Originally published by Chamber of Merchants
First things first…
Is gold back in a bear market?
No.
Economically it’s a definite no… But let’s look at the big picture charts first:
At the moment we’re at an extremely strong support zone in existence since around 2009. At the same time, it is clear that even breaking below this support zone would still not be a bear market.
In the chart below I added the bear channel support which demonstrates that there is additional support.
Let’s say that gold was fundamentally and economically flawed and we were to resume a bear market…even in that instance, we would still very likely experience a bounce around here to get all traders hopeful and long again before the final sell-off. Either way, I expect a bounce imminently.
As you know, watching and charting the gold price is of limited use. It needs to be charted in tandem with several currencies and economic indicators.
But let’s quickly look at gold vs the supply of printed currency and purchased assets by the United States Federal Reserve. Look at the orange line which is gold and how it increased in price due to the increased currency supply. Then in 2013, the Fed started to announce that they were going to unwind the bond purchases (they can’t) and raise interest rates (0.25% in how many years?). So gold was sold off more aggressively as the market started to account for an improving economy and the reversal of “emergency meaures” taken since 2008.
Now what was promised and what delivered were two different things and the market is catching on. In the latest Fed minutes they clearly state that the Federal Reserve’s Desk has full authority to still purchase and therefore inject up to $30 billion per day.
Yes, that’s $30 billion per day of currency that can get printed without batting an eyelid.
So in the above chart we can see that gold was shorted and sold off over a 4 year period, on the expectation that the Fed was about to start selling bonds back to the market and that they were going to raise interest rates.(they’ve virtually done neither)
If you’ve been paying attention you would know that the bond market is busy tanking, which means that the Fed cannot sell back the bonds they have purchased…unless they want to crash the global markets and the economy. Neither can they really raise rates in any significant way before causing a credit crisis. All of this while the United States has only achieved roughly 1% GDP.
So ultimately, if you look at the chart above you would see that gold was sold off on a lie. And gold has plenty of catching up to do given that we’re probably going to have to print more money next year to service debt, to service Trump’s spending plan and to keep the bond market from crashing. Looking good for gold.
For fun, here’s Gold(0range) vs United States Govt Debt(blue) vs United External Debt(green):
Once again, the price of gold increased as debt and increased from 2000 to 2013.
Once again, one can see that in 2013 gold was sold off on the promises which had since been broken. Debt increased and debt owed to other countries increased even more: the exact opposite of what was meant to happen. Gold has some catching up to do.
Remember: we’ve almost reached the debt ceiling which was renegotiated by Obama. Trump will need to lift the debt ceiling again next year around March by another trillion or two or risk defaulting.
So the question is, will other countries still rush to lend the United States money, or will they start to redeem their paper and swap it for real and stable assets? I think the latter.
What the heck am I going to put into the weekend report?! I’ve just used all the good stuff!
Ok… I’ll end this off….
But wait…there’s more:
The euro is just trying to find a bottom. 4th December is the Italian referendum which will provide some direction for the euro. Italy is on the border of a banking crisis so I don’t think they’ll step out of line since they need the euro big league.
Like I predicted… The Yuan has been repeatedly devalued against the dollar by the Chinese government. Yesterday the dollar was suddenly sold off while the yuan, coincidentally started strengthening. Let’s see how this unfolds…
The Dow Jones FXCM Dollar is forming a doji candle which simply indicates that the market is unsure whether it should go up or down… Finding equilibrium until a catalyst drives it up or down.
Likewise the futures Dollar Index broke through the support and is retesting to the same level which is now resistance (short time frame)
The pound has been trying to rebound which additionally puts pressure on the Dollar and is good for gold. However, the rebound appears to be seeking direction. Lower highs, higher lows…it could break either way:
The Investing.com Euro Index appears to be forming a bottom which is why the Dollar also failed to retain its 102 handle from yesterday:
The bond market has broken below its bull market trend line and is in risk of gaining more sell-off momentum. Breaking through this support would be disastrous for the mortgage and credit sector (we could be looking at another crisis if this continues much further)
And gold…it has reached the same level as February 2016. The combination of currency movements etc will determine its direction.
However, remember that ultimately there is a fundamental reason why gold has to significantly slingshot in value:
The sell-off which commenced in 2013 was based on promises by the U.S Government and the Federal Reserve which were not kept. That does not stop gold from fluctuating or even downtrending, but the fundamental truth remains that gold should be far above $2000 given that the situation is much worse now than it had been in 2013 and possibly even 2008. The economic prosperity has been bought on debt. Anyone can have a mansion and a yacht if they can borrow money at zero cost. But when the payment is due, the yacht and mansion will need to be sold to pay off the debt. That could be decade from now, it could be next year. The fundamentals of gold remain, regardless of short term price action..
Having said that, I expect a major bounce in the gold price very soon. 4th December we have the Italian referendum. 6th December we should start seeing some news about the new gold standard. 14th December is the 100% certain rate hike which I don’t think is going to happen. So consider these dates before making decisions.