Tuesday, 29 November 2016

Funny Caption 43: Bear Wants Honey

bear tries to get to champain bottle


"Cone here love, just a little peck. Alright, at least a bear hug..."

"C'mon man, sharing is caring."

"You had your turn, and now it's mine."

"Not now bear, I'm having a headache."

"Stop, or I'll call the circus!"

"Take your stinking paws off me, you damn dirty ape!"

"Hand it over. You WON'T find the answer in a bottle."

"No means no!"




Wednesday, 16 November 2016

Relationship Between the Gold and Bond Market

 Gold Price Rise in High or Low Inflation Environment 

We heard that gold is an inflation hedge. In other words, it's held by investors during high inflation environment to protect them from devaluation of the dollar.

Since the bond market is the single largest financial market in the world, what takes place in bond market will have consequences for other, small markets such as the equity or gold markets. I.e. money that's leaving the largest financial market - the bond market - will flow into other markets and push its prices higher, and vice versa.

Because the bond market is so big compare to gold market, its tiny flow from bond market can cause a flood in gold market. If the bond market is a big cap, then the stock market is a mid-cap and gold market is a small cap, and silver is a micro-cap stock. It doesn't take much money to drive the micro-cap stock to extreme highs and lows. The same can be said about the silver market.

This article explains why gold can rise in price in both period of high inflation (e.g. 1970s) as well as dis-inflation or low inflation or even deflation environment (like the one we faced in the 1st half of 2016 where gold price soared considerably).

The inflation rate needs to rise above the bond yields to get a positive carry trade. What is a positive carry? Or negative carry for that matter?

If somebody is holding a Ten-Year Treasury Note with yield of 1.5% (or $TNX = 1.5%) for a year, and the inflation of that year is 1.7%. This means that the bond holder is losing 0.2% for the year. Because while he makes 1.7% of return on the bond he holds, he actually loses out it to inflation as his money depreciates. He loses exactly 1.7% - 1.5% = 0.2%.

This is a negative carry for the bondholder as he loses 0.2% as he holds the bond for the year. This is a guarantee loss. Clearly a bad investment.

Another way of viewing carry is Real Yield.

Real Yield = 10 Year Treasury Note Yield ($TNX) - Inflation Rate.


So you can lose money too by holding 10 Year bond even when inflation is low or falling as in the case of the period from 2013 to 2016.

Interest rate chart (2006 - 2016)
Source: USInflationCalculator.com

If you look at the $TNX and gold charts below, $TNX has been fallen since the start of the year 2016 and bottoms on 6 July at 1.33%. At the same time, gold is rising from the start of year, and peaks at, guess what?, also on 6 July where $TNX bottoms.

The price of gold has been falling from the peak of 6 July, and $TNX has been rising since then. In other words, when $TNX rises, gold falls, and vice versa. This close relationship between these 2 markets aren't coincidental. Both gold and $TNX are seen as safe haven asset. They tend to both rise and fall together (in a negative correlation). Or that bond price and gold price rise and fall together in a positive correlation. When bond prices fall, gold prices tend to follow, as far as the market see them as safe haven plays.

Because they both are safe haven or risk-off plays, they tend to compete for investment money. Therefore when Real Yield is negative, it's therefore better to hold gold than $TNX, and vice versa. Because in a negative Real Yield environment, bond is a losing proposition. So gold is a better protection.

One year $TNX chart as of 16 Nov 2016
One year $TNX chart as of 16 Nov 2016


One year gold price chart as of 16 Nov 2016
One year gold price chart as of 16 Nov 2016

By now, it should be more than clear that if you flip the $TNX chart, you'll get the gold chart (with different labels, of course). Is that true? Are they mirror images of each other? Yes, but not quite. Close, but no cigar.

While the $TNX's top matches gold's bottoms, and vice versa, they're not symmetrical.

Look at the 2 tops of $TNX, they're almost at the same level. I.e. $TNX has gone back up to the start of January level. And yet, this is important, gold's November bottom is considerably higher than January bottom. In other words, gold has outperformed $TNX. More importantly, this is gold market saying that it's anticipating coming inflation, and pricing it in.

