Big Picture Remains Up
Updated
Analysing markets to determine where they’re headed is all about probabilities. Anyone who says with 100% certainty that a market is going up or down is being dishonest. But, the probabilities for potential outcomes can be judged based on prevailing information, multiple toolsets and sources, and a tried and tested process. With this in mind, there are two primary scenarios that I am monitoring over the next few weeks with respect to Gold which I’ll share today. There are numerous possibilities, but these are the two with the highest probability “in my humble opinion”.
Scenario 1
Wave (3) of 3 completed at 2089 and wave (4) is under way. Corrective waves usually come in threes: wave A, B, and C. Wave A was the drop to 1874 and we’re waiting for the peak of wave B to gage how low the final wave C could fall before we hit bottom and then head up to new highs.
For example, wave A was the drop from the 2089 peak to 1874, a decline of $215. Wave B could be from 1874 to 1975 or higher, which remains to be seen. If 1975 was the peak and wave C matches A in size, that would put the bottom around 1760. This just happens to be above the key 1750 support level.
Alternatively, if wave C = 1.618*A, then the bottom would be around 1630. It could also fall somewhere in between 1630 and 1750, with support at 1670 and the 200-day moving average also approaching that level. Suffice to say, that is the support zone I am watching for the bottom 1630-1760. It depends on where we peak in wave B.
Scenario 2
An equally viable alternative is that we have already completed wave (4) and wave (5) of 3 to even higher highs has begun.
The only difference between these two scenarios is that we have already bottomed versus a lower low still ahead. Both call for higher highs ahead in wave (5) of 3. Another case of different routes, same destination.
It’s just a question of buy now or wait for a further dip. From my perspective, if you don’t own any precious metals or miners, you should buy at least some now. For those like myself who are already long, you could average in by buying now and more later, just load up now, or wait for the lower low to back up the truck. That’s a decision you have to make.
Personally, I am leaning towards further downside before wave (5) begins. My rationale is based on bigger picture fundamentals. As I shared back on July 6, and consistently since, I am expecting a pullback into September due to the 75% cut in the Fed’s purchases of treasury bonds and the termination of the 600/week in fiscal stimulus.
Then in September, I believe the Fed will begin printing dollars at the same rate or more as in Q2 but without end. They are likely to formally cap bond yields in the process, creating a cap on real yields also and an asymmetric risk to the downside. In addition to an agreement being made to replace or continue the 600/week payments, I also believe that the U.S. Treasury is preparing to dump 2 to 3 trillion dollars on the economy ahead of the November elections, perhaps as early as September, latest October. The combination of these factors is likely to send Gold, Silver, and the Miners to stratospheric levels. This is what triggers wave (5), the monster wave.
In order to justify such moves, we are likely to see a sharp reversal in stock indices, which is why I expect a more drawn out and deeper drop in Gold and Silver before the next big rally begins. Precious metals followed stocks lower in March and are likely to do so again this time around. The decline in stocks hasn’t even begun yet. This increases the probability of lower lows before higher in my opinion. My belief that the banks will want to take out the upward trend-line tagged at 1874 doesn’t hurt either.
Are higher highs a done deal? As I said at the outset, nothing is 100% certain, but given the underlying fundamentals, it is by far the most probable outcome.
Of course, Gold and Silver could crash to lower lows (anything is possible), i.e. below $1045 and $11, but to put it politely, I consider this highly unlikely for multiple reasons, not least the fundamental backdrop.
In conclusion, the main point is that this bull market remains very much intact. Although we may have further to go to the downside, this pullback should be considered a gift given the spectacular rally to follow… in my opinion. Don’t get caught up in the daily noise and waves of emotion, instead focus on the bigger picture, and that remains up.
Scenario 1
Wave (3) of 3 completed at 2089 and wave (4) is under way. Corrective waves usually come in threes: wave A, B, and C. Wave A was the drop to 1874 and we’re waiting for the peak of wave B to gage how low the final wave C could fall before we hit bottom and then head up to new highs.
For example, wave A was the drop from the 2089 peak to 1874, a decline of $215. Wave B could be from 1874 to 1975 or higher, which remains to be seen. If 1975 was the peak and wave C matches A in size, that would put the bottom around 1760. This just happens to be above the key 1750 support level.
Alternatively, if wave C = 1.618*A, then the bottom would be around 1630. It could also fall somewhere in between 1630 and 1750, with support at 1670 and the 200-day moving average also approaching that level. Suffice to say, that is the support zone I am watching for the bottom 1630-1760. It depends on where we peak in wave B.
