The precious metals sector continues to be viewed with disdain and scepticism by the vast majority of investors, which is exactly what you want and expect to see at the earliest stages of a major bull market. However, the charts continue to shape up well, as we will now see.
On the 6-month chart we can see consistently positive technical action in the recent past, as gold made a clear breakout from a Double Bottom with a fine large white candle on very heavy volume on October 11, a sign that it “means business.” It is thus not surprising that the test of support at the top of this base pattern a few days ago was successful, amply demonstrated by another big white candle as it decisively reversed to the upside again on Thursday.
Gold’s latest COT remains very bullish, with Large Specs having virtually no enthusiasm for gold at all. Note that the slight buildup in the Commercials short positions over recent weeks is justified, given that gold is up significantly from its early October lows, and the main point to note is that this chart shows that there is plenty of room for a big rally by gold before COT positions become extreme. Gold Hedgers’ positions are still very positive for gold overall, despite easing back from their extreme of early October. Although gold did all right last month, October is on average a rather poor month for gold, on the basis of seasonal factors, as we can see on its seasonal chart below. However, November, which we have just entered, is much better and is actually the second best month of the year for gold, seasonally, and although a background factor, it’s a help.
Gold stocks indices also present a very bullish picture. On the chart for GDX, which is an accurate precious metals stocks proxy, we can see the big down day about 10 days ago which freaked out many more nervous investors in the sector, yet this was just a test of support at the “neckline” of the Head-and- Shoulders bottom pattern, which we had anticipated, although it was a bit of a “nail biter” on the day it dropped through the neckline, only to bounce back to close above it by the end of the day. Action late last week was positive with it rising away from the neckline again. There was a convincing breakout from the H&S bottom earlier in October, with a big up day on the highest upside volume since March 2017. With respect to the larger picture GDX has quite a bit of work to do to turn it really positive, which will involve it rising sufficiently to take the 50- day moving average up through the 200-day, that is still quite some way above, and working its way through the considerable resistance between approximately 21 and 24.
What about the bearish arguments going around that the precious metals sector will get taken down again by another deflationary bust, as in 2008. Let’s consider these. First of all, deflation isn’t necessarily bad for gold. it certainly wasn’t during the deflationary bust of the 30s when the precious metals sector went countertrend and did very well indeed. Secondly, the precious metals sector is already beaten down severely and extremely undervalued going into this bust, which it wasn’t before the 2008 market crash—back in 2008 had a lot of room to fall, now it doesn’t. Thirdly, it is widely assumed that the dollar will continue to surge in the event of a broad based deflation of asset bubbles, as in 2008, but will it?
Back in 2008, funk money went into the dollar, partly in order to seek safe haven in Treasuries, but so far during the current bust just starting it isn’t.
Why not? The argument of the dollar bulls and gold bears is that the bust will cause a dollar short squeeze and a surge of dollars coming home, but here’s another argument. Why didn’t investors scurry into Treasuries as the stock market tanked in recent weeks? In the first place, unless you are spending other people’s money which is often the case, you have to be mad or stupid to buy the government paper of a State that is technically bankrupt.
The so called booming economy in the US right now was financed by tax cuts, and since that means a shortfall in revenue for the government, the difference has been made up by growing the deficit. That’s alright when you can count on foreign mugs to keep conducting trade in US dollars and recycling those dollars into Treasuries, thus enabling the US to live the high life as it has since the 2nd World War by swapping piles of intrinsically worthless paper (dollars and Treasuries) for goods and services—nice work if you can get it. However, there’s an old saying which goes “Don’t bite the hand that feeds you” and the US has in the recent past not just been biting the hand, but chewing the whole arm off. Many foreigners are indeed corrupt, stupid and gullible—just look at those idiots in Europe allowing NATO war games right on Russia’s doorstep —it’s like they learnt nothing from WW2, but if you kick them in the teeth hard enough even they start to question their loyalty US foreign policy since the Second World War has basically operated along the following lines with the blunt message to the rest of the world: “You stick with using the dollar in international trade, because if you don’t, we’ll destroy your economy with sanctions (and now tariffs), and if that doesn’t work we’ll send our military over to give you a bloody good hiding.” In the case of Europe all they had to do of course was to centralize the economy via the European Union, and then buy off the leaders with huge bribes, and the masses there seem to be starting to comprehend that their leaders are not there to serve their best interests, especially in Greece which they have impoverished and asset stripped.
The problem now for the US is that there are seismic shifts underway in the global economic landscape, and rising powers have become fed up with the US telling them what they can and cannot do, and employing strong-arm tactics to enforce compliance. They know that the key to ridding themselves of this dominance is to wriggle out of using the dollar in international trade and to stop supporting the US Treasury market, which is the giant aorta that funnels the rest of the world’s treasure into US coffers. This is why they have been accumulating gold on a massive scale in recent years, so that they will have the power to back their currencies with it at a time of their choosing in the future, and beefing up their militaries at a rapid rate in order to deter the military aggression that their ditching the dollar will invite, with the theaters for eventual war with China already demarcated as the South China Sea and Taiwan. Now that the massive global debt bubble is starting to implode, things are beginning to get really ugly and the gloves are coming off, as the USbecomes more overt in its efforts to destroy the economies of China and Russia which threaten its hegemony and other countries it doesn’t like, such as Iran. Evidently, most of the US Neocons haven’t read the classic “How to Win Friends and Influence People” and instead are antagonizing and provoking many other world powers to the point that they are now working assiduously to end the dollar as the Reserve Currency and thus choke off the source of US power, and it would seem they are making great strides in this direction. As David Rosenberg (@ EconguyRosie) of Glusdkin Sheff recently opined in a Tweet, “Don’t tell anyone that foreign buying of Treasury debt has been cut in half this year and keep it a secret that the foreign share of world FX reserves has shrunk to a 5-year low of 62,5%. The dollar role as the reserve currency is on its last legs.”
So, if foreigners are dramatically scaling back their buying of Treasury debt, which is essentially worthless garbage as it is the paper of a bankrupt nation, then who does that leave to buy the stuff? Why, the Fed of course.
So at some point, and probably sooner rather than later, they are going to have to reverse position, halt the interest rate rises and revert to QE on a larger scale than ever before in order to head off a potentially devastating run on Treasuries by making good the shortfall in demand themselves. www.silverdoctors.com