“Whip inflation now”…

That was the saying in the 1970s. Paul Volcker’s Fed then locked itself in a death struggle with inflation by raising interest rates as high as necessary to finally defeat it and provide Sir Alan Greenspan, the Maestro, a wellspring of monetary goodwill with which to begin creating the toxic mess we have today. Bravo sir!

Today we are looking for a pivot sooner, rather than later as I don’t think this system, waterlogged with debt leveraged liquidity (debt creation has factored heavily in to the equation) can handle a fraction of the stern policy employed by Volcker. A potential pivot point resides at the 4% level on the 30yr Treasury bond yield (chart below). The US dollar is in blow off mode, bonds are in capitulation mode and importantly, commodities are breaking down, as led by gold and the precious metals complex for 2+ years now.

By “pivot”, I don’t mean a change in Fed policy. That will come when it comes and very likely it will come after enough aspects of the financial markets and the economy have broken. The tardy, backward looking Fed has one blunt tool in its box, and that is ‘something breaks’. Silly Fed. Fighting all those (year over year) CPI releases to date and likely, several yet to come that will signal significantly higher than 2% rates of inflation. The Fed is not watching inflation trends, it is watching and reacting to inflation rates at any given (backward looking) point as relates to their 2% ‘mandate’.

The poisoning of Volcker’s disinflationary wellspring has been systematic over the decades of policy that I call ‘Inflation onDemand’.

Greenspan birthed it, Bernanke put it on steroids with new and innovative methods of creating inflation through bond manipulation, Yellen carried on but also oversaw the end of Bernanke’s 7 year ZIRP (zero percent interest rate policy) before heeding the bond market and finally lifting the Fed Funds rate in 2015.

Then came Jerome Powell, who, compared to those previous Fed heads is a regular Captain Bligh, subject to a mutiny by the bond market and following its instructions. The real Bligh was sent away by the mutineers in a life boat. Today, financial market participants are looking for a life boat and with stocks, commodities, ‘safe haven’ bonds and even the safe haven gold all dropping, it appears we are in the final act of the coming macro pivot from debt instigated inflationary cycle, to deflationary/disinflationary counter-cyclical.

I continue to believe that inflation is already whipped on the intermediate-term (longer-term one interpretation of the chart below is that a new era of inflation may have begun). Bonds and their reliable follower, the Fed, just don’t know it yet. And they’re going to make damn sure of it because as often repeated, the Fed will not incinerate itself in an inflationary blaze. The very mechanics of its inflationary operations have for decades, right back through Greenspan, depended on a Continuum of declining interest rates and hence, inflation signals.

It’s always a good time for my favorite long-term tool…

Let’s again stress how something has changed, by definition of this chart’s long-term trends. The now green moving average backbone used to be red. It used to be a resistance level and now, while anything is possible, including a real deflationary resolution, what worked so well (as resistance) when the yield was looking up should also be watched (for support) when it is looking down.

It’s just a guess, but I think it’s an educated one. That is that the USD is blowing off to the upside amid a rush to liquidity. With that I think that Treasury yields are also blowing off, right along with the inflation hysteria that was manufactured in 2020.

What’s Up With the Gold/Silver Ratio (GSR)?

We have noted the recent divergence by the Gold/Silver ratio to the bullish US dollar. But the GSR is still intact on this weekly chart, while Uncle Buck is flipping its lid to the upside.

A lower low to the summer lows in GSR would break it down and likely signal a coming end to USD’s liquidity bid. But the GSR has not broken down. In fact, on a daily chart it has not even tested its up-trending SMA 200. So the two riders of liquidity Apocalypse are still in the saddle.

With animal spirits in play for USD and Treasury yields it does appear that a blow off is in process. If GSR regains its footing the blow off could continue. If not, it would continue to be a sign that the precious metals are readying to lead the way out of the darkness, probably after a final capitulation.

