The US Dollar and Gold
In my last report published on January 29, 2018, on Seeking Alpha, we looked at the US dollar and gold relationship. We anticipated that the dollar had found some short-term support and had the short-term potential to rally up to 92.00 levels while the gold market had reached an overbought position and was due for a correction and a time for a consolidation.
Last week the US dollar index closed at 89.04. It appeared to be building a foundation for some kind of a bear flag for a potential swing rally in the 93.50 area, indicating a gap on the daily charts to be potentially filled as the target for this swing rally.
In taking a look at the gold market, we made a high of about $1370 on January 25 and we corrected back down to a low of $1330 as of last week. If you take a look at the report that we published on January 29 in relation to supply and demand levels, we specifically recommended exiting shorts in gold at the buy 1 level of $1336 to $1316. When we look at the low of the market last week of $1330, gold has activated the weekly buy 1 level at $1336. We recommended covering shorts and getting on the long side of the market with an initial stop on a closing basis of $1316.
Some of the factors that affected the gold market were based on the economic data that came out Friday. Gold futures ended lower Friday, down more than 1% for the week, based on a stronger than expected US jobs report, which drove up the US dollar and treasury yields, since the data laid the groundwork for a stronger US interest rate response later this year. The data on Friday showed that the US created 200,000 new jobs in January, beating the median forecast survey of leading economists. Unemployment stayed at 4.1%, a 17-year low. According to MarketWatch, the government unemployment report falls into the camp of US monetary policy hawks who want to see the US interest rates rise at a faster rate, said Jim Wycoff, senior analyst at Kitco.
As for the inflation watch, average hourly wages rose 9 cents or 0.3% to $26.74, which pushed the yearly rate to 2.9% from 2.6%, marking the highest levels since the end of the 2007-9 recession in June 2009. Analysts have stressed that while inflation risk drives up bond yields, it also restores investors’ faith in gold as a hedge.
We have a long-term fundamental view for gold that is bullish. We are looking at the risk of higher interest rates in relation to world debt, which is running at record levels and are, I believe, are unsustainable. This is particularly true if we see an aggressive monetary policy of rising interest rates, which will affect interest rate payments tremendously on global debt. The effect could be enormous if interest rates rise. For every 1% interest rate it would increase approximately $600 Billion in interest payments alone. The increase in the US debt payments could exceed the entire US military budget.
The fact of the matter is that current monetary policy, which seeks to influence interest rates, is running scared based on the fact that the US dollar has collapsed. Even though we may have a short-term correction in the US dollar, back to 92/93 levels, it is in preparation for a larger wave down that indicates the US dollar could decline to as low as the 70 cent level by May 2018. I believe that increasing the cost of money would only exacerbate the tremendous burden of interest rate payments and put even more stress on the current balance sheet. It is my opinion that the reason why the Fed’s are in such a need to raise interest rates is not because of the inflation factor getting out of hand, (there is literally no inflation at hand), but to have the flexibility to lower interest rates in the future if things fall apart in the bond market as a consequence of bond vigilantes beginning to put pressure on world sovereign bonds to raise interest rates due to the high risk based on record global sovereign debt , which could collapse the bond market globally. If such an event occurred, the immediate policy that would need to be implemented would be to lower interest rates and implement another form of QE in some other name, form or manner to prevent a worse collapse than the 2008 recession.
Higher Interest Rates Bullish For Gold?
If we take a look at the first time the Fed raised interest rates in December 2016, it was the bottom of the gold market. What we have seen in 2017 is actually a test of the rally that we saw in 2016. If the price ownership and price discovery begins to be implemented in the physical cash market we could begin to see a reversion in the price of gold, adjusting to what I believe would be levels based on real supply and demand factors globally. For that to happen, the price of gold would need to adjust to the equilibrium level on a long-term basis. Until we see this unlocking of the manipulation of interest rates and the suppression in the price of gold and silver, we really don’t have a true price discovery level that we can base the supply and demand factors for gold and silver on real economic data.
The fundamentals in gold and silver have been completely skewed since 2011. If you have been trading the gold market fundamentally, you have experienced the wrath of the manipulation, which is essentially that the central bankers and governments have created an artificial paper market and created thousands of ounces of gold and silver supply that don’t exist. By so doing, they have maintained control of gold and silver as a monetary unit against the US dollar as a fiat currency. The next six months are going to be crucial, especially sometime in May, as we accomplish these corrections in the US dollar and in gold. The underlying trend that has been unfolding in the US dollar for many, many years has been on a downtrend, which will continue. What we are beginning to see is the foundation in the price of gold beginning to identify some real economic levels of demand.
