Gold & Precious Metals

Silver Rally Chart & Weekly Market Update

 

Silver Rally Chart

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  • Silver has come down to key support and is massively oversold. Fundamentally, it’s an outstanding value and a key asset.  
  • While RSI has yet to move above 30, MACD is turning higher.
  • Like gold, silver shows an upside breakout from a parabolic decline. 

 

Ed Note: Weekly Market Update below including 7 more charts & examination of The Chinese Stock Market,  Bonds, Gold & Gold Miners below: 
 
 

LT (T-Bond Proxy) Rally Time Chart

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  • The US economy is doing well, compared to Europe’s worst performing countries. The most recent jobs numbers growth shows lots of part-time workers.  That’s not going to create a thriving economy. 

 

  • There is an ominous head & shoulders top pattern on this T-bond proxy chart.  Higher interest rates put an enormous strain on the government treasury, and on many over-extended Americans. 

 

  • The US economy is doing well, compared to Europe’s worst performing countries. The most recent jobs numbers growth shows lots of part-time workers.  That’s not going to create a thriving economy. 

 

  • There is an ominous head & shoulders top pattern on this T-bond proxy chart.  Higher interest rates put an enormous strain on the government treasury, and on many over-extended Americans. 

 

FXI (China Stock Market Proxy) Power Volume Chart

 

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  • Ben Bernanke “juiced” the market with his dovish statements on Wednesday. China is the largest manufacturing economy in the world, and the door is open for a substantial rally.

 

  • There is a big h&s top pattern on this chart, but yesterday’s gigantic volume is encouraging.  It opens the door to a rally to the right shoulder highs, in the $38 area.

 

  • Unless those highs are taken out, global stock markets remain in the danger zone.

 

Gold Breakout Chart

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  • Both gold and silver have experienced parabolic price declines. The good news for embattled bulls is that this type of chart action usually happens at the end of a decline.  

 

  • Even if there is a big rally now, it will take many months for sold-out bulls to regain their confidence, and most of them could end up missing the price rise.  

 

  • Note the blue box that I put on the chart. An upside breakout from the inverse parabola may have already occurred.

GDX Arc Of Profits Chart #1

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  • If an investor believes the price is ready to rally, the arc tool should be brought into play.  Fibonacci arcs can help investors place profit booking orders. In this report, I’m including 4 examples of the arc, using GDX charts.
  • This chart shows a decline in 2012, from about $57 to the $38 area.  A rally to about $48 took GDX to the 2nd arc.

 

GDX Arc Of Profits Chart #2

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  • The chart shows the 2011 – 2012 decline, and the ensuing rally. As a rule of thumb, investors should start booking profits when the price touches the 2nd arc of the pattern. In this case, that worked out quite nicely.

 

GDX Arc Of Profits Chart #3

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  • This arc chart highlights the decline from last summer to the current lows in the $22 area.
  • There is also a possible fuel cell volume (FCV) signal in play.  The target of FCV signals is the first ring of a Fibonacci arc drawn from the potential low point of the decline.  In this case, that’s about $32.
  • GDX should be able to rally to $35 – $38, which is the area between the 2nd and 3rd arcs on this chart.   

 

GDX Arc Of Profits Chart #4

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  • The fourth arc chart shows the entire gold stocks decline, from the 2011 highs, to the current lows in the $22 area.
  • The long term profit booking area suggested by the arc is $52 – $66.
  • The Fibonacci arc does not predict that a low has been made.  Oscillators, price patterns, and “lady luck” are needed for that. The arc tool is used to suggest good profit booking areas, once a rally begins!

 

 

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Abelications

There’s a three year downward trend in Chinese imports underway. The chart below, from Nomura Global Economics, shows the trend quite clearly.

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China’s exports and imports declined again in June. Exports fell 3.1 percent yoy – the most since the global financial crisis in 2008 – while imports dropped 0.7 percent. The poor June report follows a May collapse in export gains – fake invoices had inflated data for the first four months of the year, the bogus data enabled exporters to evade currency controls and bring extra money into the country. Trade growth might come in below the government’s target of eight percent for the year. 

  • The governments self imposed target of 7.5 percent economic expansion is also at risk: 
  • June’s export growth was down from May’s year-on-year gain of 13.5 per cent and import growth was down from 8.2 per cent.
  • China’s global trade surplus contracted by 12.4 per cent compared with a year earlier to $27.1 billion. Exports were $174.3 billion while imports were $147.2 billion.
  • Growth in exports to the United States, China’s biggest foreign market, fell to 1.8 per cent from May’s 3.5 per cent. Exports to the 27-nation European Union contracted 3.9 per cent.
  • The trade surplus with the U.S. contracted by 15.5 per cent from a year earlier to $17.5 billion. The surplus with Europe shrank 20.3 per cent to $10.2 billion.