This seems to suggest that gold gives you a better returns than $TNX as a safe haven asset. At least it's seen in the 1st half of 2016). But i think this is true in general, It's true beyond this 6 months period.


You can have negative Real Yield when inflation is low or high. Similarly, you can have Real Yield negative when $TNX is low or high. But when $TNX is negative, there's very good chance that Real Yield would be negative, such as some bond yields in parts of the world (e.g. JGB or German Bund, etc).

If Real Yield is negative, gold will rise. If Real Yield is trending negative such as the 1st half of 2016, gold will trend positive. And when Real Yield is trending positive or less negative, such as the 2nd half of this year, gold will fall.


On 16 Nov (the last date on the charts), as inflation rate is 1.5%, but $TNX has spiked to 2.238%. Clearly, inflation rate is LOWER than $TNX. Real Yield becomes increasingly more positive, and so gold fell.

So even if $TNX continues to go up, say to 3% by next year, but if inflation rate goes up much higher from here, say 3.5+%, then gold will soar because of the negative Real Yield.



 The Fed's Golden Guarantee 

So how can i be sure that inflation rate is always HIGHER than TNX? Don't worry, the Fed will make sure of that. This is their policy. The operations of the economies of the world require this same policy. So an investment in gold is safe because of the Fed's (and all central banks') guarantee of behind the curve on inflation.




Tuesday, 15 November 2016

Gold Price and US Dollar Index (DXY) Triple Tops - Part 2

This is the follow-up (part 2) of the article that i published on 1st November, 2016. If you haven't read it, you can read it here.

Something quite dramatic, and unexpected had happened that i need to reevaluate the future's gold price movement. I think you know the big event that happened between then and now is the U.S. presidential election.

Just a quick recap (for those who refuse to read the previous part), i sketched out the few probable price movement of gold. In particular, i stated that Scenario 1 is the most probable one that would play out given my anticipated price actions in DXY.

Here's a chart that shows the 2 Scenarios. I expected Scenario 1, the most likely scenario as i stated before, would follow the price action of A → B → C, where A is price on the date i published the article on 1 November 2016.

Different scenarios for gold price action

The chart below shows how the price actually plays out since i published the article. C is where we're at today. While my 'forecast' isn't perfect, it isn't too far off where the prices of gold have traversed A → B → C. Although gold price only crossed the price at B briefly (at the election night). See how the price at B got stopped out cold at the downtrend resistance that i delved in great lengths in part 1 and part 2 of The Gold Market Final Technical Resistance.

Different scenarios for gold price action


Now that we're at C, where do we go from here? In part 1 of the is article, i said that if we're seeing a triple-top in DXY, in other words, if DXY tops out from here (includes a possibility of head fakes), US dollars will come down from here. And i said this is the most likely scenario.

When i entertained that possibility or most likely outcome of Scenario 1, i wrote under the assumption of a Clinton's presidential victory. Because if she had won, the projection of USD can be assumed that it will be no different from that of under Obama's.

Now that Trump had won, i'm not as confident to say that DXY would top out from here. It may still do, but i suspect it's now more likely that DXY could run up further than under a Clinton's presidency.

If the likelihood of DXY breaks out from the resistance level of 100 is higher, then Scenario 4 in the chart is now the more probable course of price action where gold would fall to the year's low of $1050.

In addition to the strong resistance of 100 in the DXY, there's also the strong resistance of the downtrend resistance line in TNX (10 Year treasury note yield curve). These 2 are closely correlated, or equivalent. If DXY crosses above 100, the downtrend resistance in the TNX will be broken out.

Yesterday - on 14 November 2016 - both of the prices of the DXY and TNX had reached this strong resistances and backed off from it, at the same day (within 2 hours of each other). These rejections result in rebound in gold prices.

