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Midweek Market 9 April 2020

Apr 9th, 2020

Executive summary

Recent events have alerted a wider audience to the destruction of value in financial markets, as the unfolding bear market unleashes a torrent of increased ’money printing’ in a futile effort to stabilise and prevent further declines. These extreme circumstances are the result of a hundred years of malpractice by governments and central banks in creating ‘currency’ out of nothing, now exacerbated by the horrific Covid-19 pandemic.

Global economies are imploding and currency values continue to erode as the wider financial dislocation becomes more evident. G4 currency values measured against gold over 50 years are collapsing, as evidenced in the log scale chart below by courtesy of Goldmoney.

The Yen dropped by over 91% and the US$, Euro and British Pound by 96-99%. This is a collapse playing out in the ‘death of currencies’ caused by central bank mismanagement, and when confidence in fake money is finally lost, a new international monetary system has to be created based on gold.

Imploding economies include estimates that the US will decline by close to 40%, and the jobs report last Friday provides an inkling of what is to come. Jobs in the US fell by 701,000 between February and March, ending a 113-month streak of net job creation, and that still excludes the last 2 weeks of the month in which 10 million Americans filed for unemployment insurance.

The unemployment rate rose by 0.9 percentage points to 4.4%, so we are just at the start of this thing.

The Dow Jones Industrial Average has completed the first major leg down in the bear market (38% drop) and has been advancing in the first major correction since (29% rise). This correction is in a very late stage which is near to completion. The next major leg down will likely drop another third to the region of 15000 points, last seen 7 years ago in 2013. This bear market is severe and long-lasting, and global human activity will be massively impacted as negative economic intensity gathers momentum.

Despite real currency erosion, the US dollar gains value during equity collapse as demand increases with global dollar loan requirements increasing in currencies eroding faster than the dollar, as well as the search for an apparent ‘safe haven’ during chaos. Also, the fate of the dollar and US Treasuries are closely linked. The US Fed is the only real buyer of government bonds at these excessive and artificial levels as they inflate currency value and depress interest rates by injecting ludicrous levels of liquidity into the system to keep ’the patient’ alive. This artificial stimulation increases the severity of collapse and promotes the demise in both the dollar and US Treasuries.

This all guarantees vast gains in Gold which is the ‘bedrock’ of the next international monetary system design once the current system starts to fail. But first, severity in the equity bear market will engulf everything in its path including gold which will be driven down to new lows first, before the start of the next true gold bull market.

US Dollar

The US$ is in long term decline but has been in a rally since 2008 with a recent strong rally since 2018 to a new high which could also exceed the previous high at the start of 2017. The very recent dollar indication of the start to a potential weakening phase will have to wait as, for a while yet, dollar value will correlate inversely with US equities which are forecast to start collapsing soon into the next major leg down in the bear market. The current US equity correction up is in the very late stage and near completion which has the dollar very near to further strength. This dollar / equity dynamic may well soon change the structure of the above chart until more meaningful loss of confidence in the present international monetary system changes it back to long term dollar weakness.

This applies also to US Treasuries and therefore the US bond market, as interest rates and the dollar are closely linked. The excessive over valuation of the US bond market will lead eventually to the collapse of both the bond market and the dollar.

The dollar is starting to turn up as demand increases with equities close to the end of the current upward correction.

The 12 month chart shows the dollar turning up in a narrow rising channel as demand increases with equities in the late stage of a rally. This presents as a pivotal moment, but as usual, may take days and perhaps even weeks to ignite.

The short term 3 month chart illustrates the dollar poised to breakout, as it holds above the 10-Day MA (blue).

EuroDollar

The Eurodollar, as the virtual opposite of the US dollar index, is in a clear weakening mode, as it continues to hold below the 10-Day MA (blue). This to a degree gives credence to dollar strength ahead.

US Treasuries

The benchmark 10 year US Treasury yield turns up slightly and starts to indicate a potential bottom, to confirm a higher low: This as a consequence of the US bond market turning down off its high point. We are now close to the pivotal point at which US interest rates start rising despite the efforts of the US Fed pumping ludicrous amounts of currency into the market in their QE program. The acid test is when US equities resume the collapse which is forecast any time soon, and whether that causes Treasuries to increase again as money flows from equities into bonds.