China’s communist leaders want to pursue a slower, more self-sustaining growth model based on domestic consumption, this model reduces reliance on trade and investment. China can handle slowing exports as long as the slowing is accompanied by rising internal consumption – a successful switch from being an export led economy to a consumer one. But since the start of 2013 a very different scenario is taking place, one that’s definitely not under our dear communist leaders control, imports and exports are both dropping, Chinese trade is being gutted while Japanese exports are rising on higher shipments to the US and China.

How did this happen? 

To put it as simply as possible; a depreciation of the Japanese yen is making Chinese exports less competitive in the world market and Japanese imports more attractively priced for Chinese consumers. Less Chinese made goods are being bought at home and abroad.

Japans monetary policies – dubbed Abenomics (deregulation and economic stimulation by easy monetary and fiscal policies), after Japanese prime minister Shinzo Abe – are waylaying communist plans.

Japan, the world’s third largest economy, is currently an economic ray of sunshine – the Japanese economy grew at an annualized 4.1 percent in the first quarter and their stock market is soaring. Abenomics goal is to end a long miserable decade and a half of deflation by kick starting the economy, this will happen because of massive yen creation. The fiat balloon will induce consumers to spend and corporations to reinvest profits, convinced by a rising stock market and surging exports that all is well. 

The flood of fiat has depreciated the yen, over the first six months of 2013 the yen weakened the most against the U.S. dollar since 1982. The yen also dropped 12 percent against the euro and seven percent against the sterling, threatening European trade. 

Japanese efforts are starting to pay off as factory output is rising (the most since December 2011), retail sales are slowly climbing and some inflation is starting to creep into consumer prices. The weaker yen is drawing investment away from emerging markets and toward Japanese equities – the Nikkei 225 has been soaring. 

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The Bank of Japan has driven down the yen against the dollar over the last six months in an effort to increase exports and cut imports into the country resulting in Japan throwing a very large monkey wrench into Chinese plans. As we can see Abenomics is having severe Abelications (Abe-li-ca-tions), but the worst is yet to come –  the ignition of a brutal currency war in Asia. 

China will, in response to Japans deliberate and massive yen depreciation, allow its currency the yuan to depreciate forcing all other Asian countries (and the EU and Uk) to do the same to keep their exports competitive with China’s and Japan’s. 

Currency War – when countries around the world start competing (competitive devaluation) to make their currency cheaper than everyone else’s as a way to boost trade.

So how do currency wars get started? From Wikipedia comes the following:

Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a particular currency falls so too does the real price of exports from the country. Imports become more expensive. So domestic industry, and thus employment, receives a boost in demand from both domestic and foreign markets…The policy can also trigger retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries.”

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Japan started a currency war with China and the world. But not with the U.S., the U.S. will be the beneficiary of all the tit-for-tat repercussions with a strong dollar.

 

 

Opportunities

There’s an investment opportunity in this mess that I’m paying attention to: uranium.

Screen shot 2013-07-12 at 9.21.43 AMHow do I get uranium out of a weaker yen and a stronger dollar? The cost of Japanese imports is really climbing, month after month of increases, remember energy imports become more expensive when you weaken your currency against the world’s reserve currency, the U.S. dollar, and Japan has been obliged to pay more for dollar denominated energy purchases – as has everybody else.

Japan imports most of its energy and utilities are being forced to keep thermal power stations running at full capacity to make up for the closure of most nuclear power plants since the Fukushima Daiichi incident in March 2011.

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There’s no way to reduce fuel import volumes, the resulting massive cost to the Japanese economy and return to a trade surplus, unless they turn back on their nuclear power plants. And that, at the same time the HUE ends, will kick start the ‘Global Civilian Nuclear Renaissance.’ That’s why I think current uranium investments are going to benefit from Abenomics.

 

Conclusion

Japan has 55 nuclear reactors using 21.3 million pounds (mlbs) of uranium – 12-13 percent of annual global uranium demand. A six-fold increase in China’s installed nuclear capacity is expected by 2020. The HEU agreement ends late in 2013 and removes 24 million pounds of uranium supply from the market. 

Current annual global uranium consumption is 190 million pounds, annual global mine production is 140 million pounds, inventory draw downs, the down-blending of weapons-grade material and the enrichment of tails material are a large portion of supply and currently make up the difference.

However with inventories dwindling and the HEU agreement ending, the drying up of most non-mining uranium supply sources seems certain. 

NuCap Ltd., a London-based industry consultancy, says the annual consumption of uranium will increase to 265 million pounds by 2020

According to The Australian newspaper global demand for uranium fuel is going to increase to 280 million pounds U308 by 2030.

A near term uranium producer is definitely on my radar screen, have you got one on your screen?

If not, maybe you should.

