Market Demons

Background

Gold and silver prices are correcting up in the downward sloping phase which started in Jul 2016, as the whole question of confirming true bottom in the 8 year cycle continues to unravel. Will prices continue up in confirming Dec 2015 as the 8 year cycle bottom or will they again resume their journey downwards to eventually reach true bottom at some stage approximately during the first quarter of 2017. Dec 2015 is 7 years after the previous cycle bottom whilst a lower bottom now will be precisely on cue at 8 years.

Key elements in this analysis include the US$ because of the high levels of correlation to the gold price, as well as a close look at price behaviour of gold and silver themselves.

US$

The US$ broke up through a triple top 2 year consolidation which now indicates a much higher upside target of between $108 – $112. The key breakout level of $100.60 needs to be penetrated on the downside to in any way alter this bullish outlook.

The Dollar has now come back to test the 50-Dema in this correction although it closed the week higher just above at $101.19. An increase above $102.00 (peak in previous cycle top end Nov 2016) would encourage subsequent higher highs and support the passing of the cycle low. 10-Dema is just under $101.80 and this is the first hurdle to cross.

The balance of probability here suggests more Dollar strength before weakness and therefore more gold price weakness before strength. This aspect does however require detailed monitoring.

Gold price

The Titanic struggle between gold and the Dollar continues and although current technical analysis indicates more gold weakness before strength (and more Dollar strength before weakness), American politics encourages the reverse.

The gold price has strengthened from a low of $1120 on 20 Dec 2016 to about $1205 recently (about 7.5% up), but has met with substantial resistance at that level. Are the 8 year cycle low forces still applicable? The answer to that question will only be known when the Dec 2015 low of $1045 is broken, or not. If the moves now are upwards then this might eventually verify the 8 year cycle low as Dec 2015, but if prices move lower (which most commentaries indicate) then this might finally verify the 8 year cycle low as now (Jan-Mar 2017) with a capitulation selloff still to come.

For immediate guidance, we need to monitor very carefully how prices now react from this recent high:

• Either it is constructive with more subsequent higher highs to come;
• Or it is destructive with more subsequent lower lows to come;

The gold price bottomed on 20 Dec 2016 at $1124.30 and has since penetrated both the 10-Dema and 50-Dema in an upwards correction to the major region of resistance at $1200. It has since reacted down slightly to close the week at $1196.20.

A constructive situation might develop in a pullback from resistance down to the mid-section region of say $1160 before another attempt to breach the $1200 level. Alternatively, a destructive situation might develop in a much greater pullback down to the previous low at $1124, and worse if it penetrates that level downwards.

Silver price

The fundamentals for silver are similar to those for gold, but the technical analysis is different. Gold and Silver are not just the inverse correlation of the US$, they are also the investment in monetary policy failure.

Silver’s resistance at $17 is not as powerful as gold’s at $1200, and price is more governed by a trading channel stretching back 6 months. We all appreciate that silver tends to lead gold, whether up or down, and the recent upturn for silver only includes some 9 closes above 10=Dema, against 16 for gold, as well as no close above 50-Dema, against 4 for gold. So, silver seems to be lagging behind gold which is possibly a powerful argument for suggesting that there is more downside to come for the precious metals complex.

The top resistance trendline in the downward sloping trading channel forms a powerful confluence at $17, where silver reversed down and closed the week $16.76.

Conclusion

The US$ seems poised to resume it’s upwards move having broken up through it’s 2 year triple top at $100.6. The inverse correlation to this is a downwards move in the precious metals complex, having recently enjoyed an upwards correction. This all presupposes more Dollar strength before weakness and more gold weakness before strength.

The Titanic struggle between gold and the Dollar continues and much depends on whether gold’s 8 year cycle forces are still applicable. Because if they are we need to determine whether the cycle bottomed in Dec 2015 or whether it is still to do so in the first quarter of 2017, on cue at 8 years exactly. The next 3 months will no doubt reveal all.

American politics is likely to disproportionately also impact this, one way or the other.

Background

The precious metals complex has reached a major inflection point during this period of verification as to whether gold’s 8 year cycle low is now (Jan-Mar 2017) or whether it was in fact Dec 2015.

Key triggers are:

• Silver penetrating down below $15.68;
  • or up through $16.60;
• Gold penetrating down below $1140.00;
  • or up through $1170.00;

Other key influencing factors are of course the US$ and the correlation between gold and the Japanese Yen.

US$

The US$ broke up through a triple top 2 year consolidation which now indicates a much higher upside target of between $108 – $112. The key breakout level of $100.60 needs to be penetrated on the downside to in any way alter this bullish outlook. Despite a slight downwards correction at the moment (providing gold with it’s upwards correction) much further US$ downside looks unlikely. This presupposes gold is still going to move down before up.

Correlation between Gold and the Japanese Yen

This correlation continues, broadly speaking, but the weakening trend in the currency still indicates more downside in the gold price before reversing up again.

Gold price

The gold weekly chart closed higher after 7 consecutive lower closes and needs to penetrate upwards through 10-Wema at about $1170 before registering any real signal of a potential bottom.

The gold daily chart indicates a bottom at $1124.30 followed by 10 higher closes in the first major correction since 30 trading days from the high at $1309.30 at the beginning of Nov 2016. This uptrend seems to have terminated last Friday, although this still needs to be verified. A move below $1140 would verify termination of the uptrend and a move higher than $1170 would validate the bottom at $1124.30.

Gold indicated a bearish ‘dark cloud cover’ candle last Friday.

Silver price

Silver indicated a bearish ‘engulfing’ candle last Friday, and if this now heralds a further price drop below $15.68 then the market is likely to continue dropping into a 8 year cycle low with a further sharp selloff.

Conclusion

The US$ is likely to reverse it’s slight downwards correction and pursue higher targets in the $108 – $112 region. This is likely to retard any Japanese Yen strength, and the precious metals complex is likely to drop further before reaching true bottom in the 8 year cycle low, approximately within the next 3 months.

The capitulation selloff will produce price bottom in gold at estimates varying between $900 – $1000, and in silver potentially below $10, as silver will drop further and faster than gold. Gold miners will react to this in even more pronounced further and faster declines.