As the USD began to break out of its two year range, it became clear that gold may experience a much needed pullback. Speculative excesses and inflows were out of hand and gold needed to shake the gamblers out. I have written about the coming pullback that could take gold deep into the $1100s a lot in this blog's short life. The dollar's rampage higher combined with a giant sentiment shift post election has given gold investors a wonderful opportunity that will solidify in the next month. The dollar's bull run is not over thanks to structural and fundamental tailwinds, but its current boost from 'Trump miracle' sentiment will die - allowing gold to withstand the dollar bull with much more resilience, and perhaps advance in tandem. The dollar may have just entered a pullback after tapping a key Fibonacci level which lines up well with gold's technicals, positioning, and sentiment.
The market's euphoria over Trump's coming economic miracle has created a great opportunity for gold investors. When viewing the market through an Austrian framework, one can see that the US economy will not go from a artificial "boom" caused by artificially low rates, credit expansion, and malinvestment - to a hot economy with real productive growth, without pain. There is always pain on the back end of a Fed induced bubble and this bubble will experience its fair share. We are late in the credit cycle with much higher debt, much lower rates, and much more systemic risk as the complexity inside the financial system has grown substantially. This all suggests a very painful bust and a need for even more radical intervention. This cycle's intervention may include fiscal stimulus, QE to buy bonds of all types (perhaps equities), and a form of eurodollar QE to provide extreme swaps to relieve dollar pressures on other markets.
The market is pricing in the US economy moving from struggling bubble economy with the headwinds I just outlined, to a sustainable, 3% plus growing economy, with zero pain and the "good" inflation. With rising rates, high govermenment and corporate debt levels leveraged to ZIRP, deteriorating demographics, falling productivity, falling velocity of money, and falling monetary heroin - Trumpflation's headstone will read as low as 2016-2017.
To be clear buying gold right now for a long term investor will be a great buy in my view, but I will illustrate where I see the a potential bottom area and why gold is ready to turn around in the next month.
Here are the reasons I am growing very bullish:
Hedge Funds Selling
CoT Shaking Out Gamblers
GLD Outflows (over $3 billion net since the election)
Physical Demand (charts from ZH)
So....Where to Buy?
I have long written about $1135 as my floor for price in this move and the closer to that level I can buy the happier I will be. I identified two levels as illustrated in my zoomed in chart above, but as a long term gold investor, I drew out the zone to cover the entire area because I am happy to buy anywhere in this zone. As you can see on the continuous chart above, price kissed the zone and advanced this week. I would expect price to possibly try the zone again, and perhaps reach the $1135 area if the "Trumpflation" theme keeps its legs for a bit longer.
Bottom line: The idiocracy-markets post election are giving you an opportunity to buy an asset with a stronger fundamental case than it had at $1375, or $1875 for that matter - on sale. We desperately needed to shake the rotten fruit out of the tree and we are almost finished purging the weak hands, so this month will be time to buy.
While many have attributed the recent selloff in the dollar to the US election, the fact is the selloff was without question technical in its nature. The election surely could have played a role but the DXY hit a supply level and sold off. The dollar is now back into a bullish zone that runs from about 97 down to just below 96 and should catch a bid in the area and head back to near 100. If the election risks are overstated, this will be a great buying opportunity based on the charts. With that said if the election ends without a clear winner and a candidate conceding, the risks to the dollar could cause an issue, although election risks being bullish or bearish is not clear to me. This is why I trust the charts and control risk more than the news. I expect a nice move up out of this zone.
One of the reasons I am so bullish on USD/CAD is the coming issues that the Canadian housing bubble will cause. This is not the fundamental reason I see the CAD falling but it is another force multiplier in the trade. It may live on for many years and I do not think the crash will rival America's despite the bubble being larger, but this will put pressure on Canada that should lead to currency issues due to fiscal and monetary firefighting. Check out the great article, full of great charts HERE.
On the chart above, I have mapped out two small, short term demand zones worth buying (on top of each other depicted as green squares within the lines drawn). These are day trading levels and not position trades. Also I have my previous supply zone drawn out where gold sold off today. To show why I had that zone drawn out I inserted a picture of the formation on a 60 minute chart and the zone is depicted as a red square. The previous resistance at 1274 could also provide short term support.