At the risk of not being a card carrying contrarian, which I tend to see myself as, I’ll just continue to have patience with the process. Last week silver gave us some hints, per in-week updates. Then on Friday it got zapped below the daily SMA 50 and its ratio to gold painted a bearish engulfing candle (FWIW).

Precious Metals

Of course, as noted last week gold could easily put on a $100/oz. in a day, given the developing macro. But at this time that would be just hopeful guesswork. Was Friday a head fake? Maybe. Should we bet on that? No way. I hold gold for long long long-term value, but I’ll speculate upon gold (via the miners) when I see a clearer path toward it. The clearest path is of course a crash and final capitulation, as per Q4 2008.

Here again is the weekly chart of gold (futures) showing the next support levels at 1560 and 1518 (the latter corresponding with a 62% Fib pullback level). Gold is just above the 50% Fib level, but there is little in the way of meaningful support there.

Beyond that, the double top pattern measures way down to the next clear support area near 1300. In that area resides the 78% Fib retrace level. That would also represent a test of the bull market, which as noted in 2019 was signaled by gold’s take-out of what we called ‘the bull gateway’ at 1378.

The idea, in my view, is to be in a position where such an event would be considered a gift from the market gods, not a thing to be afraid of. Fear should be reserved for the broad market herds that are opening increasingly negative investment statements from their financial advisers/managers every month or quarter. The other idea is to be open to a more bullish short-term event that would have to come out of left field (because it sure would not be coming from the charts). That is why I was watching the Silver/Gold ratio so closely. If it were to continue its positive divergence we’d be open to its bullish message. If not, well, we wouldn’t. Not yet.

A daily chart of silver shows the crack at the SMA 50 (blue). FOMC week shenanigans by the algos, pumpy silver bugs or both had silver looking like it was about to break upward from a bull flag that had used the SMA 50 as support. Here is the picture as the week ended.

Silver is still well above important long-term support (weekly chart) but also in a downtrend. That is why taking out the SMA 50 on the chart above would be so important. That would be the first step (of several) to eventually breaking the downtrend. As of last week’s close, the price is below that marker and hope for a bullish resolution is not in the charts, even if it manifests out of left field.

Using HUI’s monthly chart to get a big picture view of what is in play, let’s remember that we are simply asking Huey to make a higher low to 2018, or preferably to 2020. Those levels are noted on the chart.

Also noted is monthly RSI having dropped to an oversold level below 40 that is similar to the 2018 low, which was the resolution to the much needed correction that followed the first impulsive leg up in 2016 (a leg that saw its prefered counter-cyclical fundamentals erode quickly).

So today here we are, with HUI in year 3 of a correction due to the most recent cyclical inflation phase. The macro is shifting to counter-cyclical (thank you hawking Fed) and when ‘something breaks’ the fundamentals, now in progress, should start to really gain traction as gold out-performs cyclical and inflation sensitive assets. But if I am having patience with gold, I am surely having it with the miners as well.

That said, the chart above is bullish on a risk/reward basis, even if anticipating a drop to support at 150 +/-. As a side note, let’s also keep in mind the minor bullish caveat that HUI did hit our short-term daily chart pattern target of 178 (original Aug. 29th update w/ pattern/support targeting here) last week and it can also be considered to be at valid support right now.

Miners/Royalties on My Watch List

  • MAI.V/MAIFF currently held and on watch for increase.
  • AEM
  • AGI
  • SILV
  • SSRM
  • HL
  • GOLD
  • NEM
  • FNV
  • RGLD
  • WPM
  • [edit] added ORLA to the list per Fred Lacy

And maybe some others on opportunity. The next rally in gold stocks – fueled by 2+ years of downside – is very likely to be powerful. The risk/reward equation continues to be positive, even if ‘risk’ is still what is in play right now as the active force.

It is time to be greedy. Not necessarily greedy in action but for greed in thought and anticipation. With respect to the potential downsides in gold and the miners (I am still open to silver having possibly already bottomed) I think we are in the final innings of the correction in the sector that should bottom first or among the first. A counter-cyclical macro backdrop is engaging and for all the reasons noted repeatedly (and not harped on again here) that is the best environment for a gold mining fundamental view.

