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Midweek Market 28 March 2019

Mar 28th, 2019

Executive summary

This summary of global markets is adapted mostly from original thoughts by Alasdair Macleod at Goldmoney.

The global economic outlook is deteriorating with some countries now in recession and the US also signalling a looming recession with many commentaries alerting the yield curve inversion. In conditions like these Government deficits will escalate. Foreigners have already begun liquidating dollar assets, adding to future funding difficulties in the US. The next wave of monetary inflation, required to fund budget deficits and keep banks solvent, will not prevent the severe bear market that lies ahead, because the scale of monetary dilution will be so large that the purchasing power of the dollar and other currencies will be undermined. Failing fiat currencies suggest the dollar-based financial order is coming to an end, but with few exceptions, most investors own nothing more than investments based on fiat-currencies.

The global economy is at a cross-road, with international trade stalling and undermining domestic economies. Major central banks, notably in the EU, Japan, and UK were still easing their economies by suppressing interest rates, and the ECB had only stopped quantitative easing in December. The US and China had been tightening in 2018, and China quickly started stimulating in November, while the US Fed has now paused monetary tightening, pending further developments.

It is very likely this new downturn will be substantial. The coincidence of trade protectionism at the top of the credit cycle last occurred in 1929, and the subsequent depression was devastating. The reason to be worried today is stalling trade disrupts capital flows that fund budget deficits, particularly in America where savers do not have the free capital to invest in government bonds. Worse still, foreigners are now not only no longer investing in dollars and dollar-denominated debt, but they are suddenly withdrawing funds. According to the most recent data, in December and January these outflows totalled $257.2bn. At this rate, not only will the US Treasury need to fund a deficit likely to exceed a trillion dollars in fiscal 2019, but US markets will need to absorb substantial sales from foreigners as well.

In short, America is going to face a funding crisis coinciding with the top of the credit cycle: A lethal combination. The problem is bound to manifest in coming months, and is as yet still unrecognised as the most important factor behind both American and global economic prospects.
While today’s trade protectionism is less vicious than the Smoot-Hawley Tariff Act of 1929, America’s drawn-out trade threats today are similarly destabilising. The top of the credit cycle in 1929 was orthodox, but this time the credit bubble is proportionately far larger, and its implosion threatens to be even more violent. Government and consumer debt is enormous everywhere and personal savings in America, UK and EU is practically non-existent. So, the potential for a systemic crisis is therefore considerably greater today than it was ninety years ago.

The Dow Jones dropped 90% from its peak in 1929, and comparison with these empirical facts suggest we might now suffer a similar collapse in financial asset values in the next number of years. However, there is an important difference between then and now:
• In 1929 the dollar was on a gold standard, with the price-effect of the depression reflected in the rising purchasing power of gold;
• In 2019 no fiat currency is gold-backed, so a major collapse will be reflected in the falling purchasing power of currencies;

Government finances and its un-backed currency determines general price levels, and if you take the US dollar for example, the government’s debt to GDP ratio is more than 100% whereas in 1929 it was less than 40%. At the peak of the credit cycle, the government should have a revenue surplus reflecting underlying full employment and peak tax revenues. In 1929, the surplus was 0.7% of estimated GDP; today it is a deficit of 5.5% of GDP. In 1929, the government had minimal legislated welfare commitments, the net value of which was therefore trivial. Today, the present value of future welfare commitments is staggering, and estimates for the US alone range up to $220 trillion, before adjusting for future currency debasement.

Other countries are in a potentially worse position, particularly in Europe. A global economic slump on any scale, let alone that approaching the 1930s depression, will have a drastic impact on all national finances. Tax revenues will collapse while welfare obligations escalate. Some governments are more exposed than others, but the US, UK, Japan and EU governments will see their finances spin out of control. Even assuming responsible stewardship by politicians, the expansion of budget deficits can only be financed through monetary inflation. This is the debt trap, and it has already sprung shut on minimal interest rates.

For a temporary solution, governments can only fund runaway deficits by inflationary means, as the inflation of money and credit is the central banker’s only cure-all for everything. Inflation is not only used to finance governments but to provide the commercial banks with the wherewithal to stimulate the economy. An acceleration of monetary inflation is therefore guaranteed by a global economic slowdown, so the purchasing power of fiat currencies will take another lurch downwards as the dilution is absorbed.

That is the motivation to invest in physical gold, which is the only form of money free of all liabilities. Also, the value of Gold benefits twice against the loss of purchasing power in a fiat currency during a slump, because gold’s own purchasing power will be rising at the same time as the currency value drops. Also, the ongoing process of fiat currency devaluation is about to accelerate.

Chart 1 shows how four major currencies have declined measured in gold over the last fifty years. The yen has lost 92.4%, the dollar 97.42%, sterling 98.5%, and the euro 98.2% (prior to 2001 the euro price is calculated on the basis of its constituents).

Note the vicious logarithmic scale on the Y-axis.

The ultimate bankruptcy of countries in the forthcoming slump, will be reflected in another lurch downwards in currency purchasing powers.

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US Dollar

The dollar index continues to strengthen within the rising wedge assisted by the bullish Hammer which promises a further upside. This is despite the continued negative divergence with the MACD and the somewhat lethargic oscillators.

The 12 month chart illustrates the strong bounce up from 200-Dema, which repeats all the earlier attempts at penetrating down during the last year. Also, the oscillators are rising which promises further gains.