I want to focus on the silver market, in particular, as it appears to have come down to what we call harmonic levels, which is when the daily price trend aligns with the weekly and monthly trends, indicating that prices have adjusted to the average price of all three trends. When it trades at exactly the same price, it is sending a harmonic signal that a new trend or cycle could develop from here. With the price of silver coming down to $16.33 levels last week, it activated the demand levels.
Before we look at the supply and demand factors for silver, we’re going to examine the weekly Fibonacci retracement and Fibonacci fans as it applies to the weekly chart in March silver. If you look at the chart above, the high that was made on September 4, 2017 at $18.1850, it gives us the top of the range of the high of the Fibonacci fence. The measurement of the fan is basically the low that was made on December 11, 2017, of $15.55. This Fibonacci fan line gives us the resistance levels from the high to the low of this sequence. If you look at the price action in 2017, from December 2017 we begin this uptrend that broke these fan-line resistance levels that now have become support. Going back to the old saying, “When resistance is broken, it becomes support.” Long-term resistance of the Fibonacci fan trend lines has been broken and now they have become support. If we look at the low on December 11, 2017 of $15.55, and we analyze it to the high on January 22, 2018, of $17.71, we begin to see the Fibonacci fan line giving us a strong indication of the near-term support. If you look at the chart, the market has come down almost to the third fan line of support right into that line that is approximately at $16.55, the low that was made on January 29.
The combination of the longer-term trend fan lines with the intermediate to short fan lines tell us that the market has come down to a pocket of support, which gives us an indication that the market has capitulated on this correction. If we add the Fibonacci retracements from the low that was made on December 11, 2017, to the recent high we made on January 22, of $17.7050, we can see that we have identified the Fibonacci retracements in the price of silver that give us a pretty strong indication of how far the retracement can go. What we accomplished last week with a low of $16.52 was coming down right into this Fibonacci retracement of 61.8% of $16.43. That marks a Golden Ratio measurement that we use to identify the completion of an intermediate correction within a larger trending market. In this case, we seem to be identifying that the leg that started on November 11, 2017 at a low of $15.55 was the first leg of what appears to be a five-wave pattern developing.
According to Fibonacci retracement, unless we come down and test again the $16.43 level of the 61.8% Golden Ratio retracement completion, I feel we are coming very close to identifying where the reversion of the market will occur in silver. For that, we are going to look at the weekly S&D report published on February 2, 2018.
The silver futures contract closed at $16.71. The first filter that we use is the 9-day moving average of $16.91. The market closing below that point means that the market sentiment coming into the week is bearish. It also tells us that if it closes above $16.91, it would negate this bearishness.
The second filter is the weekly price momentum indicator. The average price for next week according to the VC PMI is at $16.90. The market closed below $16.90, so the market is entering the week with a bearish price momentum sentiment. If the price action closes above $1690, it would negate this bearish sentiment to neutral.
By the market on Friday closing below $16.90 it activated the exit short positions at the buy 1 level of $16.33 and the buy level of $15.95. The market is very clearly telling us to take profits on any shorts at $16.33 and $15.95 and go long on a reversal stop. If you go long, use $15.95 as your stop on a closing basis. If you get activated, your stop would be $15.95. Your target is identified at $16.90, if activated. It recommends that a second close above $16.90 would revert the bearish sentiment of the weekly price momentum indicator to bullish, activating the upper targets, which it identifies and is to points to exit long positions at the sell 1 level of $17.28 and the sell 2 level of $17.85, if you have multiple positions. These reversion levels of buy 1 and 2, and sell 1 and 2 are accurate 90% to 95% of the time.
The gold and silver ratio currently trading at 80/1 ounces of silver to gold are at record levels, indicating that the value has come back to silver. Looking at Fibonacci fans and retracement, we have come back to a level that is validating the capitulation or completion of this correction. We have activated a buy signals at the $16.33 level with a $15.95 stop. If the price action closes above $16.90, it activates the upper target of $17.28 to $17.85 for next week.
Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any futures or options contracts. It is for educational purposes only.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.