Short term US Treasury yields are increasing with the 3 month note doubling this week from 0.1% to 0.2% as rates continue to edge up despite the US Fed pumping vast quantities of currency into the system. This 3 month rate is the one that guides the US Fed into rate decisions, which means they probably cannot justify another rate cut at the moment whether equities start to drop again or not.

Gold

The sell divergence extended to a higher price but is still active and therefore gold will still go lower after the recent rally. The next gold bull market will drive price many times higher, but only after further declines to new lows first. These lows will finally signal an end to the gold bear market in a world of approaching monetary and political chaos.

The 5 year weekly chart highlights renewal of the sell divergence as it extends the timeframe to a new price peak. Divergence is therefore still active and price should decline from here. This is the signal, but as usual the action may only follow after days or even weeks.

The 12 month chart illustrates only the extended portion of the sell divergence, and the likely decline of the gold price from here. This may only occur in a number of days or even weeks.

Gold advanced to the peak and ended with a bearish red candle which indicates a potential top. The top included a breakout of the inverted H&S pattern, but which was immediately invalidated (very bearish). Declines in the gold price could well occur sooner rather than later.

South African Rand

The dollar weakens slightly from the peak against a slightly stronger Rand, as the dollar pauses before resuming a stronger bias. Some Rand strength is also the result of a recent lengthy weakening phase powered by fundamentals in South Africa. The Rand therefore continues to look fragile and volatile, and is likely to weaken further as the dollar resumes strength.

HUI / Gold Ratio

The ratio is consolidating after a period of volatility and is creating a pennant formation which indicates further declines ahead. There is a slight recent increase in the ratio in the latter stages of the consolidation which indicates US miners (HUI) are tending to move ahead of the gold price. But weakness ahead will test support lower down.

HUI The Arca NYSE Gold Bugs Index

The HUI itself has a similar chart to the HUIGold ratio, but is still poised to drop significantly as the key support level of 185 is penetrated. This is likely to test support and the March low at 142.5 once ignited.

GDX US Gold ETF

This same dynamic is event in the GDX, and penetrating down through the key support level at 23 will drop price down to test the March low at 16.

This pattern is also similarly reflected by the GDX Juniors and XAU (charts not shown), although somewhat different in the inverse Dust chart which is shown next.

Dust US Miners Bear Index

The buy divergence in the US Miners bear index (Dust) is still active and this will lead to higher Dust prices which amplify lower miner prices, which in turn has the added potential for reducing metal prices.

Silver

Long term silver continues to trend lower, despite the recent rally. The chart has a negative bias and the trend continues down in a continued major non-confirmation with gold, as silver leads the price declines. As with gold, the next silver bull market will drive price many times higher, but only after further declines to yet lower lows first. These lows will finally signal an end to the precious metals bear market in a world of approaching monetary and political chaos.

The most notable behaviour in silver is its major non-confirmation with gold which is historically typical at major trend changes. The recent rally has silver underperforming gold and this should lead to lower prices. A key pivotal level remains the previous major low point at $13.60 which has already been breached once.

The 12 month chart illustrates the formation of a bearish pennant and once key levels are penetrated should lead to much lower prices to test the March low, as with the miners.

The 3-month chart illustrates silver’s recent rally ending with a bearish candle which turned down close to the 50-Day MA (red). Also the negative chart bias illustrates the major non-confirmation with the positive gold chart bias. Both these impacts should lead to sharply lower silver prices in due course.

The Silver miners chart mirrors that of US gold miners, and is poised to drop significantly. Penetration of the key support level at 22.90 still applies to drop price down to test the March low at 16.

Gold : Silver Ratio

The gold / silver ratio closed lower at 110.77 in a chart that continues to present an upward bias which is negative for metal prices, and vice versa. The ratio is building a pennant formation which promises yet higher ratios, and yet lower metal prices. All this indicates a continued era with substantial silver underperformance which remains negative for metal prices.

General Equities

The bear market continues to unfold.

The Dow Jones Industrial Average has completed the first major leg down in the bear market (38% drop) and has been advancing in the first major correction since (29% rise). This correction is in a very late stage and near to completion. The next major leg down will likely drop another third to the region of 15000 points, last seen 7 years ago in 2013. This bear market is severe and long-lasting, and global human activity will be massively impacted as negative economic intensity gathers momentum.
This collapse is likely to be greater than any other collapse in history, and with greater consequences. In simple terms, the core problem is that money value (measured against gold) is collapsing, and when confidence in the fake money system is finally lost, a new international monetary system has to be created based on gold.

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