TNX price reached long term downtrend resistance at 2.30 and backed off from it
TNX price reached long term downtrend resistance at 2.30 and backed off from it yesterday (14 Nov 2016)

TNX price reached long term downtrend resistance at 2.30 and backed off from it
DXY price reached resistance level at 100 and backed off from it yesterday (14 Nov 2016)

These are 3 equivalent pivot levels in 3 markets: DXY = 100, TNX = Long term downtrend (2.3% as of 15 Nov 2016), and gold spot = 1220.

The question now is this price retracements of DXY and TNX are only brief pauses before the next break outs to more sustained higher moves? Or will these strong resistances in DXY and TNX hold?

If they hold, the last leg of Scenario 1 in gold chart that i depicted on 1 November will likely to play out. If they don't, Scenario 4 would more likely to play out.

Before the election, where i assumed Clinton would win, i think Scenario 1 is more likely. Now, i'm uncertain. Trump had said so many things that are simply couldn't possibly pan out. The point is, there's too little clarity in details about Trump's policies for me to even try to speculate.

His fiscal policies would seem to greatly increase the chance of DXY and TNX break outs. The very bullish price actions in DXY and TNX in the last few days projected that. Since they're strong resistances - especially TNX - it would be very surprising if they succeed in breaking out the 1st attempt. But i wouldn't want to under-estimate the strength of this Trump's risk-on, reflation trade.

This huge spike in TNX is, as Bill Miller puts it, the bursting of the bond bubbles. Although not everyone shares that characterization because not everyone believes the bond market is in a bubble state.

____________________________________

Having said all these, even if prices of DXY and TNX do break out and rise much further, that doesn't necessarily imply the bull market in gold is over. In fact, inflation is good for gold price. To understand why, you might want to read Relationship Between Gold and Bond Market.

Once you understand the relationship between gold and bond market, then you realize that the inflation rate, which tends to be a broader and more stable figure, doesn't spike the way bond yields had spiked in the last few days. You don't update your inflation rate week by week, but the bond yields do change minutes by minutes. You could say there's a lag. And so, gold would fall as bond yields spike in the very short term (in days). Gold will fall until such time when the rise in inflation rates data start to show up. Inflation should show up. This is the reason why bond yields rise. It's anticipating inflation coming soon.

Bond reacts to tomorrow inflation, but gold reacts to bond today.



Wednesday, 9 November 2016

Trump Victory and the Stock Market Roller Coaster Ride

What a 24 hour in U.S. politics and markets. The wild swings could make anyone's head spin.


 Lies, Damn Lies, and Polls 

Just before start of the voting begun, I watched CNBC showing not one, but some 7 polls all indicating good odds of Clinton's win over Trumps. While i was still wary how the poll got it wrong in Brexit, but surely the American pollsters would learn the lessons, and furthermore, i thought that this is not one poll, but 7 polls. They have to all get it wrong for Trump to win.

President Trump delivered his victory speech
President Trump delivered his victory speech

As the vote count progressed and the numbers came out that seems to suggest that the data wasn't favoring Clinton, the after market stock index futures started to do a waterfall drop. At its bottom, DJIA futures cratered more than 800 points, which is the largest one-day point drop EVER.

Pre-market S&P500 Futures on 9 Nov 2016
Pre-market S&P500 Futures on 9 Nov 2016

This seems logical because the headline grabbing "the longest 9-day losing streak since the 1980s" was caused by favoring polls swing towards Trump. So if an increase in Trump's winning odds can cause this 9-day drop (even though it's only a few percentages), imagine an actual Trump victory. So the futures market reasoned.

At this point, i expected a minimum of 5% to 8% loss in my portfolio when the market opened on 9 November.

The market opened green, briefly. Let's say it's flat. At least it's not anywhere near as bad as i feared. In fact, all the major indexes closed up more than 1% for the day. From losing 800 points in the futures market before open to the 250 points up in the close, the DJIA had moved more than 1250 points in the day ! Pretty crazy stuff.

Both the pollsters, and the futures market got it utterly, ridiculously wrong.

Were they really wrong? Well, not really. Not the markets, just the polls.

To explain the seemingly market wild swings in the markets a week leading to the election result, let's look at 3 possible election outcomes.

1.  Clinton's win with a divided House.
2.  Trump's win with a divided House.
3.  Trump's win with a Republican control of the House.

