Guest Post by Tom McCellan
September 12, 2014
Gold is still in a downtrend, if you examine a chart of gold prices measured in dollars. But gold in euros looks much stronger, and that’s actually a bullish condition, eventually.
NFTRH has been bullish the USD and bearish the Euro, Canada dollar and Aussie dollar for quite some time now, most often using this simple weekly chart of various currencies. Months ago we noted USD creeping out of its downtrend (green dotted line) and the Euro falling out of its wedge (red dotted line). Back then, sentiment toward the USD was far different than it is today. So this week the Currency segment included some thoughts (and data) on USD and Euro sentiment as well.
Also of note, while the excerpt speculates that a USD reversal could trigger bounces in commodities and precious metals, these items generally remain bearish until proven otherwise. Not the other way around.
Now everyone knows the USD is bullish and the Euro is going to hell in a hand basket. As long as faith in paper currencies in general remains intact, I think that will be the trend. But USD is over bought to a degree that we could actually see a significant – if temporary – reversal of these trends.
“First, it is committed to experimenting even more with its use of unconventional monetary policy, including by taking the deposit rate even more negative and starting a program to purchase asset-backed securities.”
What the ECB’s Moves Mean for the World by Mohamed El-Erian
He lays out Draghi’s scheme pretty well. Read a good article by a smart man. But the problem in Europe is that the Euro strength they are trying to leverage was simply a counter trend reaction out of the first ‘acute’ phase of the Euro crisis in 2011. In essence, they are leveraging a 2 year Bear Flag (or Rising Wedge) in the Euro that always was likely to fail at the big trend line. Yeh, that should work well for Europe.
Oh but then there is Fortress America. Our currency is strong and our markets booming. Nothing wrong here! Well, we’ll see how long the ISM for example, stays strong with the USD becoming persistently strong.
Wasn’t the whole premise of the US recovery its ability to compromise Uncle Buck? I’d imagine that US stocks can go well higher on the old ‘King Dollar pulls in global liquidity’ play, but there is a shelf life here if Unc gets persistently strong with two drivers at his back; the Euro trash fest and US policy that could have its hand forced toward tightening sooner than maybe the majority now thinks.
As I wrote the other day, it is hard to know exactly what will play out when, but it sure is getting interesting.
[edit, 8.1.14] SPY short covered, EWP short ongoing. [edit 2] FAZ sold. EWP still ongoing, probably for a longer hold.
How perfectly did this crap rise to test the breakdown and then drop? My stop as noted last week was a rise above 43, so I still hold Spain (Europe’s version of junk bonds) short, along with the chunk of SPY also noted. No leverage, just short. I am leveraged short against the Financials however, with FAZ, bought yesterday (conveniently noted today, so distrustful sorts feel free to discount it) on its chart pattern. This is starting to feel sooooo January 2014.
Back on EWP, it (along with Italy’s iShares EWI) was an indicator to the speculative potential (i.e. manic excess) over there in Europe since the middle of last year. The target was in the low-mid 40’s and damned if it did not get there off its lows below 20.
The monthly chart updates the situation in gold vs euro and tells a little story.
You see, once upon a time millions of Knee Jerks came flying into gold in panicked response to a credit meltdown in the weaker components of their union. The first of these monetary refugees created ‘fear gaps’ and the last of them, the unsustainable blow off top. By then, the gold mini hysteria had gone global and gold – all those unhealthy holders in tow – was cooked for a coming bear market.
Now gold vs euro is in the finishing stages of what looks like an Inverted H&S bottom after poking down and closing the open gap in 2013. The left side Shoulder did this and then the Head rammed down even deeper just to make sure. Now we have Portugal and all those low quality bond yields that were until yesterday showing a clear lack of respect for risk management.
People never change. They herd, they over intellectualize and they take too much to heart what other people say, without realizing that other people have agendas. Charts on the other hand, simply tell stories over time and space. This one has an interesting story.
Not that I want to poke fun at an asset (it’s more its promoters that deserve the poking) that I have considered essential monetary insurance (read: value) throughout its cyclical bear market. In fact, I believe that Europeans especially should be paying attention now as Gold-Euro fans its way along after closing the Euro Crisis ‘fear gap’ from 2010.
I am not counting on gold going up in USD at this time because with all the anti-dollar hype and its upside reversal (from critical support) yesterday and today I am leaning bullish on Uncle Buck. The Euro on the other hand is doing this…
There is also the case of the Euro and gold, which was the center of fear and loathing in 2010 and 2011, as gold took on too many panicked sponsors. Here is the big picture monthly view of the European fear gap getting closed out. Europeans who want a long term value opportunity could be buying now (most probably aren’t) as opposed to what they actually did, which was to buy in 2011.
The ‘all one market’ vs. the US dollar scenario is breaking up a bit. Commodities and the Euro are doing well. Gold is hanging around and the US stock market? Not liking the weak dollar so much. The precious metals want to see silver get off the floor, but it’s got a heavy open interest sitting on it. This is a tough market, folks.
One is dropping below its MA 50’s and the other is popping above, after the ECB sat on its hands with rates but made a lot of Jawboning about ‘unconventional’ stimulus in the battle against the dreaded deflation.
It is unbelievable the degree to which people still have confidence in these clowns (including the ones packed into the little clown car here in the US), but apparently they do.
It remains all one market vs. the US dollar, AKA the anti-market. SPY has actually remained somewhat on its own course over the last week, but the others are strictly in anti-USD mode right on down to the little hook upward this morning as Uncle Buck hooks down. Silver, which I got longer on yesterday, is the most sensitive.
Now we will get to test the theory that little of what most people consider fundamentals for gold actually matters. That would be things like Indian wedding season, jewelry demand, central bank buying/selling and the one hyped in the gold “community” more than any other, China gold demand.
From Hard Assets Investor: Gold Flat Amid China Demand Drop
According to the China Gold Association, demand in the world’s largest No. 1 consumer may fall 17 percent this quarter from a year ago. An official for the trade group said the decline wasn’t unusual given the huge spike in demand last year.
“Last year was a peculiar year when we saw a big fall in prices,” Zhang Yongtao, vice chairman of the CGA, said. “People bought a lot of gold, and I think demand will start climbing again once the festive and marriage season begin later this year.”
‘But but… China gold demand is strong!!’ kept people bullish last year as gold got blown up. Marriage season? Please. For me it is investment demand that matters.