July 12, 2019
Let me start this week’s article by clarifying what many of my readers already know: I am a long-term bull on Gold, Silver, and the miners, and have been since I first bought them in the second half of 2015.
I say this because many people have confused my calls for a pullback as me recommending that everyone short metals and miners. Nothing could be further from the truth. I thought I had made this crystal clear in my article on June 7: “It’s Buy-the-Dips Time in Metals and Miners.”
Calls for a pullback in a bull market are for those that are already long to consider hedging their positions or wait to add more. For those that are not long, given my long-term bullish outlook, I have said multiple times in the past to buy “some” and then just wait to add more on the dips. I do not recommend naked shorts (i.e. going net short) when I’m long, and believe the underlying market is going multiples higher within the next few years.
I have said since January that as long as we remain above 1167, I am only looking up in Gold long-term. The same goes for Silver and the miners. Please keep this in mind for future reference and as I share my “short-term” outlook for the precious metals space.
We came within $5 of my initial target for a pullback to 1375-80 in June and then rose to a slightly higher high. Now I see the risk of higher highs in both the metals and miners imminently before heading lower, potentially breaking the prior low and support in Gold at 1385. Again, to avoid confusion, I am not recommending that you short this unless it is to hedge existing positions, but I do expect a pop within days, followed by a drop over the next month or two.
Gold has come a long way from its bottom in August 2018, rising almost 25%, or 276, from 1167 to 1443. It has also risen 15% in just two months from its low of 1267 on May 2. It became extreme overbought and everyone turned bullish during that time. Since its peak at 1443, we have seen a pullback to 1385, but then the price turned up again. This time, however, momentum has not followed suit. The RSI and MACDs are significantly below their recent peaks. This is a perfect set-up for a negatively divergent higher high where the price rises above 1443 but the RSI and both MACDs are lower, signaling the next move for Gold is down. Gold doesn’t even have to hit a higher high for it to fall, but that would be an ideal signal for lower prices ahead.
From an inter-market analysis perspective, the DXY and Gold have been moving inversely in relation to one another recently. The DXY has been falling as Gold rose. At the same time, the dollar fell as bond yields fell. But the 10-Year was extreme overbought and bullish below 2%, and now yields are rising again. The 10-Year just hit 2.13%. The DXY rose to 97.60 recently but has since fallen back to 96.80 and then up to 97.15.
My expectation in the short-term is two-fold:
- An imminent reversal in the 10-Year Yield to ~2.05-2.07%. At the same time, the DXY falls to its 61.8% Fibonacci level at 96.60, which also happens to be the low back on July 2 and 3. Gold rises, potentially to a new and negatively divergent higher high.
- Following its dip, the 10-Year yield rises to 2.30% or slightly higher for its next peak. The DXY rises to new highs above 98.37, its final peak. Gold, Silver, and especially the miners fall hard. Gold could break support at 1384 and fall as far as 1350, 1335, 1300, or even 1270, and still maintain its upward trend with a higher low above 1267.
Once bond yields peak, I am expecting them to fall to new lows. The DXY to dump to new lows in the 80s. Gold, Silver, and especially the Miners explode higher in a true wave 3 rally. This would all coincide with complete capitulation in Fed policy towards QE and with all of the other major central banks turning on their monetary spigots too. But let’s cross that bridge when we come to it. Baby steps.
Another market to focus on is XAU/CNY. It has been moving up in lockstep with Gold in dollar terms since August. This is important because XAU/CNY is also approaching a critical threshold: 10,000. This will be a psychological resistance level much like 7.00 in USD/CNY, imho. I don’t expect it to break on the first test (that’s if we even get there).
Based on the RSI and both MACDs in XAU/CNY, it will also be negatively divergent at 10,000 yuan.
This area was also strong support in 2011 and 2012 before XAU/CNY finally broke down in 2013. So expect it to be strong resistance on the upside also.
It’s also no surprise to me that if you divide 10,000 by the current USD/CNY level of 6.87 that you get 1456, which would represent a negatively divergent higher high in dollar terms. Yet another sign that Gold faces tough resistance on the upside, and may be about to turn down significantly in the weeks and months ahead before it rallies meteorically higher.
Lastly, remember China’s influence on Gold via USD/CNY from April to August last year, when Gold just kept falling from 1369 to 1167 and ignored all data to the contrary, despite extreme oversold technicals, bearish sentiment, and Banks record long? Ultimately the data did matter, because we know what happened after Gold bottomed out in August.
Well, the same could be happening in reverse since August via XAU/CNY. Once again data showing overbought technicals, bullish sentiment, and Banks near record short is being ignored. But ultimately it will matter, perhaps at 10,000 yuan. You know the Bullion Banks are just waiting for the peak to drive Gold lower.
Gold looks like it has one final high ahead and then it is heading down to test key support levels. While I am not sure where it will bottom out, I expect this to be the last opportunity to buy-the-dip in Gold before it truly soars higher. This assumes that 1267 holds, and if it doesn’t, 1167 certainly does.
The same goes for Silver, but to a lesser extent. I expect it to outperform Gold going forward. Please see my prior article “If Gold is in a Bull Market, Buy Silver” for details as to why.
As for the miners, being a high beta play on the metals, they tend to overshoot on the upside. Unfortunately, I expect them to overshoot on the downside too. We could see declines in some miners of up to 20-30% in the process.
Yet, again, on a final note, focus on the big picture: The Fed’s reversal to ZIRP and possibly NIRP, QE, and likely MMT is inevitable, in my opinion, along with all of the other central banks of the world turning on the monetary spigots again. “There is no alternative” to Gold, Silver, and the miners under those circumstances. I am and remain a long-term bull on the metals and miners, regardless of what happens in the short-term. As long as 1267 holds, I am only looking up long-term.
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