Gold Awaits the Peak and Fall in USD/CNY - David Brady (October 4, 2018)

Gold remains mired in a range from 1167-1221 on the wide and 1184-1212 in a more recent narrower range. It has been stuck here since it bottomed at 1167 on Aug 16 ^th. This is despite an extremely bullish set-up from a technical (oversold), sentiment (overbearish), and positioning (record Spec shorts) perspective. Typically, when everything is bullish but we just go sideways, it’s a bearish signal. In the meantime, the risk of a move up to the 1230s remains, but I’m still looking for lower lows regardless of whether we get such a bounce or not.

My stance hasn’t changed for months now. Gold is driven by the CNY. A chart comparing Gold and USD/CNY on an inverse basis since April, when Gold peaked and USD/CNY bottomed the same day (April 11), clearly shows this to be as obvious as the sky is blue on a cloudless sunny day. It’s also simple math, given that Gold in yuan terms is stuck in a tight range from ~8060-8360.

With this in mind, we won’t see a bottom until either the trade war ends or the Fed reverses policy, causing the dollar to dump. The trade war is more likely to escalate, so we must rely on the latter, a Fed policy reversal. This is likely to be driven by a stock market crash of ~30%. Until such a crash occurs, escalation of the trade war increases the risk of a higher USD/CNY, which would push Gold down to lower lows.

So what are the risks of a stock market crash, and when can we expect it? The potential catalysts for such a crash are numerous, but the primary risk factors are covered in this article:

https://www.sprottmoney.com/Blog/when-the-us-stock-market-crashes-buy-gold.html

In my opinion, the more important question is not why, but when. For this I turn to market signals that foreshadowed the stock market crashes of 2008 and 2000. These are listed in this previous article:

https://www.sprottmoney.com/Blog/signals-for-the-coming-crash-in-stocks-and-rally-in-gold-david-bradycfa19-092018.html?platform=hootsuite

This is critical to Gold, given that the Fed has signalled on several occasions recently that it plans to ride to the rescue again when the next crash hits. This will likely mean a return to stimulus measures such as interest rate cuts and “QE”, but on steroids this time. Powell has promised to do “whatever it takes”. When the time comes, based on the Fed’s trilemma of having to choose between propping up two out of three between bonds, stocks, and the dollar, it is obvious they will choose bonds and stocks, in my opinion. Otherwise, markets and the economy will collapse. In doing so, they will sacrifice the dollar and USD/CNY will fall. This is when Gold will soar.

So how do these crash signals look today?

As you can see from the matrix above, several signals are already in place, and the remainder are peaks in the 10- and 30Y Treasury Bond Yields, a trough in high yield spreads, and a peak in USD/JPY. I don’t need all of these signals to hit, but if they do, a stock market crash is about to occur within weeks, in my opinion—perhaps sooner. The fact that Commercials are near or already record long 10Y and 30Y treasury bonds is a clear sign to me that yields will peak soon. And when they do, stocks will peak soon after.

Again, why does this matter to Gold? Because when the stock market crashes, the Fed will be forced to reverse policy to prop up stocks, cap bond yields, and sacrifice the dollar in the process. USD/CNY falls, Gold soars.

Some major tectonic shifts in markets are coming in stocks, bonds, foreign exchange, commodities, and precious metals. Everything will rise when the Fed reverses policy… except the dollar.