The markets expected outcome 1 as the most likely occurrence until the FBI's revelation of Clinton's email scandal on Oct 31, this led to an increasing likelihood of outcome 2, which the market responded with a 3 days drop below important technical support of 2130 in S&P500. When the news of Clinton was off the hook on the weekend on Nov 5, the markets breathed a collective sigh of relief and responded with a relief rally.

Clearly, markets don't like outcome 2. And on the election night, when the voting came in and outcome 2 seemed to rear its ugly head once again, the market futures indexes plummeted because last week's outcome 2 is only a probability while on election night, this was a reality. But then as the results were being digested and it was gradually understood that it was turned to be outcome 3, the market futures indexes gradually moved up, and eventually closed positive. The markets obviously like outcome 3 more than outcome 1. This makes sense because outcome 1 is similar to outcome 2 except with the uncertainty of Trump. But outcome 3 means Trump can carry some fiscal polices, which outcome 1 wouldn't. Investors by then warmed up to the idea that Trump would be the next Reagan. Of course, this should be bullish for markets. At least, that's the views of the markets.


 Gold, Stock and Bond Markets 

As the stock index futures plummeted around 10pm, gold spiked as high as 1340, but fell back to 1275. This is lower than its previous close as the equity and bond continued to rise. While this seems bad, considering that the 10-Year Treasury Note ($TNX) did its crazy thing like the rest of other markets and gapped up and closed above 2.06%, a level that similar to the start of year just after the Fed interest hike.

10 year treasury notes 2016


If we're still in the 1st half of the year, a 2% yield in TNX would cause gold price to tank. But we're facing a different situation in the 2nd half of the year comparing to the 1st half. After July, we're looking forward to an inflationary theme where we expecting a steepening yield curve, which is also good for gold price. In the 1st half of the year, on the other hand, we were dealing with a more deflationary - or some would call it 'dis-inflationary' - environment. Perhaps, i'm too early to make that call.

While this yield steepening or the rising of TNX have begun for several months, it went nuts yesterday. One of the factors for the reason for the inflation expectation is the improving economies both in USA and some emergent economies like Brazil. Chinese economy seems to stabilize. Secondly, in Trump's victory speech, he mentioned the infrastructure rebuilding, which should unleash inflation. At the very least, inflation expectation, which is also supportive of gold prices.


 Reshuffling the Deck 

I approached today's market open with the view that my portfolio was going to suffer considerable downside. Less than half an hour after market open, my portfolio was up 7%.

As gold stocks make up some 20% of my portfolio, the rise in gold price, at least in the early session of the market, gave my portfolio a boost. My other stocks that included CLF and BAC also jumped for joy.

The Trump's promised infrastructure spending should inject life into CLF. This stock gapped up and closed at almost 4.7% higher. All bank stocks were also up and my BAC closed up 5.71%.

I was lucky, the only stock in my portfolio that was down is Apple (AAPL), but by only 0.16%.

The big market drop after Trump victory that some expected didn't materialize. What happened yesterday was that institutional investors were jockeying for positions, or re-positioning their portfolios to gear towards Trump presidency. The 2 hot sectors that i mentioned are materials, especially steel, and banking.

Big pharma, which was in the cross-hair of Clinton, to be targeted for price regulations, have been badly oversold, are now roaring back. But hospital sector stocks plunged some 20% because of the speculation that ObamaCare would be dismantled.

As there're winners and losers, with seemingly more winners, the market ended up some 1+% higher.

At this point, all these Trump's fiscal policies of huge infrastructure spending, reduce bank regulation, tax reductions are all being quite swiftly being priced into the market. How much of these policies would or could be implemented remained to be seen. But this is November, and the election is over. These 2 things alone were enough to drive the market higher. The Trumponomics couldn't hurt.


 November Starts Today 

Typically September, and October are the 2 worse months of the year for equity markets, and from November onward to the rest of the year should be strong months. Many pointed to the 9-day losing streak that occurred this November month and saying it's a bad omen.