Overall on a longer term basis the ability of gold to hold steady and even climb in the face of the dollar ripping higher is very impressive. Between that resilience and the spec longs pulling back while the commercial shorts also pull back, we are looking at levels that could possibly become a nice base for the next leg upward. I expected lower levels before the upward momentum gained steam and still think new lows could be made, but I have to respect the resilience since the big shakeout at the beginning of the month.
This is an update to last week's article with the foundation of the thesis for being long USD/CAD below. I will update with the 60 min, daily, and weekly charts each week and my thoughts on what has changed. The charts look like the uptrend I am expecting could take a breather here for a bit at the top of the recent channel and at resistance from late September of 2015. This does coincide with the dollar hitting some supply and needing a bit of a shakeout after a very impressive run. With that said, the OPEC Charlie Brown football game may be unwinding for the moment, allowing WTI to re-price at a more realistic level considering the dollar run and the oil supply issues globally. The chart below is a tactical look at what the upcoming trading looks like.
So what makes USD/CAD rising a good bet?
1. Room to maneuver - Unlike most of the developed world, Canada has not used QE, negative rates, or massive central bank balance sheet expansion, or the targeting of certain maturities etc. They have not fired many arrows from their quiver yet and look ready to start soon.
2. Housing bubble - The Canadians have a pretty epic housing bubble which threatens the currency if a recession bursts the bubble (in combo with the slowing of Chinese buying). It looks as though a recession could be imminent with some yield curve inversions and very poor economic data lately to include retail sales, real estate, and jobs.
3. Commodity exports - Canada made a lot of money exporting hard commodities to China in China's insane boom via historic credit expansion and building. As we know, this led to enormous overcapacity issues and a sizable commodity bubble. China is still flooring the credit peddle but they are getting less and less return thanks to debt levels being so high. So, the odds of a big rebound in commodity exports to China to help keep the currency high are very slim. In fact, if China hits the hard landing many expect, this could be a big headwind for Canada. Canadian central bankers decry export struggles in speeches as well as the level of CAD. I suspect they would love to boost exports with a lower loonie.
4. Strong dollar - I am firmly in the dollar bull camp so I see a natural move up in USD/CAD. There are a host of reasons to be bullish the greenback for the next couple of years, at least. Funding pressures and funding needs around the globe will work to keep the dollar high as demand for dollars grows. Short term policy divergence (Fed hiking or jawboning hikes while BOC cuts or even launches QE) will pressure the pair higher. The BOJ, BOE, and ECB all appear hell bent on pushing their currencies much lower. Not to mention the risk of EU members exiting and going back to their native currencies to promptly devalue. I see this risk as underappreciated over the next 5 years.
5. Oil - Oil continues to be in a historic global glut with no end in sight as global production stays much too high for current demand, much less demand in a recessionary environment it appears we are slowly walking into. Oil is the lifeblood of Canada and the price of the loonie. If oil struggles (it will in another large move up in the dollar), the loonie will suffer greatly.
If the dollar pushes above 100=104, Canadian real estate cracks, Canada enters recession, the BOC cuts rates and enters QE, the Fed raises rates, oil goes back to the 30s or even 20s, we are looking at an explosion in USD/CAD. If only a third of that happens the loonie is firmly in the 1.40s which would be a great return in the currency markets. This has the potential to become an explosive move and one that pays a positive carry to hold. The head of the BOC, Stephen Poloz has openly discussed NIRP, large scale asset purchases, funding for credit among tools he can use in the next crisis. Well that crisis may be knocking on his door soon. Besides, it is probably no fun sharing cocktails at Jackson Hole or Davos with no money printing war stories to tell your buddies. I have been holding a core position in spot forex and scaling in and out around technical levels, in addition to the core position. I also trade the futures contract on the loonie around the stronger technical levels to amplify returns. The risk/reward of this trade over the next year and probably longer, make it a trade to seriously consider. I will keep posting about this trade here and on twitter so keep an eye out. Happy trading.
