Gold: Planting The Seeds Of Inflation And Food Shortages

Summary

• We are seeing a lot of volatility because of some recent fundamental news that just came out. US jobless claims soared past 30 million.
• There's growing pressure to lift restrictions that are choking the economy.
• I'm surprised by the overwhelming bear camp that appears to still be in the gold market.
• The world is looking to take delivery of physical gold, which is more than offsetting attempts to suppress the price of gold via the paper market. When hyperinflation hits, it will happen overnight. Be prepared.
• I do much more than just articles at Mean Reversion Trading: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Fundamentals

We are seeing a lot of volatility because of some recent fundamental news that just came out. US jobless claims soared past 30 million. Europe is also reeling. The crisis is unmatched since the 1930s. There is growing pressure to lift restrictions that are choking the economy. We are beginning to see the ripple-effect damage of this economic bomb caused by the pandemic. American Airlines posted a $2.2 billion loss. US consumer spending plunged a record 7.5% during the pandemic.

There are glimmers of hope. Some new testing of a drug, Remdesivir, is showing promise for treating COVID-19. The Czech Republic went another day without a virus death. China said that claims that the virus originated from a Chinese lab are fabricated.

The VC PMI Artificial Intelligence

What we try to do is block out all the chatter and focus on what the market is telling us. We use the artificial intelligence of the proprietary Variable Changing Price Momentum Indicator (VC PMI) to analyze the supply and demand of each market to find the highest probability trades. The VC PMI finds the mean price for a market, and then creates a structure of two extreme levels above (Sell 1 and 2) and two extreme levels below (Buy 1 and 2) to guide your trading. The levels provide trades that have 90% and 95% probabilities of turning a profit.

E-mini S&P

On the left of the chart is the daily data. On the right of the chart is the weekly data. The E-mini came right into an area that the VC PMI identified as a distribution of supply or resistance. The VC PMI then alerts you that if the price goes up to that level, you will find sellers coming into the market. Therefore, be cautious about buying the market about the Sell 1 level, even though there is a small probability that the market may go up to the Sell 2 level. If you bought low, Sell 1 and 2 are where you should take profits. There is a 90% chance of the market reverting back down to the mean from the Sell 1 level and a 95% probability of a reversion back down to the mean from the Sell 2 level.

On the 29th the market gave a buy signal at 5 am at 2887. The stop was 2881. The target was the mean of 2921. It reached that target at 5:45 am, which was when the trade was completed and you went neutral to wait for the next signal.

When the market reaches the mean, the VC PMI tells you to go neutral—do nothing. From the mean, there is a 50/50 chance of the market going up or down, so it is not a good place to enter the market, either long or short. Wait for the market to rise to an extreme level above the mean (Sell 1 or 2) to sell or to fall to an extreme level below the mean (Buy 1 or 2) to buy into the market.

The market came down right into the weekly Sell 1 level of 2898. It completed this pattern down, and now it is trading slightly above that low. We are still in a watch mode unless it closes below 2898, which would be when a short trigger would be activated. In the meantime, it appears that the E-mini is in an area of distribution of supply. By trading below the daily mean of 2921, it activated the 2881 target, which is the daily Buy 1 level. It has completed the weekly target of the Sell 1 of 2898, which has now become support as the market trades above that. Closing below 2898 activates the mean weekly mean target of 2807.

Gold

The daily average price is $1719. The Buy 1 level is $1707. The Buy 2 is $1692. The Sell 1 is $1736 and the Sell 2 is $1747. It made a high of $1764 on April 23. The algorithm identified a short trigger from the Sell 1 of $1747, the target below was activated, which is the mean. The weekly average price is $1722. We are on the lookout. We are waiting for the price to activate the algorithm. If the price closes below the mean at the buy levels, then more sellers have come into the market. The market came down and made a low of $1707 and then went back up above the daily and weekly means. It then went down again and activated the Buy 2 level again of $1692. From that level, there is a 95% probability that we will find buyers at that level, which is shown in blown. It is 95% probable that the market will revert back up to the mean.

The market has traded since the 27th between the Buy 1 of $1707 - 1692 and the extreme above the mean, creating short triggers, such as last night. Then it came back down through the mean to the Buy 1 level. Within an hour the market fell about $20. We are beginning to see, regardless of any supply or manipulation that comes into the market, it comes right into the levels the VC PMI identified the Sunday night before on the weekly Marketplace reports.

Now we are beginning to see more buyers coming into the gold market, indicated by the VC PMI in blue at the $1692 level. It is a very good level to start buying the market. A buy signal has been activated in gold. Don’t overdo it. Manage your risk in terms of size and position. Be conservative until you learn how to use the VC PMI to guide your trading in relation to the market’s momentum.

