July 21, 2016
We've been watching for two weeks as prices have once again been pushed backward into expirations. However, the pattern calls for a renewed up trend to begin as soon as next week. Is it possible to connect the dots and project that far out? Yes!
As we've been following for the past two weeks, the USDJPY has now rallied seven points or 7% in just eight days as Krazy Kuroda in Japan has promised to buy 1T yen worth of new government debt and perhaps even begin the "helicopter money" plan of direct government debt monetization going forward.
The correlation between the yen and gold has been present for years and we have monitored it closely since 2014. As a reminder, here's how it looks in 2016:
This unexpected rally in the USDJPY (the inverse of the yen shown above) has conveniently helped the market-making Bullion Banks to manage their positions into the front-and-delivery month August gold expirations next week. Here's the calendar:
Tuesday, July 26 - August gold option expiration
Thursday, July 28 - August gold contract "expiration" as it goes "off the board"
Friday, July 29 - August gold First Notice Day as August gold trades only with 100% margin and in its "delivery" phase
Previously in 2016, there's a clear pattern of price management and selloffs as front-and-delivery month contracts moved toward expiration. As you can see below, the latter stages of March (ahead of April) and May (ahead of June) saw declines similar to what we are seeing now:
But more importantly, look at the price action while "deliveries" were taking place this year. During the calendar months of February, April and June, gold has soared anywhere from 7% to 12%! Could August be setting up for a similar move? Yes!
And what, besides the end of the August expirations next week could prompt such a turnaround? Most likely, another change in sentiment and trend in the USDJPY. And what might cause that shift? Two events that will occur within 36 hours of each other next Wednesday and Friday:
Wednesday, July 27 - FOMC meeting ends with "Fedlines" announced at 2:00 pm EDT. No rate changes!
Friday, July 29 - The Bank of Japan meets and releases its latest QE plans. However, with the USDJPY already having moved over 7% ahead of this "news", this sets up as a classic "buy-the-rumor, sell-the-news" event. The thought here is that the USDJPY then will resume its downtrend in early August. See link here: http://www.reuters.com/article/us-boj-markets-idUSKCN10032J
And the USDJPY has already reached a major point of resistance on its chart. This, too, hints at a turnaround soon and continuation of the downtrend:
So, if we're looking at a reversal and continuation of gold's 2016 uptrend in August, how far might the next leg up take price. For an answer, we're going to consult another chart.
Back in February, we started following an important breakout on gold's weekly chart. The chart below is from Friday, March 7 and shows gold finally breaking out from its nearly 3-year downtrend:
What happened next? Well, as noted above, March was an "expiration" month for the April Comex contract AND, even more importantly, a breakout of this 3-year trend was something that The Banks wanted to avoid. By the end of the month, the chart looked like this:
Eventually, though, the falling USDJPY and the surging amount of global debt with negative interest rates served to drive gold even higher. By the middle of June, it became clear that The Banks were going to lose this fight. The Brexit vote that followed only served to seal their fate:
The last remaining line of defense for The Banks and their maintenance of a downtrend in gold was violated with the weekly close back on Friday, July 8. (Again, what an interesting coincidence that Kuroda's unexpected announcements came before trading resumed the following Monday, July 11.) Here's a chart we posted with that day's podcast review:
As you can see, it should have been clear to any objective observer that gold had bottomed and a renewed bull market had begun. That The Banks have used the USDJPY strength and the Spec liquidation surrounding August contract expirations to their advantage should, therefore, come as no surprise. They are attempting the same block-and-stall routine that they put on gold back in March when it broke out of its 3-year down channel. Therefore, expect the same fight now. Though we should expect price improvement and a renewed rally in August, do not be surprised if it takes until October for gold to really get cooking to new highs. Again, the March to May action around the earlier breakout is your guide.
So, summing up, what should we expect going forward:
- Further choppy to downward price action into late next week.It's still possible that gold could trade as low as $1285 and back near its 50-day moving average before bottoming. This area has proven as support all year.
- A renewed rally in August back to near, but likely not exceeding much, the highs of late June and early July. Something between $1370 and $1390. Talk will begin to spread that gold has seen a "double top".
- Another tumble in mid-late September as the next front and delivery month (October) comes off the board, However, October is never a big volume or big "delivery" month. Instead, most of the action after August typically shifts into the December contract. Therefore, following the 2016 pattern, any dropoff in September should be more shallow than what we're seeing at present.
- Then, finally, a breakout to new 2016 highs in October and November. This year-end rally should take gold all the way back to near the April 2013 manipulated breakdown level of $1525. Let's call it $1475-$1525.
So there you go. That's what we expect. If I'm proven correct, I'll gladly take all the adulation that comes this way. If we're wrong...well, I'm not eating my hat again. That almost killed me last time.