The Next Semi Upturn and Thoughts on Gold

Excerpted below is the Opening Notes segment from this week’s Notes From the Rabbit Hole, NFTRH 555. The report followed up this opening with extensive coverage and strategy for US and global markets, internals/indicators, commodities,  precious metals (including weekly charts of the miners for a wider view this week) and much more. As usual plenty of stock charts were covered as well for a comprehensive report bringing us completely up to speed on today’s markets.

The Next Semi Upturn and Thoughts on Gold

The precious metals have ramped higher and that is entirely in line with the favored backdrop for such a move. The inflationists have been banished, US manufacturing is wobbling and now about 1.5 years after we got our initial negative signals from the Semi sector (as we charted the top and failure of equipment makers AMAT and LRCX vs. the broad Semi sector) the masses are finally being treated to the view that all is not well with the economy (ref. a paltry +75K jobs created in May and coming Fed rate cuts).

I know that a fair number of NFTRH subscribers are my fellow gold/honest money advocates. But just as Alice fell down the rabbit hole and had to adjust her view of reality accordingly, Notes From the Rabbit Hole will continue to adjust and move forward based on what we see, not what we want to see or think we know.

What I see is an industry (Semi) that is the earliest of cycle indicators now in the tank as memory gluts and order push-outs have put major slack in the supply chain. But I also see these. Thing 1 is a chart I’d buy all day as a bottom feeder if it were a nominal stock chart. Thing 2 has firmly trended up since the stock market began to correct in October.

Dial back to January of 2013. As a gold bug wishing for the gold bear market to be a quickie (as opposed to the maxi event it has been) it gave me displeasure to call the Semi cycle we saw being born before our very eyes. That birth directly followed the angst of the US Congressional “Fiscal Cliff” hysteria that cleaned out the cyclical markets, sentiment-wise the preceding December. A sentiment clearing event followed directly by a cyclical ‘UP’ signal was exactly what the counter-cyclical gold sector did not need.

The rest my friends, is history. You can tell who the gold sector promoters are because they kept on promoting (and NFTRH even lost multiple subscribers to those who were willing to continue waving pompoms projecting bullish outcomes).

So let me tell you a couple things here, up front, before the gold bull hysterics kick in as they always do.

  1. We gauged the coming of the latest precious metals rally with an emphasis on the miners’ under valuation vs. gold and vs. the fundamentals that matter. Fundamentals in hand, we now transition to a more technical analysis based management style after the “launch”, as noted in a recent update.
  2. The trade war will be worked through, Trump will either be re-elected (based on positive economics) or kicked out (based on failure). But unless the world is ending, which it isn’t, the Semi cycle will rise again one day. Hopefully that will be far enough out on the horizon to give a nice, trade-able rally or mini bull in the gold sector. But we will have none of this… sorry, I could not resist.

So forward we move, using TA and keeping tabs on the fundamentals so that our inner cheerleader may have her day, but also know when it will be time for caution, hopefully a good, long while from now.

While some aspects of SEMI seem to wave pompoms of their own with respect to Semi sector advocacy, the author of this article (Walt Custer) has seemed to have the most realistic handle on the Semi cycle from what I have seen.

Timing of Next Upturn? A Forecast

Emphasis mine…

“Global electronic equipment shipments were up 2.2% in April 2019 versus April 2018, but down 1.6% sequentially versus March 2019 (Chart 1). Seasonality provided an early spring rebound but year-over-year growth was minimal.

Based on a combination of actual and estimated first quarter company financial results, world electronic equipment sales were up only 0.5% in 1Q 2019 versus 1Q 2018 (Chart 2). End market growth had clearly weakened (Chart 3).”

“Electronic industry business cycles (corrected for seasonality) have historically been strong and often disruptive. The recent 2017/2018 industry growth spurt is now behind us. 2019 started out on weak footing and appears to be headed towards further contraction.

Not all sectors of the global electronic supply chain are affected equally in a business cycle.

The semiconductor sectors (chips and semiconductor capital equipment) experienced amplified growth in the last upturn but are also seeing strong contraction in this current downturn (red circle on Chart 4).

Semiconductor industry currency-denominated sales have been negatively impacted not only by weaker end market demand but also lower memory chip pricing, corrections to inflated prior ordering and efforts to reduce inventories.”

A Forecast: Semiconductor shipments have been historically volatile and their current growth rates are negative (3/12<1) in all regions (Chart 5).”

“When will industry growth resume? Chart 6 compares the global growth of semiconductors and semiconductor capital equipment. Both chip and SEMI equipment 3/12 growth curves continue to deteriorate – but they appear to be nearing bottom. However, after reaching bottom, real growth will not resume until the 3/12 rates again exceed 1.0.”

As a very rough estimate these 3/12s will cross 1.0 again in late 2019 or early 2020 – and then real growth will resume. There will be regional differences. This timing is a global estimate – with regional difference likely.”

In other words, the cycle is due to bottom at around the time that my industry contact advised (amid current Armageddon-like conditions for the supply chain) and around the time that we are looking for the stock market correction – assuming it continues – to provide a big buying opportunity. That would also project a time of danger for gold and the precious metals complex.

We’ll update along the way as incoming information confirms or likely, alters this view to minor or major degree.

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