Well, this time isn't different. November is a good month for market. It has just been delayed for 3 days as the market bottomed in 4 November (instead of October). This is because institutional investors have been sitting on the sideline, waiting for the election to end. Not knowing who's the next president means not knowing how to do the appropriate asset allocations / portfolio re-adjustments / sector rotations, which took place in a frenzy-feeding pace yesterday.

Now that the election is over, and the fog of uncertainty is cleared up, the market can now return to its usual seasonality. I.e. strong stock market in the months ahead. Of course, there will still be more of such portfolio re-position in the future as more of Trump's policy are being unfolded over time.

S&P 500 price chart on the day of Trump victory
Break out, Brexit and Trump victory

 Brexit Mark II 

Considered how much uncertainty and fears we faced before the election, the market held up very well, which clearly indicates a very resilient market. Remember that headline grabbing 9-day drop, it was erased in the following 2 days. This parallels to Brexit. And Trump presidency is the US' Brexit. And if the major stock market indexes roared back to new high after Brexit, i expect we will see a repeat here. In both cases, it took only 3 days to erase all the losses afterwards. Finally, in both cases, the market drop below important supports, creating traps for bears who think the markets are diving from there. In this kind of whipsawed bull market, bear traps are everywhere.

The market rally since the 2nd half of the year has been accompanied by banks, which did not occur in the 1st half of the year. The small cap index Russell 2000 is the strongest of index. These 2 factors imply a more sustainable bull market rally than any time during this year.

Now that it broke out of the down trend that started from 6 September (see above chart), i expect S&P 500 to reach 2200 in no time (probably before the end of this month).

All these, and he isn't even moving into the White House for a couple of months. But then history shows that this kind of euphoria is quite typical for a new president in the White House. I'm very keen to see how the market plays out when Trump actually swears into the office in January.

We really don't know how his policies are going to play out. For now, just enjoy the ride while it lasts.



Monday, 7 November 2016

Funny Caption 42: Window Climbing During Bull Running

Window climbing during the Running of the bull


"I've just noticed how many blasted window grills there are in this place."

"Get down. I promise I won't ram you guys. No bull !"

"From this angle, I can see that none of you have balls."


"It's just like roast ducks hanging on a Chinese BBQ restaurant. Yummy !"


"C'mon amigos! This is a bull running festival, not a window climbing festival !"

"The three in red get down here at once! Don't make me tell you twice !"
 

"I'll wait...you have to do your business eventually..."

"Excuse me, has anyone seen my toreador? He wears a cape and a funny hat."

"You call this presenting? Presenting, my ass !"




Friday, 4 November 2016

The Sudden Drop in Bitcoin Price

One day after i published the article entitled Will Bitcoin (BTC) Price Break Out of June's Peak ?, the BTC price dropped by some 6%. This CoinDesk article has an explanation for the large drop.

What this article described was exactly the situation i depicted in my above article. I.e. Chinese is using Bitcoin to trying to move money out of the country. I suspected that and wrote it in my article because the time of Baidu advertising ban on Bitcoin is too much of a coincidence with the time where the Chinese authority was concerning about capital outflow.

This is hardly an original idea. Before, we had Bitcoin being used in the Silk Road in the Dark Web, and others use it to launder money. All these groups make use of the Bitcoin precisely because it's perceived to be decentralised and anonymous and escape the control of the government. All these activities can boost the BTC price in short term, but could harm its reputation in the long term.


Silk Road website


As i said in my above article that the overwhelmingly large Chinese BTC community is a mixed blessing. Without them, BTC is probably worth less than $10 today, and its market size wouldn't be big enough to attract all the venture capitalists to throw in money to develop the Bitcoin ecology to its respectable size today. But on the other hand, that same dominant Chinese presence in BTC market is also vulnerable to whim of Chinese government.

While the Chinese authority can't kill Bitcoin because it's decentralised, and out of the hand of any government, but they can kill its price. Again, this is one of risks of Bitcoin to be lived with by Bitcoiners.

This little incidence shows how the events in China can move BTC prices more than any geographical area.


