Market Demons

Conclusion

The US$ started to correct up this week and the Euro is beginning to weaken which all needs to happen if gold is to continue down to a 6 month cycle low in June. However, the US$ is forecast to weaken considerably in the long term after the current short term strength, and this supports near term gold weakness followed by considerable strength thereafter.

US$

The US$ started to rise this week out of the down cycle after 39 days which it needed to do if gold is to continue down to a 6 month cycle low in June.  This is in tandem with the Euro which is now beginning to weaken, and the US$ could potentially increase to the resistance trendline at the level of 99.

The Euro has strengthened strongly after the French election result but has reached short term resistance and has begun to weaken this week.

The US$ is forecast to weaken considerably in the long term after the current short term strength. Consider the 9 year weekly chart with the slow Stochastic oscillator at the top indicating Dollar strength when the Stochastic reaches down to the 20 level (blue circle). However, after this near term strength the Dollar will resume a downward trend away from long term resistance toward long term support. The 1st phase decline target is 94.5 and the final decline target is 86.

These movements support near term gold weakness to a 6 month cycle low in June followed by considerable gold strength thereafter.

Gold

The criteria for the likelihood of a June 6 month cycle low as listed in last week’s analysis still holds good, and is now additionally supported by the currency market movements recently. The US$ long term expectation is for the currency to weaken substantially and therefore the more numerous financial commentaries calling this the start of the next leg up in the gold bull market.

The gold chart is also therefore just a repeat of last week’s chart.

The US Fed released minutes of the May meeting last week and it confirms the likelihood of a rate hike at the June FOMC meeting on the 14th. This will provide Dollar short term strength and corresponding gold short term weakness. But, as with the previous hikes, gold is likely to respond positively to this.

Conclusion

The coming week is pivotal in the markets with the US$ and oil probably the main drivers. This will dictate confirmation or rejection of precious metals and miners continuing down to a 6 month cycle low in June.

Imminent trigger events are the release of US Fed minutes on 24 May from the previous FOMC meeting indicating the likelihood of a June rate hike, and the OPEC attempt to extend production cuts at their meeting on 25 May.

The US$ continues to weaken and now beckons a reversal soon, but much depends on some measure of turmoil reduction in Washington. If OPEC successfully extends production cuts at their meeting next week this will propel energy stocks and generate US stock markets to new highs which could impact negatively on precious metals.

A gold 6 month cycle low in May is patently too soon and there are many technical reasons why it will probably be in June, with silver moving lower as gold drops down in June.

US$

The US$ continues to weaken into the 38th day of this cycle which now beckons a reversal soon, as previous cycle durations usually do not extend this far. Much depends on some measure of turmoil reduction in Washington. The Euro has strengthened in tandem with Dollar weakness but the Jap Yen has not strengthened to the same extent, which has perhaps retarded gold price gains over the same period.

A US$ bottom needs to occur early next week if gold is to continue down to a June low. Close attention to detail is necessary next week.

Precious metals

There is a gold : silver divergence, once again, with silver having met the criteria for a 6 month cycle low and gold not. If OPEC successfully extends production cuts at their meeting next week this will propel energy stocks and generate US stock markets to new highs. This could impact negatively on precious metals and support the forecast for a June cycle low in gold. Alternatively, an unsuccessful OPEC result or dovish US FED minutes could strengthen the metals.

Gold

The weekly gold chart illustrates why a May 2017 6 month cycle low is patently too soon as well as many technical reasons why it cannot be and probably will be June:

• There are only 2 red candles, compared to 4 in May 2016 and many more in other 6 month lows;
• Only one red candle closed below 10-Wema, compared to one in May 2016 but many more in other 6 month lows;
• May 2017 has not closed below previous low, compared to other 6 month lows;
• The slow Stochastic remains well above 20 whereas most 6 month cycle lows push this to below 20;

Therefore a June 6 month cycle low is far more likely than May.

Silver

The weekly chart illustrates why silver has already achieved the requirements for a 6 month cycle low but will continue lower as gold drops down in June.

Preface

The analysis this weekend takes on a different format in viewing the long term trends and how this might impact the next period. This involves currencies, share and bond market values, and the precious metals complex, because the next period could be somewhat more impactful than most of us think. The analyses are longer term and are not necessarily time related.

Currencies

Euro/Dollar

The French election result has been supportive of the status quo for the EU to continue to exist for longer than some might have feared, and for populism to take a breather from the momentum of Brexit, Trump, and Italy’s constitutional referendum defeat. It seems markets have passed the point of maximum pessimism regarding the demise of the EU, and proper evaluations of it’s constituent parts as well as the EU as a whole can now begin.

Consequently, it is now probable that the Euro has hit a major bottom against competing currencies, and being the largest component of the US dollar index, it may now also be that the dollar has hit a major multi-year high. The last high of this magnitude in the dollar occurred in 2001, which coincided with the $255 low for gold.

 First the short term chart of the Euro/Dollar.

