Weekly update for week ending 2-24-17

It’s now been several weeks since I’ve given an update. And a lot has happened in the meantime.

The dollar has practically fallen off a cliff. It was worth 0.8411 mAU the last time I gave an update (two weeks ago) but is now only worth 0.7986 mAU. That’s a fall of 425 pips. A huge drop for just two weeks of time.

The media is giving a lot of different explanations for this fall in the dollar (which they call a “rally in gold”). One explanation is that it is caused by dovish statements coming out of the Fed. Another is that it is because of uncertainty about the Trump Administration’s policies.

However, what the media doesn’t seem to be recognizing is that there are very few speculative traders buying gold right now. As proof, look at this chart of the CoT report. Speculators are only net long by about 100,000 contracts and commercials are only net short by about the same amount. This is about 1/3 less open positions than we had in the middle of last year. So speculators are not buying and commercials are not succeeding at convincing them to buy. This means that the current rally is not driven by “paper gold”.

So why in the world would anyone care if the Fed is being “dovish”? Why would the current buyers be worried about interest-rate increases? They’re not holding an open position that will expire and have to be rolled over. They’re buying the actual physical metal. And since the inflation rate of 2.5% is well above the interest-rate of 0.5%, there’s not even an “opportunity cost” to buying gold instead of holding cash. Another quarter-point increase in March wouldn’t change that…so it’s irrelevant.

And about that Trump uncertainty. ETFs aren’t buying much gold these days either. The World Gold Council’s latest data on ETF holdings shows that they’ve only increased by 1% since the start of the year. So it’s not people with stock-brokerage accounts that are buying gold…which means this rally can’t be driven by fears that the stock market is going to tank.

So who is selling dollars for gold? And why are they doing it?

The most likely explanations are:

  1. Central banks (probably Russia, China, or both) because they have a long-term plan to accumulate gold and diversify out of the U.S. Dollar.
  2. Chinese investors buying through the SGE and holding it in vaults because they want to retire on it some day.
  3. Retail coin buyers who are stacking gold in their houses because they want to retire on it someday.

All three of these groups tend to buy more gold when it’s cheap and less when it’s expensive. So when people wonder “why are so many people buying gold”, the answer is simple: because the price is too frickin low!

Or, to be more precise, the basis is too low. Futures speculators are refusing to buy even though they could make a nice profit with very little risk by doing so. As a result, commercials are not willing to build inventory since they can’t hedge the price. This is causing a chronic shortage of gold in the spot market…pushing the price up higher and higher.

So let’s take a look at a chart for the dollar and see what can be done about this.

RSI is well below 50, almost into oversold territory. MACD is well below zero and falling. The price has now gone below both the 100 and 200-day EMAs. But the EMAs have not yet crossed over.

If I had saved dollars and was waiting for an opportunity for them to go up again before I sell them for gold, I would seriously consider giving up right now. The chance for higher dollar prices (lower gold prices) has probably passed us by.

If I wanted to make a short-term, leveraged trade to short the dollar here, I’d want to look on this chart to get a better entry point.

The price has fallen well below the 10-day EMA. So ideally I’d want to wait for a pullback up to that line before entering the trade. But I’d really have to watch it closely because traders all over the world are going to be waiting for just that opportunity. It may be that the price never gets there. So I’d even consider entering early if the dollar rises (gold goes down) just a little.

So what about stocks? Are they falling too?

For U.S. stocks, the RSI is below 50. There’s been a MACD crossover, which would generally be a bullish sign. However, it appears that MACD is going to crossover again. So the original crossover could have been a fake out.

Regardless, it appears that the price is consolidating above the 1.850 oz./share level. If the 100 EMA was on here, we would see that it is slowly rising to meet the price. So I’m not seeing any clear sign that stocks are about to fall. They seem to be holding their own and trying to push up, at least for the moment.

But I’d want to wait at least until MACD gets a clear crossover and the 100-day EMA catches up to the price before buying.

And bonds?

I’ve included the 10, 21, and 100-day EMAs on here so that we can get both a short and long-term perspective.

From a long-term perspective, bonds have been trading in a range whose bottom is represented by the solid red line at the bottom of the chart. This line was broken once before in November but quickly reversed.

Now it is being broken again. But this time it’s starting to look serious.

There was a time that I expected bonds to mean revert back to the 100-day EMA. And of course they will do that eventually. But I now wouldn’t want to buy bonds until I see a clear sign of a short-term reversal, such as a crossover between the 10 and 21-day EMA, for example. Otherwise, I wouldn’t touch this right now.

Regardless, bonds are going to mean-revert at some point in time. So I’ll be watching this closely as it develops.

And miners?

Mining stocks are absolutely getting slaughtered…which is strange because until now, they had been outperforming gold since December. I can only assume that earnings for a lot of these companies must have been less than what investors were expecting. So now the price is pulling back to take into account the slower rate of earnings growth.

If we had gold stocks and had been watching this chart, we could have seen the ominous MACD crossover at around Feb. 12-13 and gotten out before it was too late. But still, we might not have caught it in time. Technical analysis is a great tool for understanding the markets, but it isn’t perfect. So unless you are buying physical gold, always use a stop-loss. Even gold-mining stocks are still technically stocks. And they can be just as volatile as Netflix or McDonalds or whatever.

Check back next week for another weekly update.