Stock Markets

The daily charts of SPX and other US indexes painted little daily chart hammer candles on Friday. That may give stock bulls small hope for next week, but turning to the weekly chart the technical picture is not good at all. At least not until support is found that provides the platform for a real recovery.

SPX has the 50% Fib retrace level at 3500 and the 62% Fib at 3200. For safety’s sake, I’d make the assumption that 3200 +/-  is the best target prior to any thoughts of a real rally or even bear market end point.

Meanwhile, if the target of 3200 on SPX is a good one, there would be appreciable additional downside in stocks and trading favors that downside. In other words, in a bull market you’d like to buy pullbacks within uptrends. In bear markets you’d like to sell rallies within downtrends.

As such, I shorted TSLA and XLY last week per this update (after covering a short on SPY due to concern about the potential for an FOMC week contrarian play that never materialized). Here is the chart from the update, showing the current situation. As you can see, TSLA’s SMA 200 is just starting to turn down while its SMA 50 is actually trending down despite the recent lift. A bounce within a downtrend. XLY is very similar as it is well below its SMA 200 (not shown) and trending down.

I’ll never be a stock shorting wise guy. But in a bear market you take what they give you (in this case select shorting, but primarily cash paying increasing income). That would also eventually include gold and the miners with time being the issue as the macro transitions.

Global stock Markets

Global is in a similar boat. As with SPX above, let’s look at weekly charts to gain the wider angle view.

The Global index is in a cyclical bear market that should hold at or just above 400 in order to avoid a terrible – as in life altering for many one way investors – breakdown.

Europe currency hedged ETF looks for all the world like it’s ‘gap fill or bust’. Let us not yet talk of the gap lower than that from spring 2020. A disgusting chart pattern with plenty of support (that had better hold).

German DAX is cracking support now with its sights set on 11500.

Canada’s TSX is also in breakdown mode from a topping formation.

A public post showed the poor standing of the TSX-V. So does this chart.

Australia is rolling over with support around 6500 and more below 6000. Another bear market.

Japanese Nikkei has been relatively bullish, but the preferred buy area – if applicable – begins at 2400.

Monthly Nikkei shows the well intact breakout from a long – and I mean LONG – base that measures to 3600. This is a chart we reviewed years ago and it’s still in play. Old man time. Boy does he move slowly.

India is in what some pattern dorks call a Megaphone, which is something of a reverse Symmetrical Triangle. If a Sym-Tri is bullish the nerds say, the reverse of it is bearish. Well, whatever. I have no interest in this relatively strong market at this time. Support is noted at around 52000 and 4000. Hmm, this might actually work as a short. That would be pending more research on India (market, policy, currency, etc.).

China large caps have been annihilated again after an ill fated bounce to resistance at 35. While not visible on this chart, FXI is at long-term support. That support is represented by previous lows and is not inspiring.

Asia (ex-Japan) is disgusting. When the US dollar tops out we’d watch Asia/EM for signs of out performance some bullish day out in the future.

EM ETF is very similar, since they share some of the same components. The US dollar is really hurting EM due to its dollar denominated debt. On that subject, I have not had a moment to review the EM bonds fund, TEI, but will try to do so soon.

Last week it was harpoon city for the UK fund, EWU. A gap is yawning at 24. Terrible.

Sweden has been in a pure cyclical bear market all year and a hold above 1000 will be critical to avoid a terrible breakdown.

Commodities (daily charts)

Personally, with URNM finally pried out of my grip on Friday I have no commodity related exposure. Indeed, I have no exposure to anything other than one gold miner (MAI.V), a lot of interest bearing cash and a couple shorts.

But let’s run down a few key commodities in light of the shifting macro. Remember that gold must start to out-perform commodities in general and oil in particular for a bullish macro view on gold mining.

So let’s start off with the Oil/Gold ratio and view a still intact fundamental improvement for gold miners. WTI/Au is on the verge of a nasty breakdown after it failed to get back above the moving averages.