Scenario 2
An equally viable alternative is that we have already completed wave (4) and wave (5) of 3 to even higher highs has begun.
The only difference between these two scenarios is that we have already bottomed versus a lower low still ahead. Both call for higher highs ahead in wave (5) of 3. Another case of different routes, same destination.
It’s just a question of buy now or wait for a further dip. From my perspective, if you don’t own any precious metals or miners, you should buy at least some now. For those like myself who are already long, you could average in by buying now and more later, just load up now, or wait for the lower low to back up the truck. That’s a decision you have to make.
Personally, I am leaning towards further downside before wave (5) begins. My rationale is based on bigger picture fundamentals. As I shared back on July 6, and consistently since, I am expecting a pullback into September due to the 75% cut in the Fed’s purchases of treasury bonds and the termination of the 600/week in fiscal stimulus.
Then in September, I believe the Fed will begin printing dollars at the same rate or more as in Q2 but without end. They are likely to formally cap bond yields in the process, creating a cap on real yields also and an asymmetric risk to the downside. In addition to an agreement being made to replace or continue the 600/week payments, I also believe that the U.S. Treasury is preparing to dump 2 to 3 trillion dollars on the economy ahead of the November elections, perhaps as early as September, latest October. The combination of these factors is likely to send Gold, Silver, and the Miners to stratospheric levels. This is what triggers wave (5), the monster wave.
In order to justify such moves, we are likely to see a sharp reversal in stock indices, which is why I expect a more drawn out and deeper drop in Gold and Silver before the next big rally begins. Precious metals followed stocks lower in March and are likely to do so again this time around. The decline in stocks hasn’t even begun yet. This increases the probability of lower lows before higher in my opinion. My belief that the banks will want to take out the upward trend-line tagged at 1874 doesn’t hurt either.
Are higher highs a done deal? As I said at the outset, nothing is 100% certain, but given the underlying fundamentals, it is by far the most probable outcome.
Of course, Gold and Silver could crash to lower lows (anything is possible), i.e. below $1045 and $11, but to put it politely, I consider this highly unlikely for multiple reasons, not least the fundamental backdrop.
In conclusion, the main point is that this bull market remains very much intact. Although we may have further to go to the downside, this pullback should be considered a gift given the spectacular rally to follow… in my opinion. Don’t get caught up in the daily noise and waves of emotion, instead focus on the bigger picture, and that remains up.
Note
Gold and silver, two of the best-performing assets in 2020, have both run into an overdue correction following a three-week surge that took gold to a new record high above 22000/OZ and saw silver reach 330/OZ after almost touching 112/OZ during the dash-for-cash panic sell-off in March. Both metals are now set to be engulfed in a battle between short-term technical traders looking to sell, and longer-term buyers who worry about the economic outlook while seeking protection against the risk of an oncoming period of inflation.So far the market has been hit by two bouts of profit taking. The first one following the recovery in U.S. real yields in response to improved U.S. economic data and the second, this past week when minutes from the latest FOMC meeting revealed a certain hesitancy of moving towards an implementation of yield-curve control.
Overall, we maintain a bullish outlook for gold and silver with loose monetary and fiscal policies around the world supporting not only gold and silver, but potentially also other mined commodities. Real rates - as highlighted earlier - remain by far the biggest driver for gold and the potential introduction of yield-curve control combined with the risk of rising inflation – as the U.S. authorities look to overstimulate the economy - should see those rates remain at record low levels, thereby supporting demand for metals.
An increasingly fraught U.S. elections season combined with current U.S. – China tensions are likely to add another layer of support through safe-haven demand. The potential for even lower real rates should also support a continued weakness of the dollar, thereby creating the trifecta of drivers that should support investments in precious metals.
However, what the market needs in the short term is to consolidate its strong gains. On that basis we see the potential upside above $2000 limited until the market gets used to and feels comfortable with the current levels. Given how far the market has travelled already this year, a correction could be relatively deep. Using Fibonacci we focus on support at $1920 which also is the previous record high from 2011, followed by $1873 and $1825.
Ole Hansen
Head of Commodity Strategy saxobank
Note
Spot Gold continue to consolidate, as they potentially will during the coming weeks while the market gets a clearer post-FOMC minutes view on the direction of yields and the dollar. So far gold has managed to find support ahead of the support area between $1900-$1920 while potential new long buyers may sit on the fence looking for a deeper correction or a break back above $2015 resistance.Note
"The belief is still that the Fed is most certainly notgoing to allow interest rates to rise at this point in time and
that some kind of control cannot be ruled out," said Saxo Bank
analyst Ole Hansen, adding, the market still sees dips as a
buying opportunity.
