Market Demons

Conclusion

The US$ is seemingly under pressure but is actually building a large consolidation base from which a strong rally is likely to emerge. The US Federal Reserve increased the rate 25 basis points on Wednesday which set the tone for the next investment period, despite many troubling paradoxes. The slew of less than good US economic indications during the last period did not deter the rate decision, with yet another indicated during the year.

In spite of this the US$ only reacted insipidly and finished the week pointing down against the Euro, Jap Yen, and even the Pound (despite developing chaos in the UK). The strong breakout from consolidation is supported by behaviour in the metals and miners data which continue towards a 6 month cycle low, although somewhat delayed by another 4 to 6 weeks into the July to August period, before the next leg up in the bull which will follow.

The equity markets continue peaking in the face of the interest rate cycle having turned up.

US$

The US$ is seemingly under pressure but is actually building a large consolidation base from which a strong rally is likely to emerge. The US Federal Reserve increased the rate 25 basis points on Wednesday which set the tone for the next investment period, despite many troubling paradoxes. The slew of less than good US economic indications during the last period did not deter the rate decision, with yet another indicated during the year.

In spite of this the US$ only reacted insipidly and finished the week pointing down against the Euro, Jap Yen, and even the Pound (despite developing chaos in the UK). Nevertheless, a strong breakout from consolidation is supported by behaviour in the metals and miners data which continue towards a 6 month cycle low.

Note also that there is a supportive MACD breakout in the bottom portion of the chart.

Gold

Gold has reacted down from long term resistance and technical analysis has for some time now suggested a price drop into a 6 month cycle low which has not yet occurred because of the persistently weak US$. A long term view in the 40 year chart below reveals one reason why this is so and why it is still to happen, before the next leg up in the bull market which will follow.

Note the similarity in the bear markets following the gold peaks in 1980 and 1996 which each took 311 and 312 weeks respectively to breakout through the resistance trendlines, to the current bear market which has thus far only taken 301 weeks. To complete similar retracement percentages the current position requires further price reduction over the next period with price likely to complete the 6 month cycle low sometime during Jul-Aug.

The short term 7 month chart indicates gold now dropping towards the short term cycle trendline which it should penetrate. The 6 month cycle low target is in the region of $1200 which is likely to be achieved in the Jul-Aug period.

US Miners

The GDX US miners chart indicates a massive engulfing candle during the week which will induce further drops toward support at $21.00. This is likely to inspire a short term bounce followed by further drops below support. This will match a further drop in the gold price, or if not, will then increase divergence between metals and miners.

DUST US miners bear index

The DUST chart indicates a massive engulfing candle during the week which will induce further rises toward resistance at $37.00. This reflects exactly the reciprocal situation to gold and gold miners, and therefore supports the gold 6 month cycle low proposition.

General Equities

The equity markets continue peaking in the face of the interest rate cycle having turned up:

• When interest rates are at the top of a cycle it is the best time to invest – like at the beginning of the 1980s;
• When interest rates are at the bottom of a cycle it is the worst time to invest – like now;

Add to that the fact that debt is massive and out of control, and that economic growth is prevented because of that. These are serious fundamentals that all point to a huge asset bubble in the markets that effect the stock market, the bond market, and the property market.

How do we recognise an asset bubble? One way is to analyse a specific economic data file produced by the US Federal Reserve ST Louis office (FRED) – “Net Worth as a Percentage of Disposable Personal Income”

This is what the blow off stage of a stock market bubble looks like.

This percentage reached:

• 610 just before the 2000 Tech bubble crash;
• 650 just before the 2007 global financial crisis;
• 660 just before the next crash – it is called the Everything Bubble;

Conclusion

The US$ shows signs of a bottom and gold reacts down $20 during the week prior to the US Fed FOMC meeting on Wednesday 14 June. The Dollar is overdue a cycle bottom with the oscillators oversold, and although a rally is likely soon it had better assume some strength and duration because if not further weakness will follow. The UK election result led the British Pound lower initially which added some reciprocal strength to the Dollar, and the Euro and Jap Yen also weakened.

The gold price dropped this week and also shows signs of a top, all in accord with the stronger Dollar. These moves are all preparatory to the US Fed FOMC meeting in the coming week because the balance of opinion suggests another rate hike, despite the recent negative jobs report.

Many commentaries are claiming a gold breakout through the long term trendline from Aug 2011 which is most evident with an arithmetic y-axis but less so with a logarithmic scale which is more commonly used. The divergence between miners and metals still exists and this plus the US$ fundamentals continue to support a lower gold low in June, or soon thereafter.

International equity markets remain elevated with US equities at peaks, but this situation is contaminated by a number of factors, most powerful of which is that the interest rate cycle has turned up.

US$

The US$ began to show signs of a bottom this week as the extended cycle moves out to 52 days. The Dollar is overdue a cycle bottom with the oscillators oversold and the US Fed FOMC meeting on Wednesday 14 June likely to hike the rate which is still supported by the balance of opinion, despite the recent negative jobs report. This may be another false bounce and whilst a rally is likely soon it had better assume some strength and duration because if not further weakness will follow.