Considering how bad gold has been nominally, oil is in trouble if it can’t beat that performance.

CRB index cracked a new correction low on Friday. Inflationist commodity super cyclers can blame the Fed all they want, but this is reality. Commodities and the wider inflation trades are breaking down even if inflation expectations are still intact (but also vulnerable).

Gas continues to be vulnerable as it breaks down from the ugly pattern we noted previously. Sure, it could just be a test of the uptrending SMA 200, but I’d have some patience before testing that out. It’s a market that seems set on breaking everything and that includes areas with supposedly bullish global supply/demand fundamentals.

Copper is no good. No good at all. Nor are its miners.

Palladium had been relatively firm as it grapples to try to hold the SMA 50.

Platinum got positive to the degree that it took out resistance and turned MACD positive. Then… this. Utter failure. Tough racket these commodity rotations. The trend is down. The trend is the driver of everything unless you’re day trading (i.e. gambling in hyper alert fashion on a daily basis).

The Uranium ETF broke down and shook me out. I was holding it for the gap fill but other areas of the U market started taking out the August low so I said bye bye for now. Again, the market seems to want to wreck everything. Don’t blame the Fed. They left plenty of breadcrumbs, beginning with Powell’s April jawbone while I was in the air on this rare thing called a vacation with my wife. I didn’t blame him then and I don’t now. That’s not an adult way to manage the markets [brain dump aside brought to you by someone who abhors dogma and excuse making].

The Ags are relatively okay, but the monthly view per this post showing a bear flag creeping up the underside of a broken trend line was all I need to say adios and stop fooling around with any of this stuff for now.

Market Sentiment

Unsurprisingly, market sentiment is contrary bullish pretty much across the board. Stocks, precious metals and bonds while apparently the commodity bulls are still trying to rally the troops (because everybody knows it’s inflation as far as the eye can see, after all) as all of that stuff bows to the Fed’s policy and/or the surging US dollar. From Sentimentrader:

As for other indicators…

  • Investors Intelligence: very contrary bullish
  • AAII: very contrary bullish
  • NAAIM: very contrary bullish

And so on and so forth.

So there is sentiment basis for expecting a broad market rally. But sentiment is not a timer. It is a condition. That condition is in place for asset markets to rip higher in a bear market rally at least. But it’s the technicals vs. sentiment and sentiment could easily wait for logical support levels (e.g. SPX 3200).

Here is an interesting look at CESI from Where in 2021 we were observing the stock market flying around too high with respect to surprised economists, today the market is in tank mode well below the CESI. Turnabout is fair play I suppose, but it is another indicator not at all standing in the way whenever the market decides to look for a reason to rally.

Portfolios & Final Thoughts

Very simply I hold MAIFF/MAI.V as my lone long position. If the market so instructs, I’ll add to that, possibly aggressively. That could include gold stocks and/or select broad stocks/markets. But it is not likely to include commodities, which appear to have at least as much downside as anything now, if not more.

Meanwhile, the trends are bearish across the board (outside of USD and bond yields) and I do believe I’d be open to more ‘trading with the trend’, i.e. shorting. Short positions are TSLA and XLY. With a sentiment profile like this and knowing my own market psych makeup, I’ll evaluate daily/weekly before adding more short positions, although CRB tracker DBC looks like a candidate. Also, as noted in the report above, I’d love to find a fundamental rationale for shorting India and then find the right vehicle.

Who says you can’t have a little fun in a bear market? Collecting income is good, but trading the swings can be a viable pastime (speaking personally, of course) while waiting out the shifting macro and upcoming resolution.

Meanwhile, the default position continues to be cash, now paying another .75% thanks to the hawking Fed.

2 thoughts on “NFTRH 724

  1. I don’t know about the other subscribers, but I consider this report as a well deserved victory lap.

    1. Funny, I don’t feel victorious in any way right now. Hopefully if the rest of this plays out as expected that will change. ;-)

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