Note
At the risk of repeating what I’ve said since June 6, the forecasted pullback is clearly well underway. The only question that matters now is where the lows will be before the spectacular rally to follow. Fortunately we may not need to be so precise, because the trigger for that rally is obvious, in my opinion: more currency printed out of thin air to fund more handouts from the government.With the November elections fast approaching and political rhetoric heating up, it is only a matter of weeks before the Republicans and Democrats agree on new stimulus measures to replace the 600/week that most Americans lost this month. Neither side wants to be blamed for the lack of Doritos while watching Netflix 24/7 or by those who truly need the assistance. At the same time, although the Fed downplayed the need for more stimulus in their Minutes yesterday, make no mistake, they will be ramping up the printing presses again to facilitate their new average inflation target to be announced at the next FOMC meeting. This means targeting official inflation rates above 2%. I say “official” because we’re already seeing rampant inflation due to supply shocks in many sectors, most notably meat and more recently lumber. I only expect this to get worse in the months ahead just as the U.S. Treasury prepares to send out bombers to rain dollars from the skies, which the Fed has already financed and needs no approval from Congress. All of this means the rally in Gold and Silver is just getting started. Miners are getting ready to explode higher.
Ahead of that and what we’re seeing now, in my opinion, is a pullback to reset sentiment and squeeze out the weak longs that arrived late to the party before the even bigger celebration takes place soon.
Note
Gold hit a new record high in dollar terms at 2089 on August 7. By August 12, just three days later, it had fallen over 10% or $215, to trendline support at 1874. I call this wave A. It has since rebounded to a lower high of 2024 on Tuesday this week. I call this wave B. Assuming wave C is equal in size to wave A, i.e., a drop of another $215, this would put the target for the bottom in Gold at 1809, or around 1800. However, if wave C equates to 161.8% of wave A, i.e. $348, we may have to wait until key support at ~1670 before the low is in place. This happens to be the 200-day moving average too. There is also the key 1750 level in between. I plan to wait for the turn up from one of these support levels before adding to my long-term position.The alternative scenarios are (1) we have already seen the low and we’re about to see a higher low above 1874 before heading up to new highs, or (2) we will continue treading sideways for a while before we head up to new highs. The third scenario is an extremely low probability: Gold breaks key support at 1670 and dumps. For that to happen, we would need a catastrophic crash in stocks. Again, I give that a less than 1% chance of occurring, but it is worth a mention. Nothing is certain.
Note
However low we get in the metals and miners, please keep in mind the pending monetary and fiscal stimulus on steroids about to be unleashed in September and the spectacular rallies that are sure to follow. This remains a buy-the-dip bull market.Note
As of August 24, gold bullion1 has gained 27.13% YTD and 39.74% YOY. Gold mining equities (SGDM)2 are up 38.85% YTD and 61.54% YOY. This compares to 7.55% YTD and 11.96% YOY returns for the S&P 500 TR Index.3 Silver has posted outsized gains, climbing 49.03% YTD and 50.00% YOY.Gold is a Mandatory Portfolio Asset
Now that gold has powered over $2,000, it's an excellent time to take stock of what has been accomplished by the monetary metal and what may lie next.
Most importantly, in our view, it has been established as a baseline that a diversified asset portfolio must include an allocation to gold. We believe this statement is justified by the fact that gold is now the only monetary asset that is priced by a liquid-free market and not directly correlated and partially controlled by central bank (i.e., government) policies and market interventions.
Without once again judging the merits of the exceptional monetary debauchery and fiscal stimuli of 2020, and regardless of an investor's views on credit and equity market valuations or prospects for inflation, there is no other liquid asset which accomplishes what gold does in the way of portfolio insurance and purchasing power protection.
High Key Currency
Gold's superior track record as a currency has been demonstrated over 100-, 50-, 20-, 5- and 1-year timeframes. Almost 50 years since de-coupling with the U.S. dollar (USD) and throughout the advances of electronically transmittable fiat currencies, gold has relentlessly retained its luster. While there have been corrections during gold bear markets, most notably versus the USD as it became the chief global collateral asset, gold has savagely outperformed as a store of value.
