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Market Analysis 7 May 2020

May 7th, 2020

Executive summary

The bear market is in its initial stages, and is likely to mature into a decade-long collapse. The Dow Jones Industrial Average has completed the first major leg down and the first major correction up, and the second major leg down is commencing. A strong sell divergence signal has occurred in the chart which will propel prices lower. This bear market will be severe and long-lasting, and global human activity will be massively impacted as negative economic intensity gathers momentum.

Investors are still 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.

The markets overall are beginning to finally move, albeit tentatively. The Dow Jones is in the early stage of the 2nd major leg down, the dollar has started to resume gains, US Treasury yields are off the bottom in beginning to build a consolidated base for later gains, and gold has started declining slowly.

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 completing the current upward correction as the bear market readies for the next major leg down.

The shorter term 12 month chart reveals the dollar moving sideways but strengthening in the tail as it moves back above the Feb 2020 high. This presents as a pivotal moment as the dollar starts to strengthen, 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 strengthening slightly in the tail. This all coincides exactly with the Dow Jones behaviour, except in the opposite direction. This means it is likely to start a serious rally as the Dow Jones starts the next major leg down in the bear market.

EuroDollar

The Eurodollar, as the virtual opposite of the US dollar index, is in 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 begins to create a support base as it turns up slightly. It is now set to build on this base as the US bond market drops down from its peak. But the real test is about to occur as US equities start the next major leg down in the bear market and the US Fed ratchets up the already ludicrous amounts of currency pumped into the market in their massive QE initiative, 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 eventually 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 the US Fed increases bond purchases massively in response. This 3 month rate is the one that guides the US Fed into rate decisions, and the chart indicates no rate cut yet.

Gold

Long term gold still has an active sell divergence in place which should lead to declines from here, and prices are beginning to decline although still very slowly. 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, monetary and economic collapse.

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, which are already beginning to decline slowly. 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, is starting to propel gold to lower levels. Although the technical signals are there, market reaction is proving to be slow.
Pic Gold 3m

Gold has broken down through the rising wedge in the wake of the sell divergence, and prices are beginning to roll over, although slowly.

Brent Crude Oil

Oil is consolidating in a zone around $30 as it reacts to the recent sharp declines. 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.

The gold / oil ratio, which equals the number barrels of oil that 1oz of gold will purchase, drops down through the rising channel as it starts to normalise towards the support zone. At these levels it still indicates much lower gold prices to come.

South African Rand

Breakout from the bear flag indicates Rand strength, but formation of the pennant indicates Rand weakness. The chart implications are therefore somewhat mixed, probably as the result of a dollar that has meandered sideways for the past 6 weeks. The dollar is forecast to now start strengthening markedly and this will leave the Rand weaker.

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 still clamouring to buy gold shares in the face of potentially lower gold prices.

HUI Gold Bugs Index

The HUI itself has a similar chart to the HUIGold ratio, but has broken to a higher new high and still includes a gap lower down. Price reversed down off the peak and the chart has reversal potential. Penetrating 185 still applies and this will trigger further declines to test the March low at 142.5.

This applies to all US miners and GDX, GDXJ, and XAU are all subject to lower penetrations which will trigger further declines to test the March lows.

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 plus a reducing wedge which should beak up soon, both leading to higher prices ahead. But, importantly, 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 currency, monetary and economic collapse.

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 pennant pattern has formed and this indicates yet lower prices once the apex breaks, and a key pivotal level remains the previous major low point at $13.60 which has already been breached once.

Silver prices are rolling over after the break through the rising channel and 2 key levels await below represented by the red lines. Penetration of these key levels will lead to much lower prices to test the March low, as with the miners.

The 3-month chart illustrates the silver price rolling over with the potential to penetrate the 2 key levels which 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, 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 impact factors.

Gold : Silver Ratio

The gold / silver ratio closed higher at 112.46 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 and the first major correction up, and the second major leg down is commencing. At the same time a reverse sell divergence signal has occurred which will propel prices lower. 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 now 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 in the region of 15 000.

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