Original article published on 10/21/2016 - USD/CAD 1.33331
CHARTS VIA QUANDL
Good news for the gold bulls is the spec longs have been reduced substantially and are almost back to late May levels. It was just after the May 24 COT report where longs bottomed, when gold made a big move up on June 3rd thanks to a poor jobs number. If spec longs can get beneath that level, I would feel much better about being more aggressive buying gold or mining shares. The most substantial headwind for gold in the shorter term looks to be the dollar which is on quite a tear and moved much higher today than I expected. It still looks to me like gold needs a bit more of a decline before substantial buying comes in. I will keep watching the price charts as well as the COT reports each week for clues. Open interest, commercial shorts, and spec longs are all close to revisiting late May's numbers and they may even get there next week. Looking forward to an exciting week ahead with all of the technical damage done to equities and bonds this week. Have a good weekend.
The dollar has started to weaken today which has helped the PMs. With that said, I think the DXY will possibly make another run into 98, pushing metals to new lows. Above on the daily chart I have my two buying zones which we have not reached yet. I do not love the first one because of the significant amount of time spent there in the past (yellow) but will buy it carefully. If gold were to fall all the way under $1150 I would buy aggressively.
Below is the hourly for gold and I outlined a zone that should push gold back down a little bit.
Below is the daily silver chart where I have drawn out a buy zone I love and will buy aggressively. As I outlined here, I expect silver to outperform gold and the ratio to break its uptrend. I will start buying here at $16.75 and keep scaling in expecting a move back to $19.
The dollar continues its march higher and is now finally about to meet some legitimate resistance in the zone drawn above. I expect the dollar to retreat from the zone in the 98 area before heading back up. This zone has been tested only one time and the move down was very strong (the wick in the zone is circled). I have been long the dollar against GBP, CAD, JPY, and EUR the last couple of weeks and will close those out or at least heavily reduce size after DXY gets above 98 and look to go long again around 97. In the equity space I will be looking at the charts for precious metals and miners to try and couple some good buy zones in metals with the DXY hitting 98. Commodities should get a decent bounce once the dollar hits this supply area overhead. I am a firm dollar bull but will like to trade around this little pullback I expect from this zone. Looks like we will see what happens here pretty soon. Stay tuned.
GOLD DECEMBER CONTRACT - GCZ16
My current target for buying gold is at $1,225 but this chart (December contract) has me a bit nervous. I love the way gold gapped up so strongly on June 3rd (jobs report Friday) but what makes me nervous is how worn out this zone is getting. As you can see from the daily chart, price has spent a lot of time in this area and it is easy to imagine gold getting through and heading back to prices last seen in early 2016 ($1135 for me). I always see a chart like this as a boxer who has taken 25 solid jabs. Sure he is still standing, but every jab makes the next punch more likely to take him down. It was easy to buy this level after you just confirmed gold is headed higher or on a 5% pullback; this time it will be on an ugly 10+% pullback. We may find less excited buyers here this time. I think the way to play this is to go long in this area expecting a bounce but keeping a stop just beneath this zone and moving it up if price bounces, in case it fizzles and heads back lower. If we move out of this zone and I make money and get stopped out before a retest, I will not go long here again. The dollar is in the driver's seat right now for gold and everything else, which I covered here, and it just got more interesting.
The dollar blasted above its 200 day this week and blew through and closed above the trend line I have, looking very bullish. On Friday however, as you can see, the $DXY closed red just beneath that trend line. This makes for a very important upcoming week for the dollar. I still believe we will move higher, up past the 98 level, and with that we will see gold move into the June lows if not down to February.
BONUS CHART: SILVER DECEMBER CONTRACT - SIZ16
Silver looks much more attractive at its June 3rd area. I will buy at $16.75 anticipating a bounce out of the zone I have drawn out. Silver has a great base between a couple rallies and this zone was not jabbed to death like gold. Seeing a much stronger zone for support for silver than gold leads me to an obvious conclusion: the gold to silver ratio is about to break down. As you can see below, the gold to silver ratio has been in a steady uptrend in a well-behaved channel. I expect this trend line to break and the ratio to fall from the 70s to at least the mid 60s.
GOLD TO SILVER RATIO - 10 YEAR CHART
Looks like the dollar just broke a key trend-line and may be about to take off. It is doubtful that the dollar makes a meaningful move back down until it gets above the 98 level. I expect it to run into trouble between 98.15 and 98.58 (shaded in red). The dollar has closed above its 200 day moving average every day this week and closed above the trend-line that goes back to last year. This should continue to put pressure on metals and may even begin to pressure crude oil when investors come to grips with the fact that the OPEC "deal" is meaningless and the supply glut is alive and well.