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Midweek Market 23 April 2020

Apr 23rd, 2020

Executive summary

The bear market continues to unfold, and the big news this week is the oil market collapse. This is one of the more obvious casualties of the current economic implosion. The implications of this could be catastrophic in as much as it could even lead to war in some form or another. Historically, there has mostly been a high correlation between oil and gold, and the implication is therefore that this will lead to a much lower gold price. Paradoxically, the fear factor could be one of the reasons the gold price continues at elevated levels. But financial and monetary trouble or even collapse usually trumps fear as the main impact on gold. So, there is quite an impactful and toxic mixture in the world at the moment.

The US equity market is where we were last week with the Dow having either already started or is very nearly to start the next major leg down which will be severe. The dollar is trending up slightly as demand increases with equities in the late stage of the rally and close to the end of the current upward correction, all in contradistinction to the EuroDollar which is trending down slightly.

The benchmark 10 year US Treasury yield continues to weaken towards the previous low as the US bond market rises towards the previous peak. This is all powered by the twin impacts of US equities poised to resume declines in an unfolding bear market and the US Fed pumping ludicrous amounts of currency into the market in their massive QE program which has the effect of reducing interest rates.

In spite of this, real interest rate expectations are for increasing rates as deflation starts to kick in eventually, before inflation and hyper-inflation starts in the phase that will follow. All that will reverse US Treasury yields from lower to higher as the US bond market starts to collapse in line with equities, and dollar value resumes a weakening phase as confidence in currencies decline.

This is all good for gold, but there are a number of negative impacts in the market which is likely to see gold at lower prices ahead, despite prices remaining at these elevated levels for now. Market response to technical signals vary from immediate to days, weeks, or months later. 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 has exceeded the previous high at the start of 2017. This will corrupt this dynamic with dollar strength into continued equity collapse, as we enter a new dynamic until a 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 trending up as demand increases with equities in the late stage of the rally and close to the end of the current upward correction; also indicated on the 12 month chart.

The 12 month chart shows the dollar in a strengthening mode as dollar demand increases with equities in the very late stage of the rally, if not already completed. This presents as a pivotal moment, as also indicated by other currencies opposite to the dollar, such as the Euro.

In the short term, the dollar is in rising mode in stabilising after its recent correction down, which all coincides exactly with the Dow Jones behaviour, except in the opposite direction. This means it is likely to strengthen once the Dow Jones starts to weaken, which is forecast to occur very soon. The dollar is supported by the 50-Day MA (red) and has moved up above the 10-Day MA (blue) and is holding that position, all well above the 200-Day MA (green).

EuroDollar

The Eurodollar, as the virtual opposite of the US dollar index, is in a clear weakening mode, as it continues to trend lower. This to a degree gives credence to dollar strength ahead, as the EuroDollar is behaving technically nearly exactly opposite.

US Treasuries

The benchmark 10 year US Treasury yield continues to weaken towards the previous low as the US bond market rises towards the previous peak. This is all powered by the twin impacts of US equities poised to resume declines in an unfolding bear market and the US Fed pumping ludicrous amounts of currency into the market in their massive QE program which has the effect of reducing interest rates.

In spite of this, real interest rate expectations are for increasing rates as deflation starts to kick in eventually, before inflation and hyper-inflation starts in the phase that will follow. All that will reverse US Treasury yields from lower to higher as the US bond market starts to collapse in line with equities, and dollar value resumes a weakening phase as confidence in currencies decline.

Short term US Treasury yields are holding in a narrow range at about 0.12%. The 3 month yield is subject to the same influences as the benchmark 10 year, except that it is more directly responsive to US Fed activity because the bond purchasing program (QE) includes mainly short term Treasuries. The acid test will occur once equities actually resume significant declines in the bear market and what the US Fed response will be. This 3 month rate is the one that guides the US Fed into rate decisions.

Gold

Long term gold still has an active sell divergence in place which should lead to declines from here, although prices continue to remain at these elevated levels for now. 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 the sell divergence in more detail, as well as the massive drop in volume as the gold price peaked. This all indicates lower prices ahead, despite prices remaining at these elevated levels for now. Market response to technical signals vary from immediate to days, weeks, or months later.

