomberg.com/news/articles/2016-11-10/mr-yen-says-trump-victory-doesn-t-change-currency-market-trend

The correlation therefore indicates that gold will track the Yen’s strengthening move of more than 20% within 6 months, and that whether gold true bottom was Dec 2015 or Dec 2016 becomes irrelevant as long as short term market gyrations and pain can be sustained. The real temporary threat is that if the gold price falls by the height of the head above the neckline of the head and shoulders pattern, then the price should fall to the previous low at $1045, or even lower to $1000, before it finds true bottom. This of course will have the very painful although temporary knock-on effect of further price plunges in the gold miners.

There are strong US$ headwinds against increases in the gold price at the moment and until these are curtailed the current status will prevail. The prospects for the Japanese Yen and the correlation between the gold price therefore adds substance to the prospect of a trend reversal soon.