Over the past 20 years, these five major currencies — U.S. dollar, Euro, Yen, British Pound Sterling, Swiss Franc — have all lost purchasing power value when compared to gold bullion. Over the past 5 years, gold has increased in value relative to these five major currencies — U.S. dollar, Euro, Yen, British Pound Sterling, Swiss Franc. Over the past 20 years, gold has increased in value relative to these five major currencies — U.S. dollar, Euro, Yen, British Pound Sterling, Swiss Franc.
Note
We are at a loss to explain why salty investors with long-term horizons refuse to classify gold as its own unique portfolio allocation. Gold's track record, along with the diversification and correlation statistics, all stand on their own.We should also highlight, once again, the massive size and liquidity of the gold market, which we estimate to be over $12 trillion and $100 billion traded per day, respectively. Of this total, approximately $3-4 trillion can be accessed by private investors as physical gold in stored bar formats, coinage or gold mining equities, while most of the balance is owned by central banks or used as gold consumed in jewelry or industry.
Gold is a 12T Market…Trading More than 100B Per Day
Note
Update on FundamentalsWe believe gold is well-positioned versus its risk-free counterpart U.S. Treasuries on both a short- and long-term basis. While bonds may be effective cash-parking vehicles for quick-triggered investors, they currently submerge investment portfolios with negative real returns and also expose their owners to plenty of inflation risk. Global debt and deficit to gross domestic product (GDP) ratios are near record highs while real interest rates are anchored below zero through market intervention.
After 10 years of tepid economic growth, we now enjoy record-high asset valuations and suffer from minuscule cap rates. And yet, from the banking provisions and economic statistics, we read the worst is yet to come. Massive inequality is fueling populism globally, which in turn generates election victories for those political parties promising even more "tax and spend." These factors combine to load a tightly coiled spring which could launch us into uncharted monetary territory at any time. We are currently comfortable with JOMO (Joy of Missing Out) on financial market activity and will be increasing our recommended gold sector allocations in the current environment.
More specifically, we believe the gold price has gravitated back to its historical correlations to the rapid growth of M2 money supply, towering U.S. deficits, and the exploding size of the Federal Reserve balance sheet (which can henceforth serve as a rough proxy for USD currency that has been printed by Modern Monetary Magic). Gold prices should gravitate into the mid-$2,000s based on these factors and the announced roster of monetary and fiscal programs, not considering the acronyms to come.
Note
The ChallengeThe penultimate, and somewhat unappreciated, qualification of gold is to attain complete "fungibility." A study of gold's major weaknesses is required to understand the importance of this concept.
Currently, gold does not qualify as a "Highly Liquid Quality Asset" under proposed Basel III banking guidelines. Without getting into the minutia, under the current proposal it has been assigned a "Required Stable Funding" ratio of 85%, 17 times the equivalent capital charge for U.S. Treasuries! We understand that the main reason for this determination by the European Union (EU) finance ministers was the lack of transactional data reported on a global basis to evidence the qualities of gold's underlying liquidity, which appears to exceed that of government bonds by some margin.
Complicating matters is the lack of standardization of the various forms of gold bullion specified for delivery purposes across global financial markets, i.e., 100-ounce, 400-ounce or 1-kilogram bars. All denominations are stored in different vaults and currently need to be moved around for settlement in an archaic fashion more appropriate to a market of spoilable goods.
The limitations of physical gold were thrust into the limelight by the recent spike in the EFP (Exchange for Physical) contract. The EFP, which usually trades in the range of $4-5 per ounce, spiked in March to over $69 as driven by the increased demand for physical gold in North America both for settlement on leveraged COMEX contracts and to satisfy the demand for allocated physical bars and coins — while the refinery and gold transport system was COVID-19-handicapped. As a side note, we acknowledge that there is an indisputable movement by gold investors toward allocated physical gold, a positive development in our view.
Much as we experienced schadenfreude at seeing gold's principal commercial bankers — who used the futures versus physical arbitrage as their profit playground for decades — get spanked by this spike to the aggregate tune of some $500 million by our math, the resulting scrutiny by regulators and reduced trading liquidity isn't good for gold. A modern, highly liquid monetary-based market like gold should not be shackled with these limitations and the physical gold market must be upgraded ASAP.
There are multiple objectives for a new set of physical gold standards: speed and cost of settlement, trade reporting, regulatory oversight, ease and cost of storage, trading costs, etc. All of which are constrained by aged systems of the various players involved in the gold trade, whose sus-pect behavior is motivated more by protecting existing profit centers than by making gold a better and more widely-owned asset. It's a classic case of making more from each tree than increasing the size of the forest.