The Euro/Dollar has short term support at about 1.05 and resistance at about 1.16. Also, there is a breakout up through the down-sloping resistance trendline reaching a new high at 1.10. All this promises a catapult rise to the 1st phase target of 1.15 (green) at the bottom of the resistance zone.

In the longer term, we refer to the full history of the Euro since inception (18 year chart) to establish the more important 2nd phase target. This illustrates that recent Euro movements in the breakout described above actually occurs in accord with long term support in an up-sloping trendline from previous major lows in 2001.

Major resistance is in the zone of 1.45 – 1.60, enabling a catapult rise to the 2nd phase target of 1.45 (green) at the bottom of the longer term resistance zone.

The previous Euro lows occurred in 2001 with the euro bottoming at 0.83, whilst the recent low at 1.035 represents a higher low by about 25%. This is a Euro reversal of major potential and of note is the fact that the Euro decline starting in 2008 totaled 34% whilst the US$ rise from that time was much less.

If this was the best the dollar could sustain for the eight-year advance which began in 2008 – the US currency is in trouble. We cannot know why at this juncture, but the reversal in the euro / dollar is signalling something negative brewing for the US currency in the future.

The last euro low in 2001 marked the beginning of a 10-year advance in gold from $255 per ounce to over $1,900 in 2011.

 Dow Jones

The Dow Jones is replicating a near exact copy of 1983 when it made a significant breakout after a 17 year consolidation. This was at a time when celebrated investors referred to the perfect conditions for long term equity investment.

In 1966, the Dow made an all-time high while the Dow/Gold ratio peaked. It took about 17 years from that peak (1966 to 1983), for price to break sufficiently higher than the 1966 level. About three years before the breakout, the gold price made a significant all-time high (in 1980).

In the completely equity-friendly environment of 1983 the Dow continued up by a factor of 10.

This sequence has been repeated recently, nearly exactly. In 2000, the Dow made an all-time high at 10200 while the Dow / Gold ratio peaked. It took 17 years from that peak (2000 to 2017) for price to breakout through resistance, and about 6 years before the breakout, the gold price made a significant all-time high (in 2011).

Now, just like in 1983, the consensus is that the Dow will continue to rise much higher than current levels. Due to this similarity, many are calling this a new bull market to take the Dow to much higher levels, like 40 000 and beyond. This now becomes a balance between great expectation and great despair. Because, unlike 1983, the conditions are not perfect for long term equity investment, with just too many obstacles for a new bull market in the stock- and bond- markets with probably the 2 most important being:

• Debt levels are massive and uncontrollable;
• The interest rate cycle has bottomed and is turning up;

However, it is critically important to also consider the precious metals market.

Gold and Silver

There are also glaring similarities with 1983 in the gold and silver charts.

Observe the 2 similar patterns from the 1980 high and the 2011 high. The comparison is very plausible, especially given the fact that the Dow is currently in a similar position, as explained above. If the comparison with the 1980 pattern is justified, and the current pattern continues in a similar fashion, then gold will continue in a sideways move for the next 20 years.

However, there are just too many fundamental obstacles to such a scenario, since gold appears to be ready for the next phase of the bull market which started around 2000. From a technical perspective, price is currently at a critical point, which will indicate whether the next phase is up in the expected bull market, or whether the next phase is sideways in the very unlikely dormant market. A breakout at the top blue line (point 5) would almost certainly confirm the bull market scenario and cause prices to rise significantly once the breakout occurs.

A breakdown at the bottom blue line, could mean that prices continue to follow the 1980s pattern, and move down below $1000.

The silver long term chart is very similar to the gold chart, except the highs are higher and the lows are lower. Once again, if the high at 5 is exceeded then the bull market scenario will be confirmed, and if the low at 4 is penetrated then it could mean that prices continue to follow the 1980s pattern, and move down below $10.

There are just too many key obstacles to prevent the next leg up in the precious metals bull market, probably the 3 most important being:

• Debt levels are massive and uncontrollable;
• The interest rate cycle has bottomed and is turning up;
• The threat to the International Monetary System survival;

Gold and Silver impacted by interest rates

To illustrate the impact of interest rates on the gold price we have used the same $gold price chart, as earlier, but divided the data by the 10 year US Treasury Bond yield to obtain the chart below. The timing of the same 1980 gold peak is indicated by the red vertical, but because interest rates at the time were high the gold price is reflected as virtually flat.

This is a perfect illustration of how high interest rates were in 1981 and that the cycle was turning down, and also how low interest rates are at present and that the cycle is now turning up. This created positive conditions for general stocks in 1981, and adverse conditions for silver and gold.

Currently, interest rates are close to all-time lows, and appear to have bottomed, with higher interest rates coming. This will create adverse conditions for general stocks, and very positive conditions for silver and gold.

This is of course all true for silver as well.

