Jeff Cooper: Is Gold About to Shine?
“There are about three hundred economists in the world who are against gold, and they think that gold is a barbarous relic — and they may be right. Unfortunately, there are three billion inhabitants of the world who believe in gold. ”
-Janos Fekete
“The record of fiat currencies through history, 100%, is eventual failure. The record of gold for 5,000 years, 100%, is lack of failure.”
-Simon Mikhailovich
My process is technical and cyclical in nature so I can't explain the fundamental catalyst behind a market move.
But I'm not so sure there is an unequivocal cause and effect.
Accordingly, my trading philosophy is that speculation is observation, pure and experiential. Thinking isn't necessary and often just gets in the way.
As I often say, the news breaks with the cycles, not the other way around.
And we've had a lot of news that seems to be validating an array of cycles that are due to exert downside influence right here, right now.
Yesterday we wrote, “at the border of turmoil and order nothing rules; it is a kind of zombie zone.”
We went on to say that many markets are testing the perimeters and borders of significant trading ranges while completing parameters of multiple projections from cycles of diverse degrees.
When multiple asset classes and markets are at inflection points, the greater the chances of a high impact move across the board.
Such is the case currently with the SPX, the RUT, oil, bonds, the dollar, and gold.
Yesterday, we walked through the inflection points in the SPX and IWM.
Today we're going to look at the dollar and gold.
The vast majority of traders believe the dollar and gold are strongly inversely correlated.
In other words, when the dollar goes down, gold rallies, and vice versa.
However, the premise is that ALLEGED correlated markets only trade in tandem during extreme or momentum phases of the lead market.
For example, when the dollar is in a monthly trading range, chopping back and forth, the correlation to gold is nearly non-existent.
The important thing to be mindful of is that if the dollar is dropping to new monthly/yearly lows (or rising to new monthly/yearly highs), gold is much more likely (not always) to take notice and move with authority in the opposite direction.
But, even this is a facetious relationship at times because the dollar could be dropping on deflationary fears and a slowing US economy — weighing on metals as well.
Gold could rally as a monetary equivalent, i.e., fear of fiat (too much printing), or it could rise on inflation fears. Gold is thought to do down when debt is weighing on sentiment.
However, if there is fear about the quality of debt, then bond holders could demand higher yields. And the dollar could follow those yields higher while the same fear could drive gold higher.
My point is simple: not only that is it difficult to inextricably define a cause and effect relationship for one item, but connecting correlations among various items can often be a mug's game.
But people like reasons.
My trading thesis is to follow a market on its own technicals and structure, but when there is a powerful correlation between various asset classes, it means accelerated momentum may play out.
Consequently, with so many markets dovetailing with parallel pivots, the presumption is a some powerful moves are on the table.
Yesterday we sent a note to subscribers about the setup in GDXJ.
GDXJ rallied to recapture its 50 day line, offsetting Monday's down gap in the process. Now it is threatening to breakout of a 2 month triangle.
Follow-through indicates an attack by GDXJ of its overhead 200 day moving average.
Except for a Pinocchio over its 200 day this February, GDXJ hasn't been above its 200 day on a sustained basis since February 2016.
The February 2016 push over the 200 day saw GDXJ climb from 22 to 52.
So we saw a genuine breakout by GDXJ over its 200 day in February 2016 and a false move over the 200 day on the one year cycle in 2017.
Here in August 2017, GDXJ is 540 degrees from the solid February 2016 breakout and 180 degrees from the false breakout over the 200 day line.
If GDXJ vaults its 200 day, the Rule of Alternation should be on the table. In other words it should be successful and lead to a powerful advance.
How powerful?
Let's pull back the lens to look at a monthly GDXJ from the 2011 top.
Following a SIX month/180 degree Bear Trap (bullish) in late 2015, GDXJ exploded to breakout (in Feb 206) over a 3 year trendline.
Subsequently, GDXJ corrected to backtest the breakout point.
GDXJ has been in a tight 6 month consolidation.
The presumption is that be on the verge of a powerful 3rd wave advance on trade above the declining trendline connecting the 2011 top and the August 2016 top.
Notice the workout of the one year cycles from the December 2015/January 2016 low to the December 2016 /January 2017 low as well as the one year cycle from August 2016 to August 2017.
GDXJ should be on the cusp of big move and by the looks of the monthly chart, I would not want to be short.
Now let's go to the weekly US dollar:
The picture suggests a big move is coming for the dollar.
The gold bears assume that the dollar is going to explode out of a descending wedge from horizontal support.
However, arguably, it will fail and if so, it could waterfall below big picture triple bottoms on trade below 93.
Moreover, the T Rex in the ointment may be that the alleged inverse correlation (as offered above) between the dollar and gold does not play out — for whatever reason.
Let's take a look at a daily dollar.
The dollar has been in a persistent downtrend all year. It needs to eclipse 94 to see an attempt at a genuine rally and even if that occurs, the first test of the 50 day is likely to be rejected after such a well-defined downtrend.
Conclusion.
Gold is up $85 dollars in a month without a single day of GLD inflows (until just recently).
At the same time the senior mining index, GDX, has seen shorts soar 22%.
Gold is set to challenge the double tops at 1300 level, above which a strong run should be on the table.
If you like reasons, the current geopolitical events and confidence in the administration may have handcuffed the Fed; hence, the recent dovish comments from the them.
This may be the spark that ignites an upthrust in gold and the miners, a glimmer of which we saw yesterday.