Safe Havens

April 17, 2016

Imagine as a paying passenger standing on the poop deck of one of the old sailing ships and you hear the Captain say to the mate: “Look at the barometer”, it is now falling faster than I have ever seen it before; there must be a terrible storm on the way. Worse than we have ever experienced.” After a very stressful lunch, when you return to where the Captain is standing and ask him what the barometer now says, he answers with, “Barometer? It is steady and all is fine. No storm warning; look the sky is clear.”

Many observers must have a similar feeling after Yellen had called an emergency meeting at very short notice…and she had spoken with Obama and Biden, also at extremely short notice. There were other Fed meetings and rumours of very senior people practically queuing at the WH entrance. But the only press releases were as nonsensical as the above fictional response by the Captain. Two possibilities now exist: one is that there really is nothing to get concerned about; the other is that everything possible is being done to prevent a market panic in an election year. It will be just too devastating if the situation is not managed. 

Should someone make a book on the two possibilities, on which outcome would you place your bet? As it happens though, there is a book being made; you can bet on the outcome. The book is being made by the market; perhaps the global market. If it seems that the storm will blow over with little damage, you can purchase calls on the DJIA on the premise that it will break 18000 in this election year and continue much higher. Or invest in the US 10-uear Treasury Note, believing that with NIRP or ZIRP in place, yields will continue to new lows to reflect the ongoing benign stewardship over the US economy by the US Federal Reserve.

Alternatively, if you believe that the coming storm, if it should be as destructive as the behaviour of the authorities seem to indicate, cannot be averted, then you can bet on that assumption by retreating from conventional investments to seek out the safer havens of hard assets and precious metals. ERGO, Storm insurance!  

It is widely known that some perceptive people saw the 2007/8 crisis coming well in advance.  They made billions of profits for their funds based on their foresight, when a large majority of economists and market watchers still saw fair weather ahead, all the way beyond the horizon. It would really be a surprise if the same is not true of the present; that there are some perceptive people who are aware of the extent of possible damage by the storm bearing down and are doing what they can to take out the best insurance they can find – and have been doing so for some time.

A look at the first three months of the year could reveal the tracks of such people if they are in fact taking precautions to firstly escape from the effects of the coming storm…and secondly to profit from it. Four significant trends stand out: the precious metals, gold and silver, started 2016 in bull mode and the effort to at least contain the surge in their prices, as has been a leitmotif the past 5 years, meant that open interest on the CME now approaches record levels. Secondly, the DJIA started 2016 in bear mode, which lasted until it became clear that something had to be done or the outcome of the election would be determined well before the time to vote. That the DJIA is again approaching 18000 is not a normal market reaction, but a form of rigging the votes. Then there is the amazingly weak US dollar index. The dollar is not so weak all round, and has held steady against the euro, but it was slaughtered by the Japanese yen.

Now why would the US dollar, currency of the global economic powerhouse, suffer so badly against the currency of the deeply troubled Japan where money is printed in even greater abundance than in the US? Obviously, if the yen is a safe haven in what some people anticipate to happen, but the euro is not and the DJIA is not and the precious metals are also a destination for funds flight, these offer clues to what kind of storm is being anticipated: its path will run through the US and Europe and it is thought to cause devastation among their equities and currencies.

The origin of the storm is unlikely to lie in the international arena; while there are a number of potential major problems ‘out there’, the apparent lead time of the flight to safety discounts that kind of problem. The problem must be of a financial nature, as the involvement of the Fed also hints. Fingers have pointed at Deutsche Bank as a trigger for a much larger conflagration. However, better if I leave speculation to the experts, as well as the question whether it is possible for the US and/or Europe to avert or at least contain the damage that would result from such a storm. 

Euro-Dollar

Euro-dollar, last = $1.1284 (www.investing.com)

The euro’s steep recovery off strong support at the bottom of channel KL ($1.1021) has topped out, but the trend in bull channel JK ($1.1572) is still intact. A euro rally has to break clear above line K to be confirmed, after which there is new resistance at lines C($1.1764) and P ($1.1771) with which to contend. The euro was strong against the dollar for much of 2016, but acted in fits and starts; it recently lagged the performance of the yen by a wide margin. It is clear that if there is a flight to safety, the euro is not viewed as a particularly safe destination. 

Dow Jones Industrial Average (DJIA)

The steep and remarkable levitation on Wall Street, following a reversal off 15660 at the support at line L, broke above resistance at line P (17638), top of the current bear channel. The break higher at first failed to hold, breaking just back below line P, but the bull trend then resumed. The move higher is now challenging resistance at line A (17913).

Last week it was thought the Fed panic and uncertainty would extend the bearish break back below line P, but the bull trend easily resumed. Such a counter-intuitive reaction adds support for the assumption that the Wall Street rally is artificial as a means to inspire confidence in the economy. On the other hand, the steep decline earlier in 2016 supports the theme of a flight to safety out of dollar assets, in line with the scenario sketched in the introduction.   

