by Chris Vermeulen of The Technical Traders
The recent movement in the precious metals markets, an incredible 33% upside price move since August 2018, has reflected an increased level of fear and greed throughout the global markets. Particularly, throughout the foreign markets. Precious metals, specifically Gold, has skyrocketed to some of the highest levels in recent times as foreign currencies devalue against the US Dollar. Still, consumers, institutions and central governments/banks are buying as much as they can right now.
12 MONTH CAPITAL SHIFT SEEN IN CURRENCIES
As we have been suggesting over the past 12+ months, a capital shift continues to play out in the global markets where capital is actively seeking the best, most secure locations for investment and we believe that will result in strength in mature global economies. Take a look at this chart of various foreign currencies to understand how this capital shift process is really playing out across the globe. Be sure to opt-in to our Free Trade Ideas Newsletter.Japan, Canada, Switzerland are all experiencing moderate price weakness against the US Dollar – yet these mature economies are fairing better than many others. The relationship between the EUR and the GPB appears to be relatively stable as both currencies have dramatically weakened over the past 16+ months – almost in perfect alignment. Comparatively, the other currencies within this display have experienced dramatic price weakness over the past 4+ years in relationship to the US Dollar and their associated PAIR currencies.
GOLD PRICE COMPARISON IN OTHER CURRENCIES
The recent upside price move in precious metals exasperates the issue of localized consumption/acquisition of Gold/Silver as pricing pressures continue to push local pricing higher and higher. We are still very early in the bullish price cycle for precious metals. As increased fear and greed enter the markets over the next 15+ months, we believe the scramble to acquire physical metals and market positions will continue to increase even further.These Gold Price Comparison charts, below, show just how dramatic the upward price move has been for foreign investors in local currencies. In US Dollar terms, Gold has risen just over 33% (approx: $350 USD). In Canadian Dollar terms, it has risen 30% over the past year (approx: $475 CAD). In Australian Dollar terms, it has risen just over 34% (approx: $590 AUD). In Chinese Yuan terms, it has risen just over 36% (approx: $$2,965 CNY). In Indian Rupee terms, it has risen just over 29% (approx: $2,545 INR). The reality is that precious metals have gotten very expensive for foreign investors in local currencies – and this is just starting to the metals rally.
The primary reason for this is the continued capital shift that has been taking place over the past 2 to 4+ years. As the global markets entered a period where commodity prices started collapsing (2014 in Oil), the global markets started shifting away from emerging markets and risky assets/investments. The hunt for more secure investment sources was on.
When Oil bottomed in early 2016, a reprieve in investor sentiment settled into the markets where expansion into more risky assets took place. All of this changed with the top formation in the US stock market in early 2018 and the downside price rotation in Oil in October 2018. Now, as precious metals start to rally and clearly illustrate that fear and greed are entering the markets, the continued hunt for secure, mature economic environments continue at a record pace.
We started off this article by attempting to highlight how shifting currency valuations have played a very big role in precious metals pricing and how these currency shifts may ultimately result in various risk factors going forward with regards to market volatility.
Simply put, currency pricing pressures are likely to isolate many foreign markets from investment activities as consumers, institutions and central governments may need more capital to support localized economies and policies while precious metals continue to get more and more expensive.
One of the primary reasons for this shift in the markets is the strength of the US Dollar and the US Stock Market (as well as the strength in other mature economies). The capital shift that began to take place in 2013-2014 was a shift away from risk and towards safer, more mature economic sources. This shift continues today – in an even more heightened environment. The volatility we are seeing in the US and foreign markets is related to this shift taking place as well as the currency valuation changes that continue to rattle the global markets.
US DOLLAR INDEX WEEKLY CHART
It is our opinion that, at some point, the support levels in foreign markets may collapse while the US and major mature global economies become safe-havens for assets. When this happens, we’ll see the US Dollar rally even further which will push many foreign currencies into further despair. The overall strength of the US Dollar is being supported by this continued capital shift and the way that global assets are seeking safety and security. The same thing is happening in precious metals.We believe the current setup in the US markets is indicative of a breakout/breakdown FLAG/Pennant formation. We believe this current setup should prompt a very volatile price swing in the markets over the next 3 to 6+ months which may become the start of a broader event playing out in the foreign markets. How this relates to precious metals is simply – more fear, more greed, more uncertainty equals a very strong rally in precious metals over the next 12+ months.
DOW JONES INDEX CHART
This Dow Jones chart highlights what we believe is a very strong Resistance Channel that needs to be broken if the US stock market is going to attempt to push higher in the future. You can also see the BLUE lines we’ve drawn on this chart that sets up the FLAG/Pennant formation. Although price broke through the lows of the FLAG/Pennant formation, we still consider it valid because it confirms on other US major indexes. Should the Dow Jones fail to move above the previous price high, near early July 2019, then we believe the Resistance Channel will reject price near current levels and force it lower (filling a recent gap and targeting the $25,500 level or lower).CUSTOM VOLATILITY INDEX CHART
Our Custom Volatility Index chart shows a similar type of setup. Price weakness is evident near the upper channel level of this chart. This chart is very helpful for our research team because it puts price peaks and troughs into perspective within a “channeling-type” of rotating range. You can see that previous major price peaks have always settled above 16 or 17 on this chart. And previous major price bottoms have always settled below 7 or 8 on this chart. The current price volatility level is just above 13 – just entering the weakness zone in an uptrend. If price were to fail near this level, a move toward 8 would not be out of the question. We just have to watch and see how price reacts over the next few weeks to determine if these weakness channels will push price lower.GOLD MONTHLY CHART
If our research is correct, the entire move higher in precious metals, originating near the bottom in December 2015, is a complex wave formation setting up a WAVE 1 upside move. This complex wave formation is likely to consist of a total of 5 price waves (as you can see from the chart below) and will likely end with Gold trading well above the $2000 price level near or before June 2020.If this analysis is correct, we are about to enter a very big, volatile and potentially violent price move in the global markets that could rip your face off if you are not prepared.
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