SHORT TERM: 0 – 30 DAYS
We all know that positioning and sentiment are bullish for Gold and have been since May. Hence the need to focus on the technical picture. As I reported last week, Gold is in a Bear Flag following its drop from 1369 in April to 1167 in October. It touched channel resistance at 1257 on Monday, but the closing high was 1253, strong Fibonacci resistance. Gold has fallen back since. Now the 200-day moving average has fallen to meet the top of the rising channel at 1259.
Gold needs to break and close above 1260. This would be extremely bullish. I would prefer to see it move above 1270 and close above there for at least two days before feeling confident that the worst was behind us, and we’re heading up to test and break the 2016 high at 1377. We’ve had similar experiences in the past, where the 200-day moving average has been broken, only to see Gold dump back down below it in the next day or so. A fake breakout to the upside is typically extremely bearish. Remember, this is a Bear Flag.
The recent move up to 1257 was negatively divergent relative to the previous high at 1246 on October 26 from a DSI (sentiment), RSI, MACD Histogram, and MACD Line perspective. We may have topped out already. If Gold fails to break 1260, but decides to fall back to channel support currently at 1207 and break down, this could go a lot lower.
In Elliott Wave terminology, a corrective structure is typically defined by 3 “ABC” waves. Wave A could have been the drop since April from 1369 to 1167 on an intraday basis, and 1360 to 1184 on a closing basis. We could be in wave B now.
Assuming wave B did peak on Monday and wave C has begun, if wave A = C, as it often does, the following scenarios could play out based on intraday and closing levels:
Note how the intraday level is only $10 above the December 2015 low of 1045. Double bottom, anyone?
This is solely to illustrate how far Gold could reasonably fall if the bottom of the ‘Bear’ Flag channel is broken. It would have to also get through the prior lows at 1167 and 1184 (closing) first, then the December 2016 low at 1124, and there are plenty of other Fibonacci levels in between also.
MEDIUM TERM: 1 – 6 MONTHS
There are two primary drivers of Gold medium term. The Trade War and its effect on USD/CNY. The risk of a US stock market crash followed by a Fed reversal of policy to rate cuts and QE, and the peak of fall of the dollar.
Over the past several months, I have extensively covered the relationship between developments in the Trade War and the Chinese yuan, and the yuan and Gold priced in dollar terms. Suffice to say that should USD/CNY (or its offshore equivalent USD/CNH) break the critical 7 level or XAU/CNY drops significantly from its double top at 8640, then Gold is going lower in dollar terms.
What could drive USD/CNY above 7? An escalation in the trade war such that the U.S. imposes 25% or more in tariffs on most, if not all, of China’s exports to the United States. Despite the so-called ‘truce’ at the G20 on November 30 th, nothing has changed, in my opinion, and nothing will—voluntarily anyway.
China will NEVER agree to U.S. demands. President Xi cannot and will not allow the U.S. to dictate China’s domestic economic policies. This trade war will only be decided by one side having to concede due to an economic and/or market crisis. This is what China has been betting on since the war began: a backlash against higher prices and costs from U.S. consumers and businesses, or a U.S. stock market crash.
Since the G20, China has tried to appear cooperative with U.S. demands. But China is simply playing for time by conceding what it can, in order to appease the U.S. and stave off additional tariffs while waiting on a crisis, such as a U.S. stock market crash. It appears the United States has figured this out, as several officials have repeated the threat of more tariffs if the Chinese don’t comply to a greater degree by March 1. Commerce Secretary Wilbur Ross said it best yesterday, when he stated that China will need to meet more of the U.S.'s 142 trade-deal demands if it wants to end the trade war:
"They’ve started to make some very early stage, very preliminary, but very welcome moves."
The U.S. is clearly letting China know that they know what the Chinese are up to and it won’t work.
The arrest of Huawei’s CFO in Canada at the request of the U.S. and her subsequent court appearances in Canada have only strained relations further. The Chinese have already responded by arresting Canadian officials.
Simply put, both China and the U.S. are trying put on a show of conciliation to support a “Santa Rally” in stocks in both countries. When January begins, I expect the fireworks between the two adversaries to begin anew and the very real risk of 25% tariffs and a break of 7 USD/CNY following in March or sooner. Gold will fall in dollar terms should this occur, perhaps to new lows.
On the other hand, should a U.S. stock market crash occur this month or next (December 19 FOMC meeting and rate hike or beginning of buyback blackout period in January), this would likely lead to a Fed reversal in policy to rate cuts and ‘QE’. This would also mean the peak and fall of the dollar, including USD/CNY. Gold would soar. Whether the crash occurs sooner or later, this is my primary scenario for the beginning of the coming rally in Gold.
LONG-TERM: 1 – 3 YEARS
Governments around the world are swimming in record levels of debt, yet they continue to spend more than they take in and fund the difference with even more debt. This is especially true of the United States. They are all acting as if the slate will be wiped clean tomorrow, figuratively speaking. Perhaps that is exactly what is going to happen, either via a global debt jubilee or forgiveness of debt by central banks, or hyperinflation. In either case, the value of fiat currency would fall and precious metals would soar.
The dollar’s reserve status is increasingly under threat. The global de-dollarization process, led by China, Russia, and now the EU, is accelerating. The Petrodollar, the lynchpin for the dollar, is at risk on several fronts.
· China is the biggest buyer of oil in the world today in an oversupplied market. The Saudis just agreed to five new oil contracts with the Chinese. You can bet those were denominated in yuan.
· The U.S. is now the biggest producer of oil in the world, a direct competitor to the Saudis.
· Trump wants lower oil prices to boost domestic economic growth. The Saudis want higher oil prices; it is their primary revenue stream.
· Lastly, and perhaps most importantly, the U.S. Senate just voted to end U.S. participation in the war in Yemen, and stated that they hold the Saudi leadership, including the Crown Prince, responsible for the murder of the journalist Khashoggi. This may be the last straw for the Saudis.
If the Saudis abandon the Petrodollar, the dollar will fall significantly. If the dollar loses its reserve currency status following another crisis, it will fall precipitously, up to 30% overnight, according to Ray Dalio. All of this is tremendously positive for Gold.
Finally, if a U.S. stock market crash occurs and the Fed is forced to print dollars in order to buy massive new issuance of U.S. Treasuries to fund ballooning budget deficits and unfunded liabilities coming due in size by 2020, this could cause a loss of confidence in the dollar on the world stage and a collective call for a new global reserve currency. If the U.S. crisis becomes global, then a global monetary reset is likely, and the end of the dollar as the reserve currency would occur.
All of this is supposition and educated guesswork, but what is fact is that China and Russia have been loading up on Gold for years. Many other central banks have also joined in by buying Gold or repatriating what they already own. Why? They are hedging against a crash in the dollar and a devaluation of all currencies in a global monetary reset to mitigate or eliminate the global debt problem. Gold (and especially Silver) would explode higher overnight under such circumstances.
Follow the smart money long-term and buy Gold and Silver. They are going multiples higher, in my opinion.