Dow Jones Industrial Index, last = 17897 (money.cnn.com)

Gold PM fix - Dollars

Severe pressure on the price of gold since before the April options expiration and FND has lasted into April, with mixed successes. It is clear the price of gold has to be kept low to prevent owners of open April contracts to take actual delivery rather than to take a cash settlement – if the contracts are in the money. This suppression comes at a cost of an increase in short positions, which seems likely to be a major liability if gold resumes its bull market after the end of April. The fact that this cost – unless there is a very successful bear raid to come that causes the longs to close their losing positions – gets taken on by the Cartel, is a sign of how important it is to keep gold in the basement.

If the speculation in the introduction is correct, the bears now have to contend with much more than the normal bullish speculators – there is heavy money involved in the flight to safety, out of currencies; which could be the reason why the gold price of gold has been bullish during 2016 and also proved to be so resilient during the past week. After rebounding lower off resistance at line C, it looked as if support at line L ($1233) would give way under relentless selling, yet it managed to hold just along line L in a steady recover, to close right at line L on Friday. The prices in the Trends table are the values of the trend lines on Monday, 18th April. What happens to gold this week, with delivery still a factor to prompt more selling, but presumably with strong safe haven demand in support, should provide interesting clues to what is going on behind the scenes and which way the future may unfold.  

Gold price – London PM fix, last = $1227.10 (www.kitco.com)

Gold PM fix - Euro

While the euro gained against the dollar for some weeks, the dollar price of gold did not enjoy the same success, but remained static at first and then declined steeply into option expiration. This resulted in a break below bull channel KL ($1104) and it looked as if the price could fall further. However, when euro lost ground against the dollar again, while the gold price also improved against a stronger during the past week, this combined action boosted the euro price of gold enough to recover back into bull channel KL, but then just failed to hold the break. 

It seems unlikely that the authorities can maintain silence about the reason for the rumoured helter-skelter through the Oval office for another week without risking a growing panic, first among market players and then also along main Street. What it will prove to be is not known, but speculation is rife and some of it on fringe sites is extreme. These sites are the only ones seemingly disregarding the need or request to avoid such speculation about what is happening with the Fed; their readership is likely to be mostly from Main Street and easily inflamed into a state of concern. 

Euro gold price – PM fix in Euro, last = €1093.8 (www.kitco.com)

Silver Daily Fix Chart

For quite some time after their initial surge higher early in 2016, the price of silver lagged the price of gold. Last week this changed as the roles were reversed. Gold yielded more to the sustained selling than silver, which started a new surge higher – perhaps becoming the greater favourite as a safe haven, because of the sustained flood of commentary stating that the gold-silver ratio will revert closer to the mean and thus that silver will outperform gold during the next phase of the bull market.

The silver open interest on the CME is near an all time high. If a long held suspicion that silver presents the greater problem for the shorts is true, what is happening at the moment must be a cause for their real concern. Resistance at lines D ($16.74) and R ($16.86) that seemed out of reach not so long ago, is now reachable within 2-3 good days for silver. A break higher would be most significant and indicative of very strong demand overcoming the continuing waterfall attacks.   

Silver daily fix, last = $16.17 (www.kitco.com)

U.S. 10-year Treasury Note

2016 started off with a strong rally in the bond market that carried the yield of the US 10-year Treasury note lower to a close below bear channel VW (1.857%). The rally reached  at 1.70% and then reversed higher, back above new market support at line K(1.725%), for a bearish bias again.

At first glance a strong rally in the market for the US 10-year Treasury note might seem to contradict the theme in the introduction – that there is a strong move out of US assets. However, keep in mind that Treasuries have long been he preferred safe haven for US investors in particular. The rally perhaps could be a typical knee jerk reaction that lasted for the first part of 2016, but might be tapering off. It is to be expected that any further weakness in the bond market would now trigger semi- official support for the market, similar to the DJIA and for the same reason.

U.S. 10-year Treasury Note, last = 1.754%   (www.investing.com)

West Texas Intermediate crude. Daily close

WTI crude – Daily close, last = $40.42 (Investing.com)

After breaking, below line K ($36.88), the WTI price of crude held at support of the bottom of bull channel VW ($37.68) and then broke back above line K. News that reserves in storage at Cushing had declined was seen as bullish, but this might be a parochial view that disregards the global picture.

News from OPEC and others is that production in many oil-production countries has been pushed to maximum – partly to raise as much revenue as possible, and partly to have a large volume to take into a successful agreement on a production freeze. At the same time, Iran tries to recapture market share by lowering prices while also claiming that a freeze at this point in time would discriminate against Iran, which is still working hard to increase output.

$40/bbl seems like a psychological level that at the moment has the bulls and bears locking horns and teeth or nails. With demand expected to weaken along with what is happening in the global economy, $40 in time might prove to be a price too high.    

©2016  daan joubert,   Rights Reserved      

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China has only 2% of its Total Foreign Reserves in gold.