'Chunky' Chinese man caught trying to cross border to Hong Kong with $74,000 strapped to his waist
'Chunky' Chinese man caught trying to cross border to Hong Kong with $74,000 strapped to his waist.
'Smuggle' Bitcoin out of the border is far less messy and dangerous, if he knows how (and if it's still possible).
Source: shanghaiist.com

Again, i imagine they would shut down the Chinese BTC exchanges as a very last resort. One thing they can do right now is to enure the Chinese BTC exchanges will put in measures to prevent those Chinese million of Bitcoins ever leave the Chinese border.

As i said in this article, which states that while Bitcoin itself maybe decentralised, but not its infrastructure. This means the government can control Bitcoin via the centralised infrastructure like exchanges. Bitcoin is only partially decentralised. But then, if Chinese authority can't control the Chinese Bitcoin activities, it would shut it down, and we'll see a BTC price of $50 tomorrow.




Thursday, 3 November 2016

Will Bitcoin (BTC) Price Break Out of June's Peak ?

 Chinese Bitcoin Factor 

BTC price is within a striking distance (some 2% during this writing) of June's height of $768.

There're several reasons for these, which i won't go into in depth. Since China is the biggest BTC community, they exert the greatest influence in BTC price. While the following chart is several months old that i used a few months ago in another article (i'm too lazy to get a latest old), the big picture is that Chinese BTC community still the largest by miles.

Since the Chinese occupies the largest slice of the pie - almost the whole pie / market - therefore they have the largest impact on BTC prices. Proportionally, their impact should be about 90+%. This is hardly surprisingly, the Chinese also has the largest impact on commodities from iron ore, coal, copper, you name it. So why should BTC price be an exception? (Paradoxically, not so much gold. US Comex has the greatest impact on the price of gold).

BTC exchange volume distribution


Just want to mention briefly that the drive in BTC price in China including the drop in Yuan, capital outflow, rise in gold price, and simply political uncertainty. Both Yuan and gold have some - not large - correlation with BTC price. After all, Bitcoin is sometimes being called the digital gold. So the environment that's good for gold would be good for Bitcoin.

Lately, CCP (Chinese Communist Party) asked Baidu - the Chinese Google - not to advertise Bitcoin. The fear of capital outflow causes the Chinese authority to put in measure that prevent citizens taking money out of the country. Bitcoin is one great way to do that. In fact, this is the very political ideology that Bitcoin was born under: to prevent government's control over your money. Bitcoin provides a perfect vehicle for this.

This could be a double-edged sword. If Chinese government is feeling that they're losing control over Bitcoin, they will shut down the BTC exchanges. This will be a disaster for BTC price because Chinese BTC community makes up some 90+% of market share. Based on simple supply and demand price model, a sudden removal of Chinese BTC market would lead to 90+% drop in BTC prices.

Among many system risks, BTC price is hinged very much on Chinese government, who can't kill Bitcoin, but certainly can kill BTC price, if they choose to pull the plug on Chinese BTC exchanges. Not that i think this is going to happen. I'm just saying, this is another risk to think about, even if it isn't huge. I don't think the Chinese government would flip the kill switch on Bitcoin likely. After all, OKCoin has been operating in China soon after the dawn of Bitcoin (5+ years).

Star Xu, founder and CEO of OKCoin
Star Xu, founder and CEO of OKCoin

For taking on so much risks, the Bitcoin holders are rewarded with high price appreciation. The only thing comes close is gold. But gold carries far lower risks. While Bitcoin has been around for about 6 years, gold has been around for 6,000 years. It's far more time-tested. It's true that Bitcoin has technology on its side, but gold is far from being a barbarous relic. Not by a long shot.

It's silly to compare gold and Bitcoin and say which is superior investment or currency or store of value. I've seen some Bitcoin holders swear that Bitcoin is better than gold. It's like asking which types of cars are better. It depends on your needs. If you're young and single, you want sport car (and drive dangerously because you want to, or because that's the only way you know how to). If you have a family, wagon is more preferable. If you're a nature lover, 4-wheel drive or mobile home would be your choice. And it doesn't have to be one or the other. You can have both with different position size, depending on your belief or risk profile or tolerance.

