- Interim Update 2nd December 2020
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The November-2020
Monthly Closing Prices
Today we will review monthly
charts for gold, the HUI, the S&P500 Index (SPX), the Dollar Index and
copper, starting with gold. Note that this section was written at the end
of the month, that is, after the close of trading on Monday 30th November.
It therefore doesn't mention the downside breakout in the Dollar Index and
the upward reversals in related markets that occurred on Tuesday. The
market action subsequent to Monday 30th November is covered later in
today's report.
Gold's correction continued in November and isn't
complete, although it should end soon.
Since the start of the
correction we mentioned several times that a test of or an intra-month
spike below the 8-month MA (the black line on the following chart) could
happen as part of a normal correction. Also, in our previous monthly chart
review we wrote: "If there is going to be a test of the 8-month MA it
probably will happen this month (November-2020) as part of a
correction-ending plunge."
As illustrated below, the US$ gold
price didn't just test or spike below its 8-month MA during November; it
ended the month well below this MA. This is more weakness than we
bargained on, but it is consistent with the way the fundamental backdrop
has evolved over the past few months and is expected to look during the
bulk of next year's first half.
The break below the 8-month MA is
potentially important, but it doesn't imply that there will be a large
extension of the recent price decline. On the contrary, it suggests that
the gold price is stretched to the downside and probably will rebound for
1-2 months regardless of the gold-bearish shift in the fundamentals.
Regarding the gold mining sector, over the past few months we have
been anticipating a test by the HUI of important lateral support near 286
(the 2016 high). A month ago we wrote that there was a decent chance of
the support being tested in November.
The following chart shows
that the support was tested and marginally breached during November. We
won't be surprised if the short-term decline extends to the 250s or even a
little lower, but in response to a rebound in the gold price we expect
that the HUI will be back in the 300s by January-2021.
At the time of our previous review of monthly charts the US stock
market, as represented by the S&P500 Index (SPX), had just completed a
2-month decline from around 3600 to around 3200. This was our assessment:
"Over the coming 1-2 months there is the potential for a sizable
move to the downside AND the potential for a sizable move to the upside,
with the direction dependent upon the election outcome and COVID-19
lockdown/vaccine/treatment news. We don't have a strong opinion about the
market's likely short-term performance, but our big picture view remains
the same as it has been for several months. It is that the March-2020 low
will not be tested over the remainder of this year or during the first
half of next year, but that it will be tested in parallel with another
recession during 2022."
In response to reduced US political
uncertainty and good news regarding COVID-19 vaccines, we got the "sizable
move to the upside" alternative. As illustrated below, the SPX recouped
its September-October loss and achieved a new monthly closing high in
November.
When the market is this strong this late in the year,
the short-term upward trend normally extends into the early part of the
New Year. That's certainly possible this time around, although our 1980
Model warns that there could be a significant correction in December.
In any case, our big picture view is unchanged. The next major decline
probably won't begin before mid-2021.
November was an outside-down month for the Dollar Index, meaning a
month in which the DX closed lower after trading above the high and below
the low of the preceding month. This adds to the evidence that the DX's
rebound ended about 1.5 points shy of the minimum target we had in mind.
An extension of the rebound to 96-98 can't be ruled out, yet, but the
most likely scenario is that the DX's cyclical decline has resumed.
Immediately below the following monthly chart of the DX is a monthly
chart of the US$ copper price. We've done this to highlight the effect
that intermediate-term currency-market trends have on the commodity
markets. To be more specific, putting the copper chart below the DX chart
makes it clear that the big trends in the copper price generally are
inverse to the big trends in the US$. For example, the DX trended upward
from a January-2018 low to a spectacular spike high in March-2020 and has
since trended downward, while the copper price trended downward from a
January-2018 high to a spectacular spike low in March-2020 and has since
trended upward. An implication is that the ream of copper supply-demand
research that gets produced every year is largely pointless.
After
almost hitting a 10-year low in March, the US$ copper price is now at a
7-year high. Needless to say, the copper market is 'overbought' and
vulnerable to some corrective activity. However, we expect that the
overall upward trend will extend well into next year in response to US$
weakness.
Monetary
Inflation Roundup
There were no significant
changes on the monetary inflation front during October (the latest month
for which we have complete money-supply data). Instead, monetary inflation
rates generally stabilised at very high levels. For example, the first of
the following monthly charts shows that the G2 (US plus eurozone) monetary
inflation rate was 25% at the end of October, meaning that it essentially
has gone sideways over the past four months. The second chart shows that
Australia's monetary inflation rate has flatlined in the 26%-27% range
over the past four months. Of course, stability at such high levels does
not constitute genuine stability.
The bad effects of this monetary
inflation will be seen over the next few years. Some of these effects will
be obvious, such as large increases in commodity prices and the average
person's cost of living. Other effects won't be so obvious. For example,
the malinvestment that the flood of new money will incentivise.
China continues to stand out from the crowd by virtue of NOT having a
stratospheric monetary inflation rate. The following chart shows that the
annual rate of growth of China's M1 money supply has risen over the past
several months but remains much closer to a major low than a major high.
This could enable China's economy to perform relatively well over the next
few years.
The Stock Market
COVID Waves
The number of COVID cases reported in most countries will be very
inaccurate, for two reasons. First, the number will be greatly increased
by the fact that the tests generate a lot of false positives. At the same
time, the number will be greatly decreased by the fact that many people
who contract the virus will experience no symptoms and never get tested.
