June 26, 2020
Beginning with the fundamental backdrop, we’re seeing an increasing number of headlines and States signaling a resurgence of COVID-19, or “Wave 2”, and talk of renewed lockdowns. This comes on the heels of the Fed’s taper of liquidity, which I discussed last week. This spells disaster for the economy and a double whammy for stocks.
We are already seeing a rerun of the conditions in January that led to the crash in oil prices: the spread of COVID-19, negatively divergent technicals and sentiment, and the peak and fall in Funds’ net long positions and Commercials’ net shorts respectively. Oil led the drop in stocks by two months, the sharpest drop in stocks in history.
Bond yields have been falling, but the risk now is that inflation expectations fall even faster, along the lines of 2008, and real yields rise. Another steep drop in oil and energy prices in general would contribute to this too. Rising real yields would suggest that the risk is turning down in precious metals and miners, at least the paper prices.
Physical Gold and Silver prices are likely to outperform their paper futures equivalent, especially if refineries and mines are forced to suspend their activities again due to the risk of COVID-19 infections.
However, given the pending elections in November and the massive rise in the Treasury’s cash account from a typical ~$400 billion to $1.5 trillion, I am expecting a helicopter drop of cash onto the economy in the September or October timeframe. This will signal the beginning of stagflation and thereafter hyperstagflation, imho. As I said back in 2017, this will likely lead to a rally in everything, except the dollar. Stocks will soar to new all-time highs. Bonds will rally once yields are capped by the Fed. At that point, precious metals and miners take off, but until then, the risk is greater to the downside, in my opinion.
In the short-term, we can see a number of headwinds for precious metals and miners, signaling a peak is imminent.
Gold has hit a higher high, but it’s a negatively divergent one. Sentiment is also negatively divergent with everyone looking for far higher prices. Banks remain significantly short Gold.
While price has continued to rise on a weekly basis, momentum has continued to turn down. It’s only a matter of sooner rather than later before this matters.
As shared last week, the monthly RSI is extreme overbought and at its highest since the 2011 peak. The MACD Histogram is at its highest since the 2016 peak, which was the highest level in twenty years. The MACD Line has only been higher in 2011. While this does mean that the rally is coming to an end, expectations for a sizeable pullback are far from unreasonable at such extreme levels across the board. The smallest reversal we have seen in the past twenty years when the RSI has been at this level or higher has been 25%.
Watch the support zone between 1750-1764. A break below there opens up a move down to at least 1700-1680, perhaps as low as the 1400s. This will be the best and last buy-the-dip opportunity you will get for some time, imho.