The secretive Chinese have been assumed to be major purchasers of Gold as they diversify large Dollar heavy trade surpluses. The previous report from 6 years ago was expected to at least double and perhaps quadruple their hoard as of 2015. Instead their growth was disheartening for Gold Bugs with only a 60% increase. This may have been the “trigger” for the sudden acceleration of precious metal prices to the downside, but certainly not the cause of a major downtrend that is now almost 4 years old. Hard assets and raw materials are simply risky assets in a secular slow growth demographic world we remain in this entire decade. Aging first world demographics and asset liquidation on reduced consumption rates lead to logical asset depreciation and these forces show no sign of ending until the 2020’s. Expertly navigated global monetary stimulus “may” eventually generate a normal or at least full recovery threshold with sharply rising wages, inflation and capacity expansions, but don’t bet on it anytime soon.
Our contrarian assertion during the current 7 year experiment with Quantitative Easing (QE) and zero bound interest rates has been that there would not be the normal inflation response to massive monetary stimulus. Our interpretation has and continues to be that we are in a global demographic decade of deflation that is being combated with monetary inflation. Aging first world countries with excess debt and sub par rates of consumption have generated a capacity hangover which has been negative for commodities. Gold and precious metals have been in a state of relatively pronounced atrophy since 2011. Petroleum related energy commodities finally added their weight to the global commodity devaluation by crashing over the past year.
In late 2013 we began to reach some temporary oversold conditions in Gold and many commodities, yet secular disinflation trends and surprising Global economic weakness has once again renewed the downward assault. May 12th Exec Spec said: “Metals continue to carve out a long term base with one final surge to new lows possible under $1,000 Gold. We remain sidelined and will not Buy Gold in this 1130’s to 1330’s range. Seasonal lows are due this summer.” A review of our recent KDelta model reports will show our Bearish forecast was backed up with recent trades to Sell August Gold in the 1130’s and 1140’s. These trade signals were shared with readers on this website in advance of the price decline and they have already captured large profits with prices moving down to the $1,070’s this week ($6,000 per contract profits to date).
The purple signals below were long term KDelta trading model Sells disseminated in recent years. The Blue Sells are based mostly upon our perceived extremes in Commitment of Trader (COT) positions. Extreme net long COT positions by Managed Money and Large Speculators is not a trading model and can be very imprecise in calling an extreme top or bottom. Nonetheless when major price reversals occur COT net positions are almost always at a relative extreme level, indicating increased risk of pronounced trend changes. With Money Managers having liquidated all their remaining net long positions this month there is potential for prices to reach medium term price lows soon as sentiment craters.
In our April Financial Sense interview (FinancialSense.com) we stated Gold rallies should stay under 1330 and held out the possibility in our charts for a sub $1,000 an ounce reading. While many feel the central banks manipulate gold and such chicanery has a small degree of merit, we nonetheless find the analysis of price patterns and investment flows of large speculators have guided us quite well. The current Gold breakdown closely resembles the previous congestion breakdowns in early 2013 and late 2014.
While our work has been negative toward Gold and all metals over the past 4 years, there have been a couple periods we have indicated for short to medium term positive outlooks in late 2013 and 2014 with Gold in the 1100’s. Currently all trend timelines are down with our recent medium term Sell signals that were disseminated ahead of time for readers (Short Gold futures). The managed Money positions in our first chart indicate that prices are closer in time to a Buy signal than a Sell, thus we will have to pay attention as we approach ideal downside targets near the $1050’s/ounce and maximum risk Buy zones in the 900’s. Any move back over our short term resistance Sell areas we gave at 1135 to 1145 will turn the downtrend to neutral.
The big picture charts below reveal that major swings in all commodities have moved in unison and inversely to the Dollar touching 13 year lows this month. Commodities are like a currency, as one side of the trade depreciates the other appreciates on a relative basis.
The chart above and the next two charts below show the clear inverse relationship with raw producer commodity prices and the US Dollar. This next chart shows the multi-decade commodity up cycles ending in 2008 as Oil peaked in the $140’s per barrel. The real estate bubble and sub prime mortgage panic caused Gold, Oil and virtually every asset class to implode in 2008 for lack of liquidity and fear of a massive demand contraction. The Global Asset repurchase programs embodied in Quantitative Easing (QE) allowed for a global asset rebound in tangible assets. Hard assets peaked in 2011 while paper assets continued to appreciate as it became apparent that QE efforts to stimulate the animal spirits of inflation were being partly neutralized by a powerful paradigm shift of reduced long term rates of consumption growth due to aging demographics and excess capacity. The 2011 – 2013 leg down in global commodities was led by pronounced economic weakness in the world outside the US. This low inflation low credit rate environment with massive monetary money creation has been goldi-locks for stocks. The final commodity index leg down this past year was triggered by the almost inevitable threshold realization that energy supplies were exceeding projected demand; credit here goes to the US, not the Saudis. Saudi oil production never changed, yet US supplies continue to grow while consumption demand growth rates have been weaker than expected. This Oil hangover and the relative expected interest rate differentials with the US and the rest of the world have helped send our US Dollar higher and all other commodities lower.
Oil is priced in Dollars and as Oil deflates the relative Dollar value typically inflates. One major reason for the past 12 months of a surging US Dollar aside from falling commodity prices is the perception of Euro vs US credit spreads. While Europe continues to state they will continue adding monetary stimulus and additional credit for another 14 months, the US has stopped adding stimulus and is on the cusp of reducing credit. As US rates rise due to our tighter credit policy relative to Europe, our currency naturally appreciates. The only surprise to us is that the Dollar began to break out higher into a confirmed Bull market only one year ago.
Summary: “There’s Gold in them thar hills”; apparently too much. World Gold reserves have been rising over the past 6 years to reach 12 year highs today. The huge outflows of “precious” to the Far East have never materialized as expected and with a world inching closer to a cycle of rising interest rates and more restrictive credit conditions, precious metals have few fundamental or technical reasons to enter a new Bull market anytime soon. The technicals are likely to be severely oversold medium term before the fundamentals before a major low occurs. Any move down to the $950 to $1050 price zone for Gold seems likely to generate such extreme pessimism that the odds of a long term base being built in the metals at that juncture will increase sharply. Thus far the fundamental evidence of a Global economic rebound remains absent and a rising interest rate environment will require much faster economic growth to allow a long term recovery in Gold and all commodities.
Stock Market Update:
While the tech stocks as represented by the Nasdaq spurted higher upon our AAII and Option sentiment extreme Buy signals 3 weeks ago, stock prices have yet to break to new highs in the broader indices (Dow & SP). Difficult to pinpoint the timing and direction of a sideways trading range breakout that has become very narrow over the past 6 months.
A move under this trading range at 2039 basis the cash SP 500 Index (~2033 basis September futures – see red line support in the above chart) would be a sign that some capitulation over expected earnings and global growth had set in at which point we would raise our cash (& short term fixed assets) from 10% to 20%. Until then there is enough corrective base building point and figure action to generate a strong short term rally over the SP 2200 price level should the breakout occur to the upside. Fundamentals of a strong dollar, weak exports and contracting earnings as well as very weak Global growth all point to lower stock prices. Technicals are mostly favorable with strong oversold sentiment readings and a trading range that allows a move in either direction. It may take clarity on the timing of the first Fed rate hike before prices decide to breakout more decisively in one direction for the short to medium term. Long term trends still look favorable.