Watchman Report Feb. 16, 2022 "Gold & Silver Update, God's Money!"

 

GOLD & SILVER UPDATE

GOLD & SILVER IS GOD’S MONEY

REMEMBER, IF YOU OWN PAPER GOLD OR SILVER YOU DO NOT OWN IT! BUY PHYSICAL GOLD & SILVER!

 

The bulls brushed off the FOMC related pull back in the last week of January, turned around, and started to penetrate the upper channel of a 1 year triangular formation, which usually just means a consolidation that could break either way. The break occurs when it makes either a higher high or a lower low, thereby ending the sequence of lower highs and higher lows.

Lots of fancy talk for a break out. The top shaded line around 1900 is where the gold price peaked out back in 2011-12. After breaking to new all time highs in August of 2020 the market began a correction that it now appears ready to end. But we still need to see an upturn in volume and a breakout through at least the old 2011 high before being sure.

Until then we have to view the upper shaded line as a line of resistance, probably the last line before reaching the $2100 high it made in 2020, but nevertheless, caution is warranted until we have seen more solid signals that the bull market in dollar denominated financial assets, and the dollar, is over. Technically we can see the US equity averages, the Dow and Nasdaq 100 here, having broken the last highest low in their sequences.

These sequences started after the early 2020 collapse in stocks, and technically appear to be ending for now, whether that means more topping first or not is difficult to say, but given how sharply bond yields are rising, it would be surprising to see such a one way 14 year old trade that is a child of zirp withstand the end of zirp.

The odds favor more downside in stocks. And to the extent that keeps the Fed from tightening as much as it needs to tighten (see last night’s newsletter for my latest Fed analysis), the bear market rally in the US dollar should surrender.

So far, after a brutal 45% decline in the US dollar from 2001-08 that pushed the gold price up from $285 to $1925 over the decade, the USD has taken 14 years to retrace only about half of a decline that took just six years. The next 6 will be fun too.

The foreign exchange value of the dollar has been topping for essentially 7 years now. It might not be a top, but I think it is. Technically the verdict is still out. It is a very neutral pattern. The 2011-15 rally ended with the 2017 plunge through the last highest low in that sequence, which would have been good enough to call a reversal if it wasn’t for the spike back up to the 104.5 high in early 2020. The subsequent fall in 2020 failed to break to a lower low. It was stopped by a bounce at the end of 2020 due to the strength of stocks relative to most commodities again in Q4. In any case, it looks to me like the US dollar index and the stock markets are topping out in the short to intermediate term trends, which should provide a tailwind for gold and silver.

The US dollar pretty much has reached its technical objective. We pegged the maximum potential upside in the dollar index at about 98, and it hit 97.5 after the Fed’s meeting. And it has been having trouble at this level. A drop through the 2018 low at around 88 on this index would set a bearish objective in the low 70’s.

It’s possible I’m wrong and both the dollar and stock market continue higher as inflation slows. Maybe this time the Fed will actually be right in a forecast. Even a stopped clock as they say. But if we see the currency breaking out to the upside I’ll revisit my fundamental analysis, which remains bearish (and yes I’ve rebuked the dollar short thesis and other bullish arguments over the years). For now, the technicals are confirming neither the bulls nor the bears on the likely future primary trend. They are only confirming the short term.

Over the next few years I’m looking for the US dollar index to drop by half into the 50’s in a drop similar to the one from 2001-08, and I am expecting to see the DJIA back at 15,000. Gold and silver should soar in such a situation as the central bank will have little choice but to fan the flames of inflation just to keep government tax revenues from collapsing. But for the moment, a return to the highs of 2019 are more than likely this year.

The gold move is in my opinion front running a downturn in stocks and the dollar, and a bear market in USD denominated financial assets more generally. But the media has tried to pin it on geopolitical tensions like those developing in the Ukraine. The risks to gold are mainly only in the short term as it struggles to break away from this triangle. Any talk from the Fed that confirms a steep rate hike trajectory or is very hawkish is bound to shore up the dollar and pound gold. But it will pound share markets too unless it is coordinated on a day when there happens to be good economic or earnings news. On the other hand, any sign that inflation pressures are continuing and the Fed is not manning up to crush it, will cause bonds and the dollar to slip.

Both of those are ultimately good for gold. It remains to be seen how much resolve the Fed has but our money is on: not very much. I’m eager to see this hypothesis tested. As the markets wake up to the fact that you already know, i.e., that the Fed is behind the curve, gold bulls have got an edge. If I am right about the US dollar I will be right about gold. And if I’m right about these two, we should start to see gold at $2100 soon.

At that point we expect to see the dollar bouncing along the low 90’s, bond yields up at 3%, and the Dow down by at least 20-25%. That should result in gains of around 50% on most of the blue chip gold miners.

But beware, the current breakout may be premature. But don’t let that stop you from buying. In fact, if you are underweight you should put more weight on the breakout. I’m only cautioning that it lacks confirmation.

The only reason for my caution is I don’t yet know for sure that the Fed is going to chicken out on tightening.

It will eventually abandon it. I am convinced. But right now it may want to reassure bondholders.

That means look out below for stocks. Whether that translates into a weaker dollar depends on how the Fed then deals with the stock fallout. That’s when we will see if gold wants to break out for real. I suspect it does.