The 12 month chart illustrates a shorter term and additional sell divergence which, together with culmination of the rising wedge and rising channel patterns playing out, should propel gold to much lower levels soon. Although the technical signals are there, market reaction is proving to be slow.

Gold advanced to the apex of the rising wedge as the sell divergence activated, which should soon propel prices lower.

Brent Crude Oil

The oil price has collapsed, to be one of the more obvious casualties of the current economic implosion. The implications of this could be catastrophic in as much as it could even lead to war in some form or another. Historically, there has mostly been a high correlation between oil and gold, and the implication is therefore that this will lead to a much lower gold price. Paradoxically, the fear factor could be one of the reasons the gold price continues at elevated levels. But financial and monetary trouble or even collapse usually trumps fear as the main impact on gold. So, there is quite an impactful and toxic mixture in the world at the moment.

This chart reflects the $gold / Brent oil ratio, which equals the number barrels of oil that 1oz of gold will purchase. Considering the amount of money involved in the global oil industry, it could be assumed the chart will probably settle at a gravitational pull from 85 down to a region above the support zone between say 40-50, until economies begin to open up after the lockdown periods. There may well be an oil price explosion after that, but it will take many years before the oil industry recovers. After this collapse, gold prices will be depressed.

South African Rand

The dollar starts to strengthen again against the slightly weaker Rand, having come down from peak dollar strength. But the dollar is forecast to strengthen further as US equities resume declines, and this will weaken the Rand further, as it continues to look fragile and volatile.

HUI / Gold Ratio

The earlier breakout in the ratio has run its course into negative sell divergence which will lead to lower ratio values. The increase up to 0.153 indicates higher US gold miner (HUI) prices than even the higher gold price. The ratio needs to break through resistance to new highs otherwise it will be subject to weakening substantially, and potentially testing the March lows.

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 with a lower gold price. Penetration of this support level will test the March low at 142.5.

The long term 10 year chart illustrates a strong 7 year basing pattern which is poised to break either up or down. A breakout will propel price toward the 600 region, whilst a break down will depress price toward the 125 region. So, this is quite a meaningful inflection point, but will require a strong gold price and buoyant market to succeed.

This same dynamic is also evident in the other US miner vehicles on US markets such as GDX, GDX Juniors, and XAU (charts not shown), and declines through key supports will drop prices down to test the March low levels.

Dust US Miners Bear Index

The Dust chart is a US miners bear index which responds in the opposite direction to the miners themselves. It is also geared and is a valuable indicator as well as being a valuable investment vehicle as well.

The chart illustrates a strong long term buy divergence which will lead to higher prices to come. But this amplifies lower metals and miners prices, being and inverse bear index.

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 3 key support levels (red lines) which if penetrated will encourage yet lower prices in testing the support zone. Penetrating these key levels should lead to much lower prices to test the March low, as with the miners.

The 3-month chart illustrates the silver price rolling over as it breaks down through the rising channel (red circle). The lower key support level is at $13.90 and penetration of this level will drop price down to test the March low, as with the miners.

The Silver miners chart is poised to break up or down. Breakout to a new high will advance price significantly, but a break down through $22.90 will drop price significantly to test the March low at $16.

Gold : Silver Ratio

The gold / silver ratio closed higher at 113.36 in a chart that continues to present an upward bias which is negative for metal prices. The chart bias is positive 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 and the countertrend advance in the correction up is now complete or very nearly so. The next major leg down has either already started or is very nearly to do so. Also note the severely declining volumes which reflect the exhaustion in the advance. This bear market will be severe and long-lasting, and global human activity will be massively impacted as negative economic intensity gathers momentum.

This chart reflects the Dow Jones Ind Ave performance from the 2008 Global Financial Crisis, and illustrates very basic Elliott Wave counts indicating where we are in the collapse. Declines since the final top of the market at 5 have completed the 1-2 correction up in a 3 wave leg that is next to drop severely in wave 3 down. 3rd Waves are the longest and strongest and this wave 3 is likely to decline towards a level of 15 000 from 24 000 at 2.

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