Richard (Rick) Mills

 

Richard is the owner of Aheadoftheherd.com and invests in the junior resource/bio-tech sectors. His articles have been published on over 400 websites, including:

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If you’re interested in learning more about the junior resource and bio-med sectors, and quality individual company’s within these sectors, please come and visit us at www.aheadoftheherd.com

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Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified. 

Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

 

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

 
 

 

 

 

 

 

 

 

Global Oil Slick Update

Oil Bears Flummoxed

We recently posted an update on crude oil, entitled “What’s Up With Crude Oil?”, in which we shared our technical and sentiment observations on the oil market, as well as our admittedly rather limited knowledge of the market’s fundamentals (a number of charts illustrating the fundamental backdrop can be found in this previous article). The in our opinion at the time most important and noteworthy fact was that in spite of the market’s healthy technical condition, it was accompanied by a lot of anecdotal evidence showing widespread incredulity at the market’s strength. It was no exaggeration to speak of a deeply ingrained bearish consensus. We wrote:

“The main reason to talk about crude oil these days is its stubborn refusal to go lower. There is a fairly widespread anecdotal consensus that prices will – nay, must – come down. In fact, only veryrecently the US Energy Information Administration (EIA) opined that the sharp increase in US domestic production portends lower prices in the future. It presumably had to point to the future because it is definitely not producing lower prices in the present. In fact, Monday’s close in spot WTI at just above $97/bbl. was right at the upper end of its multi-month range and only a hair away from what would be a noteworthy technical breakout. This is evidently not what the consensus would expect, especially in view of the fundamental data accompanying this show of strength.”

WTIC-daily-annot

……read the rest HERE (be sure to read the conclusion)

Your Best Strategy for Playing This QE Rally

Don’t worry. The bubble “Quantitative Easing” has built is still intact. For now.

However, even though there’s breathing room, don’t think it’s time to breathe easy. There will be Hell to pay, just not now.

And I have found three opportunities to take advantage of the next phase in this unsettling market.

But let’s gather some perspective first.

The news that the Fed might taper QE bond purchases gave the bond (and stock) markets a fit of the vapors and caused gold to careen toward $1,200 an ounce.

155810But when the smoke cleared, the market took a deep breath and realized that the Fed would reduce its stimulus very slowly, while other central banks were still pumping out the money.

In that environment, while bonds and gold may hiccup, we can count on a further extension of the 2009-13 QE bubble.

Given the Fed’s leisurely timetable, the real crash will wait till the second half of 2014.

Prepping for 2014

The elephant in the room: money supply is way out of balance with the real economy. The monetary base rose 21.8% in the year to June 26, bank reserves rose 29%, the St. Louis’s Fed’s Money of Zero Maturity rose 7.7% and M2 money supply rose 6.9%.

All those are much higher than the roughly 4% increase in nominal GDP in the year to June. Monetary policy is very stimulative, and the narrower the definition of money supply, the more stimulative it is.

Interestingly, one effect of the recent uptick in long-term interest rates may be to boost inflation. Banks are holding over $2 trillion of excess reserves at the Fed, on which the Fed is paying them 0.25% interest.

Before 2008, the Fed didn’t pay interest, so banks rushed to lend the excess reserves in the interbank market or to customers. However if long-term rates and especially 2-3 year rates rise far above the 0.25% the Fed is paying the banks, they will lend out these reserves.

That will stimulate the economy (good) but increase both the economy’s debt (bad) and its inflation rate (also bad!).

Of course, the Fed could raise the rate it pays on reserves above 0.25%, but it’s very unlikely to do so while it’s attempting to provide “stimulus” by buying $85 billion a month of Treasury and Agency securities. Naturally, if inflation rises, real interest rates fall, bond market yields rise and gold shoots up.

Global QE Will Remain

In any case, the Fed isn’t the only player in this game. Mark Carney has just become Governor of the Bank of England, and the British public is waiting for him to stimulate their feeble economy, which is still well below its 2008 level, with productivity shrinking.

Maybe he will have some new idea, but the chances are his stimulus will involve some kind of new money printing.

Then there’s Japan. Prime Minister Shinzo Abe and his central bank chief Haruhiko Kuroda have pinned their reputations on the “Abenomics” policy of printing money. It’s boosted the stock market and it seems to have helped the Japanese economy, which rose at 4% in the first quarter.

They can’t afford for it to fail for lack of money printing, whereas they can afford a takeoff in inflation – it would solve the Japanese government’s debt problem as it did in Britain in 1945-75.

So they’re buying more bonds than the Fed, in an economy one-third the size, and will increase their purchases rather than scale them back. That means the Japanese stock market will boom, as will the Japanese economy, at least before inflation arrives — which it will.

There will be more scares in the Treasury market, as it panics about “tapering” or the appearance of inflation. But until Treasury bonds yield much more than inflation, they will have little effect.