The market favours the stronger of the two competing Elliott Wave possibilities for the dollar looked at last week, and consequently we will exclude the weaker one for the time being, until proved incorrect.

The stronger option indicates completion of the barrier triangle from (A) down to (B) (having completed ABCDE), with a catapult up to (C) at or close to $100.00. This seems to have started with a strong bounce up from E.
This has major implication for markets, especially gold. The projection remains valid for penetration through the barrier above and becomes invalid with penetration down through the bottom incline ACE.

The short term 3 month chart illustrates the strong bounce off support (and 200-Dema), although the rise may be delayed by the negative end candle (long shadow above). The oscillators also have assumed a dithering appearance.

Japanese Yen

The US$ / Yen has a breakout both through 200-Dema as well as the flag pattern, together with a reversal break back attempt. This includes a strengthening Yen followed by some weakness. If the US$ barrier triangle option plays out to completion, then this will result in a much weaker Yen, together with its implications for a weaker gold price.
Both oscillators are turning up which supports this proposition.

US Treasuries

The benchmark US 10 year Treasury has strengthened, dropping yield below the previous low. This has required a new Elliott Wave count with a new wave 2 at a lower yield, which may or may not be complete. Investor sentiment is at a high 93% bond bulls, measured by the DSI, which indicates the bond rally is probably close to completion. Once complete, obviously bonds will decline and yields will advance, probably to resume the earlier collapse in the bond market which has been disrupted by partial ‘inversion’ triggered by activity in the shorter term US Treasuries and a lot of popular media hype threatening the next US recession.

The Cots data for the US 10 year Treasury reflects on the chart as a bearish convergence which indicates lower prices and higher yields, supporting the Elliott Wave view.

US Yield Curve

The official yield curve calculated on the 10 year and 2 year is still drifting sideways at 1.077, and is still some way off the inversion trigger at 1.0 or below. There is probably little doubt that global recession is coming and the media hype of inversion (usually indicating recession) is due to the shorter term Treasuries such as 3 month and 6 month, etc.


The 5 year gold chart illustrates the historic 6-month cycle lows, with the next cycle low in progress, despite the current rally over the past 4 weeks. This and the previous 6 month cycle low has been slow in coming (at closer to 9 months) but with the anticipated stronger dollar the next gold low should be factored into planning.

The 3 year chart illustrates Gold still moving sideways, although with lengthening negative shadows developing in the last few candles which should develop into lower prices. The chart is otherwise displaying a neutral bias.
US miners (GDX, HUI, etc) still outperform gold which is positive, but Silver is underperforming gold which is negative. Also, there is a non-conformance between Silver and Gold including gold derivatives, in that silver is below its 200-Dema gold above. This is another indication of a trend change and lower prices.

The 12 month chart illustrates gold advancing up in a bear flag while it turns down at the top back towards the 1st support zone. It is likely to break out of the bear flag and penetrate into the support zones. It is still well above 200-Dema but both oscillators are beginning to turn down negatively.

The 3 month gold chart illustrates the short term counter rally as it moves within the bear flag. This is likely to break to the downside, as both oscillators also start turning down.

South African Rand

The South African Rand has weakened as it moves further up the rising wedge pattern to a region of stronger resistance. Both oscillators have stalled as we await Moody’s rating tomorrow.
The stronger dollar will weaken the Rand further.

HUI / Gold Ratio

The ratio displays a strong 6 month rally up into earlier resistance, as US miners outperform gold. This was probably significantly motivated by moves out of general equities into miners pending a variety of impact factors such as, top heavy US equities, looming US recession, discounting the next US Fed rate cut/s, etc. The ratio now reflects an overbought situation, stronger dollar and weaker gold in the next period, etc. that will precipitate a substantial retracement down.

HUI Index

The HUI index itself is behaving in similar fashion with similar commentary, yet in a chart indicating less positive bias. However, it is similarly overbought and will also be subject to a substantial retracement down.

GDX US miners ETF

The GDX 12 month chart is similar to the HUI Index chart, and the commentary is identical.

DUST US Gold Miners Bear Index

The Dust chart and commentary is similar to the GDX chart, except in the opposite direction being a US miners bear index.


The 3 year chart continues to have a negative bias as silver continues to reverse up from support in a bear flag as it continues to underperform gold. Silver is likely test lower support levels after a breakout from the bear flag, with both oscillators dropping in support of this.

The 12 month chart illustrates silver dropping below 200-Dema again as the non-conformance with gold and gold miners continues with gold above 200-Dema. This is the prelude to further price declines in Silver as well as the whole precious metals complex.

The 3 month silver chart illustrates the confines of the bear flag and the position of the MAs more clearly. The oscillators are starting to turn down in support of lower prices.

Gold : Silver Ratio

The gold / silver ratio is rising to close at 85.66. This reflects the continued silver underperformance of gold which is negative for the whole precious metals complex. The rising wedge pattern continues and seemingly has a way to go yet which presupposes continued lower precious metal prices.

General Equities

US equities abound in continued major indices non-conformances, and this indicates a trend change to the downside. The Dow Jones maintains its profile of lower highs which are gradually conforming to lower lows as well, and final penetration of the preceding lows marked in red, will confirm the start of a serious decline.

The Elliott Wave counts are such that the next decline will be wave iii (circle) which will take the index below the Dec 2018 lows.

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