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Market Analysis 8 Jul 2021

Jul 8th, 2021

Executive summary

Here is a reminder of some overall market influences before we get into the detail of this week’s post. For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck, as the bull market continues unabated. But in the meantime, the same loose policies that are feeding asset bubbles will continue to drive consumer price inflation, creating the conditions for stagflation whenever the next negative supply shocks arrive. Making matters worse, central banks have effectively lost their independence, because they have been given little choice but to monetize massive fiscal deficits to forestall a debt crisis. But the US Federal Reserve’s daily reverse repurchase agreements are surging to all-time highs which actually means that liquidity is being drained from the financial system and QE is suffering a slow and painful death. But it also means the ‘taper’ has already begun and world markets are really unaware of this or just ignoring it.

A reverse repurchase agreement occurs when an institution offloads cash to the Fed in exchange for a Treasury security on a short term basis, and with US financial institutions currently flooded with excess liquidity, they are moving cash to the Fed at an alarming rate in excess of $500bn pm. So with US QE running at about $120bn per month and daily reverse repos far in excess of that, you get the reverse of QE which is ‘taper’.

We are all aware of what ‘taper’ does to markets, so while we might continue to get higher prices, strong declines should follow at some stage. For instance this post indicates a bullish stance for gold and miners, but strong declines will follow soon after that.

The Dow Jones continues to hold the topping pattern with conflicting signs of further new highs and a strong reversal decline forecast soon, given the general level of investor euphoria against the parlous condition of the financial and monetary system described above.

Much depends on US Treasury yield behaviour which drives dollar value and much else and at the moment yield breakdowns intensify as Treasuries hold up and at the same time equities hold up. Also, it is worthy noting that current yield weakness is supporting the gold price which the historical inverse correlation of the two indicates it should do.

The strong US$ rally persists into a region of indecision which needs to break either way. The indicators suggest a breakdown is likely which continued weak US Treasury yields support, although a bearish EuroDollar indicates the opposite.

Gold and miners have breakouts supported by weaker Treasury yields, but this may be short-lived.

Dow

The Dow Jones continues to hold the topping pattern – just. The sell divergence and rising wedge breakdown is still active but there is a key break level very close which, if breached, will lead to yet new highs. A strong reversal decline soon is forecast, whether this leads to continued new highs or not thereafter.

The Dow short term 3 months chart indicates the key break level at 34860 which if breached will lead to yet higher new highs.

US Dollar

The strong US$ index rally persists into a region of indecision (black circle). This is in a vertex-based reversal which needs to either breakout the expanding triangle or breakdown the bear flag. The indicators suggest a breakdown is likely from positions at the top of range with a MACD sell signal soon to be created. Continued weak US Treasury yields support this, although a bearish EuroDollar (next chart) does not.

EuroDollar

The EuroDollar breakdown indicates yet lower Euro values and higher dollar values but the indicators suggest the opposite.

South African Rand

Rand weakness has turned to indecision but the indicators suggest Rand strength next with dollar weakness. Activity remains largely within the overall down-sloping reducing channel formation indicating further dollar slippage, until that is finally breached on the upside.

US Treasuries

US Treasury 10 year yield breakdowns intensify as Treasuries hold up and equities hold up. This means the acid test is holding up with bonds and equities moving in the same direction, but in rising mode. Also, it is worthy noting that current yield weakness is supporting the gold price which the historical inverse correlation of the two indicates it should do. The deteriorating US reverse repo situation will support a strengthening yield bias and weak gold price, which of course happens next (only a matter of time).

Treasury yields continue to weaken and gold is starting to strengthen, as it should do in accord with the historical inverse correlation of the two. This also means that once yield starts to strengthen gold will start to weaken, and this might be quite soon.

Gold

Gold has a breakout as the bull flag activates, supported by weakening Treasury yields. Most miners are also beginning to breakout in sympathy, but all of this may be short-lived despite a somewhat bullish chart formation plus a MACD buy signal.

Hui : Gold Ratio

The gold breakout is not fully supported by miners yet as this ratio does not have a breakout. This, despite a somewhat bullish chart formation and a MACD buy signal.

GDX US Gold ETF

GDX has a breakout in sympathy with gold as the bull flag activates. The chart formation is bullish and there is a MACD buy signal. Also, it might be that the vacant gap will be closed a little higher up.

Dust US miners bear index

Dust has a breakdown from the bear flag, reflecting the breakout in US miners. Also, the chart looks bearish including the MACD sell signal, and it might be that the vacant gap will be closed a little further down.

Silver

The strong Silver chart formation in a major bullish triangle has gone dormant momentarily, and any potential breakout has been delayed. However, this is all supportive of gold and the miners and is likely to activate shortly, impacted similarly to weaker Treasury yields.

Gold : Silver Ratio

The gold / silver ratio has moved sideways for 6 months and a breakout or breakdown is required before we can make constructive projections.

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