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Clive Maund
originally publishedSunday, September 29, 2019
Whilst we are in complete agreement with Egon Von Greyerz ofGoldSwitzerland, about the
exceptionally positive mid and long-term outlook for gold and silver which
will soar as the monstrous global debt bubble implodes, there is the small
matter of what will happen to them when the debt junkies go “cold turkey” if
there is a sudden liquidity lockup, such as we have seen start to happen in
the repo market in recent weeks, requiring emergency intervention by the Fed.
If this happens and the Fed doesn’t immediately roll out QE4, or if it does
and the sticking plaster doesn’t hold, then markets could crash very fast, on
account of the huge margin leverage which will trigger wave after wave of
margin calls, and in this situation investors and speculators will be dumping
everything over the side indiscriminately, as in 2008 only this time much
worse, and just as gold and silver weren’t spared back then, they probably
won’t be this time either.
I say all this because the stockmarket is now set up to crash, with the
same kind of yield spread that we saw before markets caved in in 2000 and
2008, and also because gold now appears to be completing a potential
Head-and-Shoulders top with an extremely lopsided COT structure and the
Commercials heavily short.
We’ll start our roundup of the charts with a quick look at the updated
3-year chart for the S&P500 Index on which we see a potential massive
bullhorn top completing with the index laboring beneath a clear and important
line of resistance. A few days agowe took a good look at
the 3-year chart for the S&P500 indexon which we observed an
increasingly tight technical setup calling for a big move soon, but could not
make a decisive call because what happens depends on if and when the Fed does
QE4, and the chart reflects this ambiguity, which is why it could break in
either direction. As we have observed the less watched but important
S&P400 Mid-cap and Russell 2000 indices looks considerably worse.
Although the margin debt ratio has eased somewhat in recent weeks, margin
leverage is still historically at massive levels…
 
Click on chart to popup a larger, clearer version.
Chart courtesy ofadvisorperspectives.com
Since Thursday’s article was posted I have given further consideration to
the yield spread between long and short-dated Treasuries, which is at the
same sort of very low levels that prevailed in 2000 ahead of the dot.com
crash and in 2007 ahead of the 2008 crash. To assume that somehow it will be
different this time is viewed as foolhardy and dangerous – actually it is
different in that it is much worse now as debts are vastly higher. What this
means is that we may be in for a rates shock soon that will crash the
markets. You can see this with dramatic clarity on the 20-year chart for the
ratio of the yield between the 1-year and 20-year Treasuries shown below – it
looks like a very similar ratio and setup to what existed back in 2000 and
again in 2007. It’s much more serious this time round however due to the
enormous growth in debt and margin usage over the past 10 years - if or
rather when the wheel comes off this time round, it will quickly become a
much more dangerous and desperate situation because there is no buffer and no
fallback position. Rates are so low that they can scarcely be lowered and
debt is already at horrendous extremes. The only recourse will be money
printing on an unprecedented scale – QE4 – which this time is likely to crash
the dollar, choking off any funds that might otherwise be attracted from
overseas investors.
The impeachment of Trump, which is looking increasingly likely, is another
negative factor for the markets, because of the political paralysis it will
entail. The Deep State has been working to bring down Trump since even before
he swore the oath of office, and after their Russiagate hoax ended up on the
rocks, they have had to come up with another reason to get him thrown out. It
is a singular obsession of the wholly unprincipled Democratic party which
instead of working in a bipartisan manner for the good of the country fixates
on kicking Trump out of office. The Deep State’s message to the ordinary
citizen could not be clearer – “Vote for who you like, but WE decide who runs
the country.”
Thus, even though the Big Picture outlook for gold and silver could not be
better, we have to ask ourselves what will happen to them in the event of an
all-out broad-based market panic, exacerbated by wave after wave of big
margin calls, and we have to look at the latest charts for the sector and
COTs with this in mind.
An ugly development across the sector last week was the failure of the
rally of the past week or two, with a quite sharp reversal occurring at
resistance, and on the 6-month gold chart it now looks like it is completing
a Head-and-Shoulders top above a line of support at $1490, with the price
currently finding support at the rising 50-day moving average. If this
support level at about $1490 fails, then we could see a sudden and severe
decline, and such a drop would of course be most likely to occur against the
background of a plunging stockmarket.
Making a severe reaction by gold soon more likely is its latest COT chart,
which shows that the Commercials have an at least 1-year record short
position, and since they always come out on top in the end, this is clearly
not a good omen for the short to medium-term. We have been mindful of this in
the recent past, but with an awareness that positions could get even more
extreme, and they did.
Click on chart to popup a larger, clearer version.
Just how extreme are the COT / Hedgers charts for gold historically? On our
latest Hedgers chart we see that they are at their most extreme levels for at
least 30-years, and we can surmise from this that if we see a broad-based
market crash soon, then gold and silver will get taken down hard too, as in
2008, but with the difference that their subsequent recovery will be
extraordinarily sharp and strong, since it will likely be in response to QE
on a gigantic and unprecedented scale that will in due course result in
hyperinflation.
Click on chart to popup a larger, clearer version.
Chart courtesy of sentimentrader.com
To sum up, we now know where to draw our battle lines. As mentioned in the
updateMarket on the
Cusp, posted several days ago, the broad market may be shorted (general
stocks sold, with exception of some special situations, inverse ETFs and Puts
bought etc.) at current levels and especially on any approach to the Dome
boundary drawn on our S&P500 index chart, with positions being closed out
in the event of the market breaking clear above the upper boundary of the
bullhorn pattern.Note that an important difference now is that the
downside scenario is ascribed about a 60% probability.With respect
to the Precious Metals sector, there are several strategies. One is to stand
aside now, before the $1490 level fails because that will lead to a plunge,
or buy sufficient Puts to cancel out any losses on your holdings in the event
of a steep drop. Leveraged inverse ETFs are another way to insulate against
loss, but Puts are preferred because they always move as they should whereas
ETFs don’t.
The crucial point is to make sure that in the event of a PM sector rout
caused by a market crash, you are in position to move in and mop up the
incredible bargains that will abound at that time, because the subsequent
gains are likely to be incredible, and if you can leverage them even more by,
say, placing a percentage of your available funds into something like GLD
Calls, you are likely to make truly life changing gains in short order.
End of update.
Clive Maund
https://www.clivemaund.com
Posted at 8.45 pm EDT on 30th September 19.
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