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Market Analysis 14 May 2020

May 14th, 2020

Executive summary

The bear market continues to unfold, as the 2nd major leg down is underway. The Dow Jones Industrial Average is displaying a strong sell divergence signal which will propel prices much lower as negative economic intensity gathers momentum.

The dollar is strengthening again as the rally from 2018 extends, despite a recent 8 week period of lethargy. US equity declines are again increasing dollar demand into a forecast strong rally as the bear market unfolds further. This will lead towards an inflection point of increasing dollar demand to be met by decreasing confidence in fiat currencies and the eventual collapse of the global monetary system.

The benchmark 10 year US Treasury yield remains low in a fragile support area as the result of the vast (and ludicrous) US Fed bond purchasing program to supposedly stabilise financial markets. However, it remains inconceivable that the US bond bull market can co-exist alongside a collapsing equity market. In spite of this, real interest rate expectations are for increasing rates as deflation sets in, which 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 finally collapse.

Lower gold and silver prices lie ahead but could possibly break up to new highs first, before becoming enveloped in the equity collapse which will devour all in its path. Although the technical signals are there, market reaction is proving to be slow probably because of increasing turmoil in the global monetary system as well as elevated fear levels due to covid-19 economic destruction.

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.

This will present as a matrix evolving towards an inflection point with potential profit in strong currencies before and gold investments after.

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 strengthening as the rally from 2018 extends. US equities have started the next major leg down and this is increasing dollar demand into a strong rally as the bear market unfolds further. This will lead towards an inflection point of increasing dollar demand to be met by decreasing confidence in fiat currencies and the eventual collapse of the global monetary system.

The shorter term 12 month chart reveals the dollar strengthening in sideways mode as it moves back above the February 2020 high. This presents as a pivotal moment as the triangle pattern moves closer to the apex and potential breakout. Further validation is provided by competing currencies such as the Euro as it weakens towards a steeper decline.

The short term 3 month chart illustrates the sideways movement in more detail, with the dollar strengthening slightly at the triangle apex. A bullish breakout is forecast 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 declines in the fragile support area as US equities start the next major leg down in the bear market. The support base is broadening slowly and could soon develop mild bullish signals, as it is inconceivable that the US bond bull market can co-exist alongside a collapsing equity market, despite the vast (and ludicrous) US Fed bond purchasing program to supposedly stabilise financial markets.

In spite of this, real interest rate expectations are for increasing rates as deflation sets in, which 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 finally collapse.

Short term US Treasury yields are holding in a narrow range at 0.13%. 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 potential for any rate cut at the moment.

Gold

Long term gold still has an active sell divergence in place which should lead to declines from here, although some short term signals suggest gold may yet go higher first before real declines start. The next gold bull market will drive price many times higher, but only after further declines to new lows first during a period of deflation. 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 have not started yet. Market response to technical signals vary from immediate to days, weeks, or months later.

The 12 month chart illustrates a sideways consolidation that is forming into a triangle pattern, in the wake of sell divergence and rising wedge break. Lower gold prices lie ahead but the triangle pattern could first break up and propel price to a new high at about $1800. Although the technical signals are there, market reaction is proving to be slow probably because of building turmoil in the global monetary system as well as elevated fear levels due to covid-19 economic destruction.

Gold has broken down through the rising wedge in the wake of the sell divergence, but prices are drifting sideways towards a triangle apex. Gold needs to decline through $1664 to void the triangular pattern which could otherwise propel price to a new high at about $1800.

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 a breakout up from the pennant formation 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 has a breakout through the bear flag which could soon test support. The chart reflects weaker US miners against a less-weak gold price, and the miners could be leading gold lower, as has happened before.

HUI Gold Bugs Index

The HUI itself has a similar chart to the HUIGold ratio, and has broken down from the bear flag in exercising the start of reversal potential to perhaps test support soon. 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 both of which have now broken up, which should lead 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 5 year silver chart is in a sideways consolidation which is poised to either move up or down. The most notable behaviour in silver is its major non-confirmation with and underperformance of gold, still with a gold/silver ratio well above 100. This ratio is forecast to reach even higher levels, especially with a strong dollar rally expected in the next period.

This all indicates lower prices ahead, in spite of a current mild rally in the silver price.

The 12 month chart illustrates a sideways consolidation that is forming into a triangle pattern, in the wake of a breakout from the rising channel. Lower silver prices lie ahead but the triangle pattern could first break up and propel price to a new high above $19. A key support level remains at $14.50 and penetrating below this level will void any bullish potential in the triangle, and if will lead to much lower prices to test the March low, as with the miners.

Silver has drifted sideways into a triangle pattern in the wake of the sell divergence, and now has the potential to break up to a new high. But any penetration down through the key level at $14.50 will void the bullish triangle potential.

Silver miners have a breakout through the bear flag and could test support soon. Penetration down through the key level at 23 will propel 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 lower at 109.53, after breaking down from the triangle pattern which promises lower ratios and therefore higher short term metal prices. However, the chart still continues to present an upward bias overall which is negative for medium term metal prices. The continued era of significant silver underperformance seems ensured until the inflection point at the start of the next real precious metals bull market.

General Equities
The bear market continues to unfold, as the 2nd major leg down is now underway.

The Dow Jones Industrial Average has completed the first major corrective leg up and the next (and 2nd) major leg down is underway. At the same time a strong reverse sell divergence signal has become evident, and this will propel prices much lower 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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