Your protective level is based on your personal choice and financial situation. You can use a conservative stop. If the market, at any time, closes below $1692, get out. A second option for a stop is a catastrophe stop: use a maximum dollar risk which you are comfortable with to lose in the worst case. Do not use straight stops. They often get taken out. Floor brokers made a killing by pushing the market to stops, and then reverting right back to the mean.

The price is a result of supply and demand imbalances. When gold dropped down $20 within half an hour, it indicates that the paradigm has changed. Such a move would have been almost unique in the past; now they are almost routine. Therefore, you must adjust your risk and your size accordingly. Trading 10 contracts before is like trading 100 now given the volatility. If you are trading futures, make sure you follow our stop recommendations. If you only trade one contact, you have fewer options. We use ETFs to manage our risk and size, such as GDX and other gold indices and trusts. Unlike futures, such instruments allow you to manage risk more effectively. They do not have margin calls.

In gold, we are in an area that has been tested four times into the $1707 - 1692 levels the weekly Sell 1 of $1778. There are two targets in between, $1735 and $1747, which are the daily levels for today. These numbers are in play for the rest of today. At the Sell 1 level, it is a time to lock in profits.

Bearish Sentiment Persists

I am surprised by the overwhelming bear camp that appears to still be in the gold market. You have to understand the difference between the physical and paper markets. The two are separate. The paper market is the futures market and is based on contracts for 100 ounces of gold, supposedly. If you want to buy physical gold, you can use the futures market to enter a position, lock in a price, put down the deposit and get it delivered when the contract expires. That has been the normal delivery process for physical gold in using the futures markets to exercise for delivery. The physical gold market, however, has now completely separated itself from the paper market. There are a large number of open interest positions in gold, which are looking to take delivery of physical gold through the futures market. COMEX is in a jam because the number looking to take delivery are at record numbers, so they are scrambling to find the gold to meet their obligations. The rumor is out there, you can Google it, that the COMEX potentially could default on some of these gold futures contracts if they can’t find enough gold or can’t negotiate cash settlements. The problem is that everyone in the world wants to buy physical gold.

In a recent interview Terry Lynch, CEO of Chilean Metals Inc., stated the following: MontesDeOca asked about the manipulation in the metals markets since 2008. He asked Lynch how he has survived during this time of price suppression. “We have a lot of great assets in the company, but we haven’t done a lot to move them forward,” given the prices, Lynch said. He was about ready to leave the business in March last year. He started a campaign called Save Canadian Mining. It is very difficult for individual investors to make money. Most traders are overseas, selling short, and in many cases thousands of trades every day via artificial intelligence. They look for weak positions, which is easy to do in mining, and hammer down mining company stocks. Lynch hired a gold mine research authority to look into the structure of trading for mining shares. A tick test was that until 2012, if you wanted to short a stock it had to be going up, day over day. Therefore, people could not pile onto deals and push companies into oblivion. It then became a hole in the system. Lynch paid for some research on the Toronto mining stocks. If you looked at day 1 of October 2012, the market index was 100 and the currency index was 100. Now, in late February 2020, the commodity index is off about 7%. The stock index was off 65%. Historically, the stock price is usually somewhat over the commodity index. Now you have to triple every mining stock on average to get back to where it was. Lynch asked how any company could raise money with such a situation. “I am just a pissed off investor,” Lynch said.

Lynch spoke with Eric Sprott and other significant players and institutions, such as TXX, Ontario Prospectors, and mining associations wanting to reform the market.

QE To Infinity

The incredible amount of stimulus coming into the market is unprecedented. Just as the ripple effect of the coronavirus is just starting to hit the markets, we are just beginning to see the effect of this unprecedented stimulus hitting the markets. It had to be done, or we might risk a collapse or massive deflation in global assets leading to a major depression. Central bankers and the Treasury knew this, so they had to inject trillions into the economy, which they did. They had to provide liquidity. They have, however, leveraged the derivative markets to $2.2 quadrillion. If we don’t see any kind of economic recovery, it will be difficult in relation to the credit rating of US bonds. Greece, Cyprus and others had major problems when the lost the trust and faith of the government backing their bonds: interest rates exploded. Bond vigilantes demanded that because of the weak economy, that interest rates be raised to justify the risk that an investor would face by buying those bonds. I would hate to set that happen in the US. The worst thing that could happen here, with such massive balance sheets of debt, is for interest rates to rise much, if at all. A one or two percent interest rate rise would be catastrophic for the quadrillion in leverage that the Treasury is holding. Central bankers can no longer manipulate the price of gold. The world is looking to take delivery of physical gold, which is more than offsetting attempts to suppress the price of gold via the paper market. When hyperinflation hits, it will happen overnight. Be prepared.

Analyst’s Disclosure: I am/we are long GDX. 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.