Aditya Pattanaik <[email protected]>Just screen grab the graphs and post them if you don't mind. I'm inclined to agree with that thesis though.
Fri, Jul 15 at 12:54 PM
The note below by Sprott’s market strategist (Paul Wong) may be of interest if you hold investments in the Precious Metals equities segment.
I am also appending two charts here…on the Fed being stuck between a rock and a hard place. The inverted yield curve chart, over the last 40 years, has been strongly correlated with a near term pause in rate hikes ( within 50bps on the inversion ) and has been a reliable signal of an impending recession. The yield curve has inverted twice this year. The last time it was this negative was 2007. On the other hand, we have not seen inflation at these levels over the last 40 years and the Fed claims that it will continue to use its “tools” to fight inflation. The strong labor market, large corporate profit margins, corporate cash on hand stats etc. point to an economy that can tolerate further tightening. The credit markets paint a different picture.
The recent tightening of monetary conditions has resulted in a drawdown of the total market capitalization of US equity and fixed income markets by ~24 Trillion USD. The drawdown in 2008 (GFC) was ~9 Trillion USD.
From a market price action perspective, the last few weeks have been extraordinary.
From the June 8 high, BCOM (BBG Commodity Index) fell by -20% in less than 4 weeks, the sharpest 4-week drop since the GFC (credit system near-collapse) and March 2020 (oil went negative). For an equity reference, XME (Metals & Mining) fell by -40%, and XOP (O&G Expl & Prod) fell by -37% from June 8. In the past 4 weeks, there was no comparable economic or market calamity to explain this collapse from a fundamental point of view.
This price action was an example of all the challenging market conditions: enormous relative size of passive and quants vs active funds, the dominance of CTAs in trading flows, and dealer hedging flow, all amplified by algo technical buying/selling into one of the worst market depth conditions ever. It is hard to believe it could happen until you see it happen. This selling wave was a near-perfect storm of central bank policy, technical factors, flow dynamics, and poor trading liquidity. The latest leg of USD strength, driven by relative yield spreads and currency volatility, helped grease the slide.
Thematic positioning of inflation and rates re-pricing higher has branched out to recession as exemplified by EDZ2EDZ3 (Eurodollar futures spread) which is now pricing in three rate cuts sometime in 2023 (recession). The final catalyst was the terrible May CPI report, and copper is now tracking EDZ2EDZ3’s recession call. With breakeven yields also rolling over hard, the market has priced in a recession, accelerating fund outflows and market depth falling even further.
The CPI print on June 10 marked the beginning of 75 bps rate hikes and a sharp increase (or the final straw) in recession expectations. What followed was an intense mass liquidation event that I had not seen since 2008 and March 2020. These were some of the largest waves of selling (CTAs and others) into one of the poorest market depth conditions ever with eye-popping consequences. If anyone ever needs an example of selling into a vacuum, this would be a good one.
For gold, it was like being caught in an event horizon of a black hole. With near the entire market in outflow mode (equities, bonds, commodities, and even long volatility products), gold as a safe-haven asset did not matter in those few weeks. We had seen similar trading actions in 2008 and 2020 when liquidity conditions forced the selling of all assets. While the song may be different (cause of liquidity destruction), the dance is the same (sell everything). In other words, we are in the everything bear market (bad news), but the good news is that it usually does not last too long (the world tends to end). What is needed is for some liquidity to return so there can be a rotation to defensive or safe-haven (rotation vs puking). The Eurodollar futures spread is already pricing this liquidity return but at an unknown date in 2023. The EDZ market is $ trillions in size; it matters.
ST for gold, it is challenging to call except to say it is incredibly oversold. Below is a chart with my best guess, given what I see developing. The uptrend from 2018 is now busted. If the LT pattern is bullish, I still believe it is, there should be a consolidation A-B-C pattern. The issue for me is that C-leg looks too short in time; there should be some symmetry with the A-leg. The lower red dashed line is ~$1675 and sits nicely between the 50/38 Fibonacci lines. I will skip the other technical indicators as they are all very oversold.
Gold equities are even more oversold. Below is a chart of GDX as a reference. There is a major support level at ~$25.75 and an opening gap at $26.25, which GDX filled last week and moved higher. GDX is also at the bottom extension of the blue down-channel.
Here are some Sentiment Indicators that have proven helpful in the past, but I underscore again to the state of illiquidity. They are at hold your nose and buy readings that can work as long as instant gratification is not a criterion.
This graph below is one of my favorite types of indicator; the positioning wipe-out. The old trader adage that lows are made when the last seller has been exhausted (and not when it is cheap) is very close to happening.
I see the same dynamics building now as in prior cycles before a significant move higher for gold bullion, but the timing is far more complicated. As much as CTAs and the types have pounded gold and other resources/commodities lower, they can just as quickly flip and push everything higher under the right conditions.