Conclusion

All general equity markets worldwide remain elevated with EU components bouncing up because of the general euphoria of a Macron win in the French election on Sunday 7 May. The US$ continues to drift with the Euro and the Pound breaking up through resistance in line with the EU euphoria, while Gold continues to move down to a 6 month cycle low in June. There are 2 short term scenarios for gold from here, with an exciting 2nd half 2017 after that:

1. The gold price will enjoy a bounce up because of the recent weakness to be followed by a drop down to the 6 month cycle low in June, probably in the region of $1180 (give or take $20);
2. The gold price will just continue to grind down incessantly to that same low point without any excitement either way, but may reach the low point somewhat sooner;

The deciding factor may well be the French election which will impact powerfully on all markets. Against conventional wisdom, a Le Pen win will wreak market havoc with most forecasts lost in the mist of history with heightened market uncertainty and volatility.

US$ 

The Dollar Index continues to hold along the support line of the bullish reducing wedge pattern with the Euro breaking up through resistance. This is in accord with a Macron victory in the French election, whilst gold continues down into a 6-month cycle low in June The Dollar needs to break up above 99.25 to confirm a bottom whilst the long term remains bearish for the Dollar.

Treasuries

Bond market yields continue to drift sideways with a slight bias upwards, continuing to indicate the US Fed is not likely to hike rates any time soon. This may change as the next Fed FOMC meeting date on 14 June draws nearer.

Gold Price

Gold broke down through 10- /20- /50-Wema to confirm the 6 month high, as it now continues down to a 6 month cycle low in June. Analysis of the slow Stochastic indicates a move down to below 20 is required for price to reach the cycle low (as in earlier 6-month lows).

The gold daily chart indicates 3 cycle lows since the last 6 month cycle low, and it also suggests 2 scenarios for the onward pathway to the next 6 month low:

1. The gold price will enjoy a bounce up because of the recent weakness to be followed by a drop down to the 6 month cycle low in June, probably in the region of $1180 (give or take $20);
2. The gold price will just continue to grind down incessantly to that same low point without any excitement either way, but may reach the low point somewhat sooner;

Silver price

Silver continues to lead gold lower (negative) and continues to move down from the bearish double top formation. Like gold, silver is moving down to a 6-month cycle low in June with exciting buying opportunities thereafter. Support at $16.83 has been penetrated with the next critical support at the $15.68 Dec 2016 low.

US Miners GDX chart

US miners reacted up from the previous low point at 21.2 creating both a double bottom and divergence with metals. Is this the sign we are approaching bottom, and will it hold? If so, this will trigger gold scenario 1 and an interim bounce before the final drop down into the 6-month cycle low in June. Developments early in the coming week need to be watched carefully.

US General Equities

The Dow Jones Industrial Ave. is consolidating after breaking up from the bullish reducing wedge formation. This suggests more gains but 2 gaps opened in the rise, and there is still the need to contend with these. The French election result will no doubt impact powerfully on all markets.

Conclusion

Obviously the French election had spooked the markets more than most thought, and the relief that Macron and not Le Pen will win boosted stock markets and knocked the US Dollar and precious metals. The US and EU stock markets actually ‘gapped’ up (except the UK), although all ending the week slightly softer. The US$ now looks precarious and gold seems to have stabilised, but the US$ is due for a bounce up from the 6 months long reducing wedge pattern and precious metals continue moving down to a 6 month cycle low in June.

General equities have drifted since the initial thrust after the French first round election result, and much depends on the second round on 7 May, as this is regarded as confirmation whether the EU is likely to falter sooner or later. Precious metals will likely bottom in June followed by an exciting second six months in 2017.

Market uncertainty and volatility is likely to continue for a while yet as the stressed nature of things continues to unwind, or indeed perhaps even continues to build up.

US$ 

The Dollar Index is holding to the lower regions of the (normally bullish) reducing wedge pattern and a move up through 99.25 will confirm a bottom with upside potential. This period of strength is likely to coincide with gold weakness into a 6-month cycle low in June, although these moves may take time before unfolding. The long term remains bearish for the Dollar.

Treasuries

Bond market yields continue to drift sideways indicating that the US Fed is not likely to hike rates at the next meeting on 2 May.

Gold Price

Gold’s reaction down from a 6 month high will be confirmed if price drops below 10-Wema at $1255.24, in moving down to a 6 month cycle low probably sometime in June. This is also indicated on the weekly chart by the full Stochastic which is very high at 88 and probably needs to move down to at least below 50 at the low point in June.

The gold daily chart is expecting a third cycle low since the previous 6 month cycle low in Dec 2016 and price needs to breach the trendline at $1260 which will cause more selling.

Silver price

Silver continues to lead gold lower (negative) and continues to move down from the bearish double top formation. Like gold, price is moving down to a 6-month cycle low in June with exciting buying opportunities thereafter. Support at $16.83 will probably not hold, but critical support at $15.68 Dec 2016 low must hold.

US General Equities

The Dow Jones Industrial Ave. has broken up from the bullish reducing wedge formation in the general euphoria after the French first round election results indicated that Le Pen is not likely to succeed. This is likely to extend up especially after the final election on 7 May if Macron is elected, because these elections are considered an indication of the likely survival of the EU.