Note
Gold's New AestheticWe believe that standardization and tokenization is the next critical step for gold. A single standard, and a single token would achieve the optimal result. The headline goal should be that inspected and insured gold can be held in qualified vaults and registered on a central ledger. Ideally, this would avoid the need for movement of the physical, unless required for tax purposes.
The process of setting more universal standards for gold has begun and is being led by the largest constituents in the gold ecosystem. Notably, the World Gold Council CEO David Tait is chairing a newly-minted FICC Market Standards Board working group for precious metals, and London Bullion Market Association (LBMA) CEO Ruth Crowell is setting up a digitization task force. We encourage their equivalents at the Chicago Mercantile Exchange (CME), the world's major vaults, and key regulatory and commercial banking unit heads to jump on board.
Once standardized, gold can be vaulted by qualified parties, which could also serve the function of guaranteeing the "good delivery" nature and purity of the bar. Enhanced providence procedures could be added to verify "ESG" (environmental, social, and corporate governance) qualifications and the source of origin of the bar to ensure that it has been ethically produced. Bars can then be added to a digital and fully encrypted ledger, which could only be traded and altered by qualified participants, who in turn will have satisfied regulatory requirements for end customers. Customer positions on the ledger could be held by qualified custodians, assigned CUSIP (Committee on Uniform Securities Identification Procedures) numbers, be moved freely within other financial accounts, and be traded on public exchanges, and, importantly, better optimized as a form of financial collateral. Finally, the ledger could freely interact with payment systems, allowing customers to pay for goods and services priced in fiat currency using fractional breakdowns of their gold ledger account balance.
Note
Digital GoldDo I sound too "Gucci"? The technologies required to provide the infrastructure for this goal already exist and are being operated on a small-volume basis. In no particular order, the following table provides a summary of several companies that have already developed new technologies covering the essential gold investing services needed on this new railway.
Note
The legal structure and regulatory oversight most commonly referenced for tokenization is a form of a warehouse receipt for an asset. The principal regulation involved is Anti Money Laundering, although applicable Know Your Client and exchange trading rules would cover the integrity of the system. From a regulatory and exchange perspective, we believe the concepts of digital gold are more advanced than those of cryptocurrencies.Note
Keeping it 100Why does any of this matter to an asset that has outperformed all others year-to-date and over the long term? Because gold needs to become fungible, interoperable within financial accounts and more efficient for all investors to own. This will assist in both increasing the size of its audience and the participation rates of that audience. As per our earlier estimates, the prize is to bring the other $200 trillion-plus financial markets towards gold as a modern store of value, separate asset class and participant in the financial system. The resulting increased flows and participation rates should, in turn drive the gold price much higher. With $2,500 now in sight based on fundamentals, why not aspire to something much better?
Note
SNAP ANALYSIS: Fed moves to average inflation targeting, but is retaining flexibility of the mechanics by providing few detailsFed chair Powell announced that the Fed will shift to an average inflation targeting framework (AIT), which will target 2% inflation “on average”. Powell did not, however, offer any specifics about how the mechanics will work. For instance, there is no rule dictating how much the Fed will allow inflation to overshoot, which offers the central bank more flexibility in its policy reaction by not restricting its hand. The allowing of inflation to overshoot implies that the Fed will keep policy ‘more accommodative’ for longer in order to achieve its 2% average.
What this means for Fed forward guidance remains to be seen; there was nothing in Powell’s remarks about the type of guidance the Fed is leaning towards (either calendar-based, outcome-based, or a hybrid) which could be read as a lack of consensus on the FOMC at this stage, given some differing views among participants. Additionally, there was nothing about yield curve targeting policies, which some had expected the Fed to lean back on, but retain the optionality of its use in the future. There was also nothing on the Fed’s asset purchases, and whether it would shift the dynamic of its bond buying perhaps to longer-dated maturities, or even formalise the monthly pace of its asset purchases.
Elsewhere, Powell said that the Fed places employment before inflation in its policy strategy, and will seek to ensure employment does not fall short of its maximum level. Given that the jobless rate is currently over 10% (the U6 measure is above 16%), there is still some way to go in bringing unemployment towards the 3.5% area seen pre-pandemic; indeed the Fed’s projections made in June do not anticipate unemployment falling towards those levels over its forecast horizon.
Powell’s update raises the importance of the 16th September FOMC, where the market will be looking for updates on the themes mentioned above.
(Newsquawk)
Note
JeromePowell "disappointed" the market as he talked about 2% and above. The market had "hoped" for a 2 to 2.5% corridor with 5-yr breakevens falling back. Potentially worried about giving the (stock) market to much fuel .
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