Bitcoin keyring


Bitcoin carries higher risk, but its return is also far higher. When it matures, it carries less risks, so will its returns. If you put your money in Bitcoin in 2009, the risks of its demise is extremely high because its very future existence or acceptance was being questioned, and with ridicule thrown in for good measure, but then its price can jump 10,000% in just a couple of years. Today, Bitcoin market is more mature and far larger, such price spike is unlikely. In 2009, Bitcoin market was a baby size, and you can throw it up into the air with little effort. Bitcoin market is more like an adolescence. Try to throw him/her into the air. Such is the nature of risks and rewards. Return of Bitcoin is still quite impressive. I bought a Bitcoin on August at $586, and today, less than 3 months later, it's $740.

Among many other reasons, it isn't hard to understand why Chinese, not American, is the largest holders of Bitcoins. Bitcoin was invented for people who don't trust their government, and Chinese citizen is no doubt the biggest doubter of their government. Another reason is that there're far fewer investment opportunities in China than USA. The Chinese stock market isn't the best performing investment vehicle in the last few years. Some had been burnt badly during the severe Chinese stock market crash of 2015.

Since Bitcoin is still very much unknown in China - i doubt that more than a few percentage of the population have known about it - not much of this money outflow via Bitcoin is occurring. Banning the ads about Bitcoin would limit this knowledge to spread further. Even in the West, it isn't like everyone is heard of Bitcoin. But as i mentioned before about the double-edged sword, a lack of awareness of Bitcoin in China isn't a bad thing. Turtle would win the race.


 A Very Brief Technical Analysis 

Since it's within a spitting distance of June's top, the question in my, and everyone's mind is, "will the price rise above the June's top?" Nobody can answer this 6 million dollar question. Anyone say they can is a liar. But it doesn't mean we can't make some educated guess, and gauge its probability. Chart analysis is the usual tool for me.

Fortunately, regardless of who and what country or nationality is the major BTC community, or what factors in China that could affect BTC price, at the end of the day, the only universal tool that can ignore all of these different geographical, political and whatever factors is chart analysis. The Chinese is looking at the same chart and interpret the same way. There's no need to understand their minds or circumstances. All that are factored into the chart.

BTC's 6 months price chart as of 3 Nov 2016
BTC's 6 months price chart as of 3 Nov 2016

Looking at the increasing volume - shown by the uptrend arrow in the chart - indicates this run-up is sustainable. Unlike the run-up in June's peak where the volume seems more like a blow-off top volume. The moving averages in this up move is also more sustainable than the June's run-up. Based on only these technical indicators suggest that this rise is probably breaking out of the June's top. Because of it's a resistance, it may take more than one attempt to break out of it.

Up, up and away! (I shouldn't shout like this)

P.S. Read this article for the Sudden Drop in BTC price in the following day after i published this article.




Tuesday, 1 November 2016

Gold Price and USD Index (DXY) Triple Tops

 DXY's Tops and Gold's Bottoms 
The US Dollar Index (DXY) is potentially forming a triple top formation. This has important implications for gold spot prices. I'm not saying this will definitely happen, but i think there's a good chance that it would. In any case, the 100 level in DXY is a strong resistance.

Let's look at the previous times when DXY put int its triple tops.

US Dollar (DXY) Topping processes from 1990s to 2016
Dollar Index (DXY) between 1997 and 2016


When DXY is developing its triple tops in a a horizontal range-bound channel, gold is also developing its bottoming processes as you can see in the chart below in the same 3 periods. The bottoming process in this cycle is a bit short-lived, but then there're much more fear this time around. I know that with the recent drops in gold prices, it seems that the recovery in price isn't so sharp. But that's because we're living it in real time. If you look at the big picture chart below that covers a longer period, the current gold bottoming process is relatively brief. The reason is that we have lots more fears this time.

