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Market Analysis 30 April 2020

Apr 30th, 2020

Executive summary

The bear market is in its initial stages. The first major leg down in the Dow Jones is complete and the first major countertrend move up is very close to completion, if not already complete. When complete, the second major leg down will decline to fresh new lows, in the bear market which probably will endure for a decade. These first major countertrend moves up in a bear market are an emotional challenge that require patience, because they recreate the bullish spirits of the prior peak. Investors become convinced that the bull market is back and intact, in a paradox of market behaviour.

Investors are clamouring to buy gold and gold shares, but the precious metal remains in a bear market, soon to start the next major decline as it becomes enveloped in the equity collapse which will eventually devour all in its path. Similarly, the major countertrend move up in gold from the Dec 2015 low is very close to completion, if not already complete. South African gold shares are in ‘Jaws of death’ patterns with price at the upper diagonal, with potentially dire consequences as the metal starts a major decline. This is more pronounced in silver which continues a major non-confirmation with gold; traditional behaviour at major trend changes.

At the same time, the global monetary system is collapsing and the world is moving into a period towards currency collapse which argues strongly in favour of gold and gold-related investments. Therefore, the period ahead needs to be navigated very carefully between preparation and action. Government deficits are huge and increasing rapidly in response to lockdown economies, which will all promote deflation (witness the oil collapse) with inflation thereafter followed by hyperinflation as currencies collapse.

So, the pathway ahead consists of collapsing assets on the one hand and appreciating assets on the other, such as the US$ which attracts money flows (as the international reserve currency) at times of fear. This will present as a matrix evolving towards an inflection point with potential profit in strong currencies before and gold investments after.

But for now, the markets are as they were a week ago. The Dow Jones has not resumed declines yet, the dollar has not resumed gains yet, US Treasuries are not moving much, and gold has yet to start declining. Even the gold/silver ratio has moved sideways for 6 weeks.

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 already exceeded the previous high at the start of 2017. This will corrupt the dynamic with dollar strength into continued equity collapse, as we enter a new phase 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.

The shorter term 12 month chart reveals the dollar moving sideways with upward inclined support from the 50-Day MA (red). This presents as a pivotal moment as US equities complete the final stages of the current countertrend rally, which is also indicated by other currencies opposite to the dollar, such as the Euro.

The short term 3 month chart illustrates the sideways movement in more detail, with the dollar actually weakening slightly in the tail. This 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.

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 0.10%. 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 currency collapse, and 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 towards the apex of the rising wedge as the sell divergence activated, with a sideways to down price reaction and a break down through the rising wedge in progress. This should propel prices lower in due course.

Brent Crude Oil

The oil price bounced up off the bottom of last week with potential buy divergence implications. But the fundamentals in the oil market remain bearish with economic activity at such anaemic levels, and the various implications need to still work through the system before real directional signals can be meaningful. This indicates much lower gold prices to come with the historic high correlation between gold and oil.

The gold / oil ratio, which equals the number barrels of oil that 1oz of gold will purchase, is rising steeply in a narrow channel despite weakening in the tail to 70.7. The ratio dropped 17% during the week as the oil price increased, and this should continue with forecast gold weakness ahead.

South African Rand

The dollar weakened against the slightly stronger Rand, in a breakout down through the bear flag. This should reverse soon with dollar strength as US equities resume declines.

HUI / Gold Ratio

The ratio increased to a mild new high which may prove to be false, with forecast lower gold prices ahead. This is a danger signal with euphoric investors clamouring to buy gold shares in the face of potentially lower gold prices. Price gaps are usually closed later on and there is a small gap lower down at the top of the support zone.

HUI The Arca NYSE Gold Bugs Index

The HUI itself has a similar chart to the HUIGold ratio, but has broken to a higher new high and includes 2 gaps lower down. A correction down is next and the threat of penetration through the 185 level will drop price down to test the Mar 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 in moving up, which seems unlikely.

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 (not higher), being an 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.

Silver miners are 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. This latter seems more likely, given all the scenarios.

Gold : Silver Ratio

The gold / silver ratio closed lower at 111.88 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. But the ratio has moved sideways for 6 weeks and should break up soon, as all this indicates a continued era with substantial silver underperformance which remains negative for metal prices.

General Equities
The bear market continues to unfold, but is in the very early stages of development.

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.

These first major countertrend moves up in a bear market are an emotional challenge that require patience, because they recreate the bullish spirits of the prior peak. Investors become convinced that the bull market is back and intact, in a paradox of market behaviour.

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 very nearly completed the 1-2 correction up in a 5 wave leg down 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 25 000 at 2.

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