August 29, 2019
Most of us are focused on Gold in dollar terms, and Gold has rallied 34% in just one year. To put that in S&P terms using 2800 as the base, that would equate to a rally of almost 1,000 points in one year. In Dow terms, using 25000, it equates to a rally of 8500 points. Simply massive. But this is not the most interesting aspect of Gold’s ascent.
Gold has soared anywhere from 28%-45% against ALL major currencies, much of that coming in just the past 4-5 months. What this tells us is that this is not a U.S.-specific story but a global phenomenon. Currencies are relatively stable against one another, but they are all being devalued against Gold. This makes sense given that all of the major central banks around the world have reverted to monetary easing in the form or interest rate cuts, QE, or both.
A global currency war is under way, as each country tries to gain an advantage over others in order to boost exports and inflation in their respective economies. The end result is that although each currency appears stable, they are all being debased.
More importantly, this could signal a loss of confidence in fiat currency globally, because the longer this goes on, the less faith people have in the value of their currency or any other currency. Each time this has occurred in history, people have run to the one safe harbor remaining, precious metals. Although we’re not quite there yet in terms of a mass exodus into Gold and Silver, this development merits watching very closely, because once this happens, precious metals will explode to unimaginable levels.
Near-term, given how far Gold (and Silver) have come in a relatively short space of time, the risk grows that we will get a sizeable reversal at some point. Nothing goes up in a straight line. But until then, the trend is your friend. Simply put, until we see a break of key support, it has paid (and will continue to pay) to just buy the dips.
The following are the support levels I am watching to signal a reversal is under way:
- ·20-DAY Exponential Moving Average, currently at 1509. Gold has not closed below there since it broke out to the upside in May.
- 1500. Gold tried to break below this level for five days in a row from August 19-23 and failed. A break here would be a warning sign.
- Former trendline resistance since August 2018, now support, is now at 1498 and rising.
- 1490, the prior low on August 13.
Simply put, there is a confluence of support at 1489-1509, and if we break through there, then the short-term trend has changed to the downside. The 20D EMA breaking the 50D SMA would confirm such a change, imho. However, unless we see Gold fall below 1267, the weekly trend remains up and any reversal should be bought with a stop below there.
Silver is its own animal right now and has clearly started to outperform Gold to the upside. I would take a drop back below the prior high of 17.50, now support, to signal trouble ahead, and then the prior low at 16.83.
From a bigger picture perspective, there are three risks to the rally in metals and miners in the short-term…
A deflationary crash in stocks similar to that in 2008 could cause a reversal in metals, triggering margin calls in stocks that are funded by taking profits in the metals complex. Real yields could rise as they did in 2008, as inflation expectations dump faster than bond yields. Banks, near record short now, could then take the opportunity to drive the price lower, squeezing out the weak longs, creating momentum to the downside and taking out key support levels. They did this in 2008 to great effect from March to October before Gold took off again to new highs. Such a crash in stocks could be triggered by further escalation in the trade war and a Federal Reserve that is slow to cut rates and waiting for stocks to dump before reverting to QE.
On the contrary, if the S&P soars to ~4k next for a blow-off top, this pushes QE further out into the future and would therefore also undermine metals and miners. The latter have been moving inversely to the S&P for the past several weeks, which makes sense given the effect the stock market has for expectations for rate cuts and QE.
Lastly, a surprise trade deal would cause stocks to soar in the short-term and provide the ammunition for a reversal in Gold and Silver. I consider this a remote possibility, but it is a risk nonetheless.
There are other risks out there, but these are the primary ones I am watching.
BONDS & REAL YIELDS
Aside from the stock market, the other indicators to monitor are nominal and real yields.
Gold has a near perfect correlation to TIPS over the past several months. TIPS are the inverse of real yields. So as long as real yields continue to fall and TIPS rise, Gold should continue to rise, assuming the correlation continues.
However, TIPS have enjoyed a massive rally and are now setting negatively divergent higher highs across all indicators. They are extreme overbought, and the MACD Line just came off its highest level since July 2016.
That said, in order for TIPS to fall and real yields rise, any of three things must happen:
1. Inflation expectations fall while yield rise.
2. Inflation expectations fall faster than yields fall
3. Inflation expectations rise, but yields rise even faster
For now, the trend is clearly up and unless we see a break of key support at 116.40, the trend remains our friend.
Nominal bond yields are also highly correlated to Gold on an inverse basis, because inflation has remained more or less stable for quite some time. So we can also monitor 10Y treasury yields and prices or TLT to get insight into the near-term prospects for Gold.
It is no surprise given stable inflation that we’re seeing the same thing in TLT as TIP: a negatively divergent higher high at 149 across all indicators, which could signal an ST reversal. A break of 143.40 would be the first warning sign of a possible change in the short-term trend. The 20D EMA is just below there too. Again, lower bond prices (higher yields) signal higher real yields, which is negative for Gold.
The medium and long-term prospects for precious metals and miners remain extremely bullish. Short-term, we have come a long way and the risk of a potentially sizeable reversal rises, but until we see a break of support with follow through to the downside, the trend is our friend and this remains a buy-the-dips market.