Weekly Wrap

Wishing you a Happy New Year!

Market Commentary

With the US dollar in full flow, even the mainstream media is now recognising the reality that is deflation. I have been warning of this for many months – and forecasting a rapidly rising dollar, just when sentiment was hugely bearish. It is now in the opposite polarity with bullish percentages at records.

Just today, AEP in the Telegraph spells out the dire eurozone position where sovereign bond yields plumb record low depths – with German yields actually negative (you are paying them to hold your euros!). Of course, with the tsunamis of liquidity hosed into the debt and other asset markets by central banks, it had to go somewhere. That is why we are seeing all the pretty bubbles in the air.

Of course, the signal that low yields is flashing is this: an impending deflationary collapse. In terms of the amount of money and credit in the system, that is now falling and explains why we are seeing declining consumer prices.

Actually, the ECB are damned if they do and damned if they don’t do QE. The overwhelming market expectation is that Draghi will announce a scheme – but as we all know, when a particular view is embraced by everyone, it rarely plays out as expected. The odds do favour a QE sooner rather than later, but it will be seen as a damp squib, not the big bazooka everyone expects.

The knee-jerk market reaction – more QE = higher asset prices – which has been so effective in inflating the bubbles will have reached its limit of absurdity.

My view is that any QE announcement will result in a final spike low in the euro (to perhaps the 1.20 area) but then a short squeeze of mammoth dimensions will engulf the market that will take everyone’s breath away.

We are on the nine-year support line and now the weekly chart shows a very large positive momentum divergence. If maintained, the end is nigh and the sort squeeze will be on.

One other salient point: the move off the 2014 high at 1.40 is a clear five down:

I shall be preparing to trade from the long side when I see a clear reversal signal.

GOLD

I am long from $1152 but action over the past couple of weeks – until yesterday – has been disappointing as all decent rallies have been squished. But its performance is not too surprising in view of the chronic weak crude oil and general commodity sector.

But note yesterday’s action where it moved down to test the $1165 area – a new recent low – but them screamed higher on guess what? Short covering. So, in spite of the negative influence of low interest rates, record stock markets and plunging crude oil, copper markets, gold is holding up well.

Sentiment is heavily skewed on the short side and even hedge funds increased their short bets last week by 10% (cftc.gov data).

The intriguing question is this: if crude oil can catch a bid and stocks retreat, how will the money flow into gold/silver? My guess is this: very fast indeed.