However, the numbers of deaths and hospitalisations should provide
accurate indications of the health-related toll of the virus. Based on the
number of deaths or the number of hospitalisations, most countries clearly
have experienced two separate pandemic waves regardless of whether or not
they implemented widespread lockdowns. In general, the countries that have
been most successful (least affected by COVID-19) are the ones that are
geographically isolated. The best examples we know of are Australia, New
Zealand and Taiwan.
In the US there actually have been three
distinct COVID-19 waves. This is illustrated by the following chart of the
number of people hospitalised with COVID-19 in the US. Importantly, the
third wave is still rising.
The stock market is looking beyond the increasing number of COVID
hospitalisations and deaths. The assumption is that due to the
availability of vaccines and effective therapeutic drugs, within a few
months the pandemic and the associated government dictates will no longer
be an economic impediment. The stock market also is discounting the deluge
of central-bank-supported government spending that is coming down the
pike.
As we have written previously, we think that the market is
right to discount strong nominal economic growth in H1-2021. However, the
next two months could be dicey, especially if the upward trend in
hospitalisations persists and starts to wreak havoc with the healthcare
system. This factors into our view that the short-term risk is high, but a
major multi-quarter stock market decline probably won't begin within the
next six months.
Current Market Situation
The following daily charts show that the SPX made new all-time highs on
each of the past two trading days and that the NDX is testing its
early-September all-time high.
There are no signs of weakness at
this time, just risk associated with the combination of stretched upward
momentum, a sky-high level of general optimism and the worsening pandemic.
Gold and the Dollar
Gold
At
the end of last week, the most likely short-term scenario was that gold
was close to a multi-month low in US$ terms and already at a multi-month
low in A$ terms. With Tuesday's downside breakout in the Dollar Index (DX)
and assuming that the breakout is confirmed by the DX ending this week
below 91.75, the most likely scenario became even more likely.
Regarding gold's short-term prospects and with reference to the following
daily chart, note that former support near US$1850 is now resistance. A
routine countertrend bounce would end at or below this resistance, so be
aware that a downward reversal from the $1840s or $1850s could be followed
by a decline that ends in a test of or a spike below the 30th November
low. If that were to happen it would create the optimum opportunity to buy
for a short-term trade, because the chance of a sustained decline below
the 30th November low is small. In other words, if the US$ gold price
didn't make a multi-month bottom on Monday of this week there's a good
chance it will do so via a quick downward spike later this month.
Keep in mind that the overall economic/financial environment continues
to evolve in a way that favours industrial commodities over gold.
Therefore, while gold could work well for a trade in the short-term, it
should not be the primary focus of most investors. In our opinion, the
relative-strength trends of the past 6 months, for example, strength in
the industrial metals relative to gold, will continue for at least another
6 months. An implication is that equity investors should be more concerned
about buying pullbacks in copper, zinc, nickel, oil, natural gas, lithium
and REE stocks than buying gold stocks.
Silver
We wrote about US$23.00 being a virtual precipice for silver, but the
price action of the past week indicates that the virtual precipice
actually is at US$22.00 (roughly the September intra-day low).
The
silver price rebounded after hitting US$22.00 on Monday 30th November. At
this stage the rebound has taken the price up to the 20-day and 50-day
MAs.
We don't think that silver's short-term risk/reward currently
favours new buying. The reason is that although the probability of a
plunge to US$19 or lower has shrunk, there is still a realistic chance
that this will happen prior to a sustainable low being set. At the same
time, there is resistance at around US$26.00 that could act as a ceiling
over the next few weeks.
Gold Stocks
In the latest Weekly Update, we
wrote:
"For the first time in several months, the gold mining
sector's short-term risk/reward is now skewed towards reward. There is
still a distinct possibility that the HUI will plunge to support at
250-260 before a sustainable low is in place, but traders could mitigate
this risk by averaging into positions over the next couple of weeks."
A plunge to 250-260 can't be ruled out yet, but the idea that anyone
interested in adding exposure to gold-mining stocks should be averaging-in
remains applicable.
The Currency Market
In the latest Weekly
Update, we wrote:
"Our view is that the DX will breach support
at 91.7-92.0, the only question is when. It could happen immediately, or
it could happen following a minor 1-2 week bounce, or it could happen
after a 1-2 month rebound to 96-98. The second of these possibilities (a
1-2 week bounce and then a decline to a new multi-year low) is the most
likely, but it is prudent to be hedged against the third possibility."
For all intents and purposes the breach of support happened
immediately (it happened one trading day later).
Breaks below
obvious support levels that happen when the market in question is already
'oversold' have a high probability of being negated within the ensuing
week or so. However, the probability of this Tuesday's downside breakout
being negated in the near future will be greatly diminished if the DX ends
this week below 91.75.
Regardless of whether or not Tuesday's downside breakout is confirmed
by this week's close, the probability that the DX's cyclical decline has
resumed is very high. This means that there is no longer a realistic
chance of a short-term rebound to the 96-98 range.
The next
important support level for the DX is defined by the January-2018 low near
88.0. We expect that this support will be tested within the next three
months.
Updates on Stock Selections
Notes: To review the complete list of current TSI stock selections, logon at
http://www.speculative-investor.com/new/market_logon.asp
and then click on "Stock Selections" in the menu. When at the Stock
Selections page, click on a stock's symbol to bring-up an archive of
our comments on the stock in question.
Chart Sources
Charts appearing in today's commentary
are courtesy of:
https://stockcharts.com/