What’s more, most of the time the Fed’s purchases will cause yields to decline again after every rise. That’s very artificial, but the price for distorting the market won’t be paid yet.

What To Do Now

How long will this last? I’d say there will be no increases in interest rates before at least 2015; stock and asset markets will continue to climb until then.

In the meantime, U.S. stocks are fairly high while gold and other commodities have been through a major down cycle.

All that said, the ways to play this cycle are:

1. Tokyo. Wisdom Tree Japan Hedged Equity ETF (NYSE:DXJ) gives you exposure to the Japanese stock market while neutralizing the risk of a major crash of the yen against the dollar, which could happen if Abe and Kuroda get over-enthusiastic.

2. Gold. Sprott Physical Gold Trust ETV (NYSE:PHYS). This trust, unlike the better known GLD, allocates physical bullion in a warehouse for your holding. Hence it avoids any possibility of shenanigans with GLD’s physical gold holdings.

3. Commodities mining companies, which are extremely undervalued. To get a solid company with a broad exposure, you should look at FreeportMcMoran Copper & Gold (NYSE:FCX), which is a major miner of copper, gold and now domestic oil, which is trading at 9.2 times trailing earnings with a nice dividend yield of 4.5%.

Potential Upside Targets for Gold & Gold Stocks

Obviously, we can’t know if the bottom is in but I’ll repost a chart which is my best argument for why we can expect a big rebound over the coming months. The chart shows all of the worst bear markets in gold stocks. At the top right I’ve annotated the ensuing recoveries. As you can see, D (the HUI from its 2011 top to last Friday’s close) is extremely close to B and C in terms of depth and duration. B and C occurred in a secular bull market and were followed by 606% and 560% gains. D is also close to E which was followed by a 205% gain in seven months. A, the 2008 collapse was followed by a 324% gain in less than three years. 

july6bgmibears

The chart and data show that the recent downturn is well in-line with the history of gold stocks and more importantly, is well in-line with downturns in secular bull markets. Yet, the mainstream is acting as if gold stocks are going to go 0 and the industry extinct. The recent drivel from talking heads on CNBC and Yahoo Finance is exactly what you get at a major bottom. Simply put, it is the perfect contrarian opportunity and is the foundation needed for a cyclical bull market and future bubble.

Moving along, the gold stocks have a very strong resistance target which could come into play in Q4 of this year. GDX, the large-cap unhedged miners ETF has a confluence of retracement points near $38. Meanwhile, the current 400-day MA is at $43.71 and will likely come down to $38 before the end of the year. Following four major bottoms (1970, 1976, 2000 and 2008), the recovery hit that resistance (400-day MA) in the fourth or fifth month post-bottom. Finally, GDX’s low is at $22 and there is some critical resistance at $30. A very complex head and shoulders pattern could be developing and that would target $38. In the meantime, both the 50-day moving average and lateral resistance are at $27 which is the next key resistance.   

july11gdx

The equivalent to the GDX $38 target for the HUI is ~365. We looked at the price action following the major bottoms of gold stocks within a secular bull (1970, 1976, 2000, 2008) and combined the data into one. We applied that to last Friday’s close (215) and the result is below. The recovery template has the HUI rallying to 350 and then correcting for a few months before rallying up to 390. Then the HUI consolidates for another five months before breaking past 400 in August 2014.      

July11huiavgrec

We did the same thing with Gold. We looked at how Gold performed following its bottoms in 2004, 2006 and 2008 and merged the data into one. Then we applied it to last week’s close of $1212. (Note that we did not include 1976. If we did the recovery template would be much stronger). The projection shows Gold’s initial rebound peaking around $1500 in February 2014. Then it would consolidate until next summer. This makes sense considering the big breakdown occurred just above $1500. It is likely to mark the first big resistance post-bottom. 

july11goldavgrec

The projection shows Gold breaking past $1900 about 18 months from now. That would mark about three and a half years since the summer 2011 peak. After its peak in 1974, it took Gold three years to retest the high and three and a half years to make a new all time high. 

To sum things up, we can’t know for sure if Gold has already bottomed or not. If it isn’t look for $1080 to be the final low. Regardless, our gold stock bears chart illustrates that we are on the cusp of a major bottom. It may already be in or it could happen in a few weeks. We don’t know. On the other hand we do know that each passing day and week brings us much closer to a probable big recovery. Those who have the courage to buy any weakness will be handsomely rewarded and history shows us it usually is in short order. I’m sitting on losses and hope the bottom is already in. More important is the fact that the medium term potential far outweighs the risk of a final minor leg down. Moreover, some individual stocks have already bottomed or will confirm their bottoms if there is a minor leg down. If you’d be interested in our analysis on the companies poised to recover now and lead the next bull market, we invite you to learn more about our service.   

Good Luck!

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com