Gold

The gold price dropped more than $20 this week in response to the Dollar bounce and the US Fed FOMC meeting in the coming week. Despite this, many commentaries are claiming a gold breakout through the long term trendline from Aug 2011 which now pre-supposes the start of the next leg up in the bull market. This breakout is most evident with an arithmetic scale y-axis but less so with a logarithmic scale which is more commonly used.

My analysis is that gold has reached long term resistance to be followed by a drop down to a 6 month cycle low because of the US$ fundamentals and the continuing divergence between miners and metals.

The short term gold chart indicates a top pattern with the oscillators oversold and the potential for a drop to the trendline.

US Miners

The GDX US miners spiked up during the week but thereafter continued to weaken and maintain the downward sloping trading channel in contrast to gold. This continued divergence supports the lower gold price down to a 6 month cycle low.

DUST US miners bear index

An interesting aspect is provided by a bear version of the gold miner’s market in the DUST US miners bear index in the chart below.

Upward penetration of the red trendline indicates weakness and downward penetration through the triple bottom indicates strength. The next directional move will therefore indicate gold market direction.

General Equities

International equity markets remain elevated with US equities at peaks, but this situation is contaminated by a number of factors, most powerful of which is that the interest rate cycle has now turned up.

The chart below from the US Federal Reserve of St Louis website illustrates the US effective Federal funds rate since 1954.

• US interest rates increased to a peak in early 1980s (at the start of Ronald Reagan’s administration);
• Peak interest rates in 1982 could only decline providing the most favourable investment environment ever;
• Interest rates dropped to zero in 2008 after the global meltdown;
• In Jul 2016 interest rates started to rise providing the most unfavourable investment environment ever;

By this measure all equity markets have to turn down into bear markets any time soon.

Conclusion

The US$ continues to remain under pressure reaching new lows and the current cycle has gone 47 days without a bottom. The negative US jobs report on Friday pushed the Dollar lower and gold higher but the US Fed meeting on 14 June is expected to hike rates which may support the Dollar.

The gold price nevertheless remains below the previous high in April causing a divergence against the Dollar, and a second divergence exists between miners and metals because miners continue to underperform metals. Both these divergences continue to support a lower gold low in June, although the rebound in gold is taking longer than anticipated which may extend the time frame for the June low.

Conversely, if GDX US miners price remains below the previous high at $23.67 then it is only a matter of time before gold moves down to the 6 month cycle low.

International equity markets remain elevated with US equity breakouts to new highs, but with many divergent sell signals now. However all commentaries are calling for further new highs which will probably happen.

US$

The US$ continues to remain under pressure reaching new lows and there is still no sign of a bottom, although it is increasingly due a bounce. The current cycle has gone 47 days against the norm of 35 days.

The negative US jobs report came out Friday indicating 138K new jobs against 182K estimate but with a decline in unemployment to a 16 year low. High volatility followed with the US$ lower and gold higher which eventually stabilised and closed at new levels: US$ at 96.67 and gold at $1280.20. Gold is now at long term resistance levels. The US Fed meet on 14 June and consensus is that they will hike rates. This is a key event for all markets.

Gold

The gold price refuses to turn down and in fact keeps rising, but remains below the previous high in April causing a divergence against the Dollar. A second divergence exists between miners and metals because miners continue to underperform metals. Both these divergences continue to support a lower gold low in June. But the rebound in gold is taking longer than anticipated which may extend the time frame for the June low.

The gold chart below is a short term 5 month weekly chart including a Slow Stochastic oscillator (top) to illustrate gold’s reluctance to move the oscillator down to a level of 20 which traditionally is required for a cycle bottom.

Gold at $1280.20 is now at long term resistance levels, with the corresponding likelihood of movement lower. If this resistance level is penetrated convincingly then the potential for further gold gains is very real with the signal alert that the next leg up in the gold market has begun. This will at the same time void the June low theory.

The US Fed meeting on 14 June is of course also critical for gold.

US Miners

The divergence between miners and metals is evident in the GDX US miners chart which illustrates the downward sloping trading channel with price closing Friday at $22.76. This is in contrast to the ever higher gold chart. Also, as long as the GDX price remains below the previous high at $23.67 then it is only a matter of time before gold moves down to the 6 month cycle low.

General Equities

International markets remain elevated with US equity breakouts to new highs, but with many divergent sell signals now. However all commentaries are calling for further new highs which will probably happen.  A sobering thought emerges when we consider the criteria impacting current markets compared to history. This is a 100 year chart of the Dow Jones Industrial Average illustrating broad patterns.

At various points in time during the 100 years, Blue icons indicate key buying opportunities and red icons selling opportunities. Consider also the points A and B described below the chart.

Point A in 1983 is described by many famous investors (such as Stan Druckenmiller) as the greatest investment environment ever:

• Risk free 5 year US Treasury bond yield was 15%;
• This was the pre-cursor to the greatest bull market in history;
• Equities were priced incredibly cheaply to compete with risk free rates;
• Interest rates were high / Debt was low / Growth potential was high;

Point B, right now, is the opposite:

• The worst investment environment;
• 37 Year bull market in bonds is over with yields below 2.5%;
• This is the pre-cursor to the biggest market collapse in history;
• Equities are incredibly expensive;
• Zero interest rates / Massive global debt / Low growth potential ;