Gold bottoming processes from 1990s to 2016
Gold spot price between 1997 and 2016

After the 2008 Great Recession, many caught the Apocalypse Bug. There're more people calling for the end of the world than any time at least in a generation (if not 2): collapse of USD the King Dollar, end of USA as a superpower, runaway hyperinflation, global deflationary spiral, Deutsche Bank is the next Lehman Bros, equity market going to plunge far more than it did in 2008, global economy sliding into depression, WW3 breaks out, etc, etc.

Not to mention the seemingly never-ending parade of the more realistic fears from the Fed's rate hike, negative interest rates, Brexit, Trump victory, bursting of bond bubble, China's not-so-soft landing, tanking crude prices to Italian referendum. It seems that investors aren't going to get a break from this litany of worrisome news. The 2-year+ range bound equity market is telling us this investors' jittery. But gold loves all these doom and gloom. This is understandable because the memory of the Great Recession of 2008 is still fresh, and there're enough doomsayers to constantly refresh it to keep it fresh like yesterday.

More significant to this sharp gold basing formation is that fact that we just had the longest gold bear market (from 2011 to 2015) in the last 90 years. Many share prices of gold miners had dropped by some 90%. This V-shaped recovery in gold market parallels the V-shaped recovery in equity market in 2009. A vicious bear market brings on equally vicious recovery. I'm not saying this is true in general (maybe it is). But it's true this time.

One should actually just look at the triple tops in years 2005 to 2006 as a top in a bear rally as DXY drops from the top of 122 to the low of 72 (some 50 bps fall). But it doesn't really matter in this article. I won't be looking at this minor triple tops. I only include it as an additional example of dollar topping mirrored by gold bottoming process.

Things are getting very interesting as the 3rd potential peak in DXY is being developed right now as of 1 November 2016. We can't be sure that it will play out. But it's likely. Here are some possibilities we can explore below.

Possible scenarios for DXY price action
Possible scenarios for DXY to play out.
Note: the time frames where these scenarios take place is NOT to scale as there's not enough space on the right hand side of the chart. It should take months for this to play out, not days as they're shown in the chart.

 DXY's Probable Price Action Scenarios 
Let look at 3 scenarios for USD forthcoming price action.

Scenario 1   USD is falling as of the time of my writing, 1 November 2016, because it's overbought. In this scenario, after a small retracement, it runs up to the triple-top resistance of 100 to become the 3rd peak, and then starts its long descent, probably towards the uptrend line shown in above chart. I think this possibility is most likely going to play out when the Fed hikes rate in Dec to give DXY a final boost.

Of course, it's entirely possible that DXY could move above of 100 and reach, say 102, a head fake or false breakout that traps impatient dollar bulls, who think USD is breaking out of the strong resistance (and trapping gold bears who sell down aggressively) when the Fed gives it a final - but temporary - push across the line in Dec.

Scenario 2 
Instead of failing at the resistance of 100, it breaks out and runs up much further. In other words, this range bound development isn't a topping formation, but a continuation pattern where DXY continues its bull market. Anything is possible, but my feeling is - this scenario is not very likely.

Scenario 3   This isn't shown in the chart above. In this scenario, the USD simply falls from here without an attempt to test the all important triple-top resistance first. It's like saying that DXY has made its triple top already. It doesn't have to run to 100 to consider a top. The level 99 that it reached last week is sufficed. But this is the least likely scenario.



For every one of these scenarios, there's a corresponding (re)action in gold price.

Gold price chart to show Possible scenarios for gold price action, 2016
Possible scenarios for gold price action.
Note: the time frames where these scenarios take place is NOT to scale as there's not enough space on the right hand side of the chart. It should take months for this to play out, not weeks as they seem to suggest in the chart.
And the gold price won't simply bounce off in a V shape recovery in price. It's only illustrating resistance and support levels.

 Gold's Probable Price Action Scenarios 
Scenario 1   In this most likely scenario, gold price will go up further from today for a week or two. As DXY runs up to test its 100 resistance, gold price will make new low (1200) as DXY makes new high.

Scenario 2   If DXY breaks out above the triple top resistance (actually in this case, only 2 tops and a break out), gold price will fall further, probably back to the 1050 low. This is very bearish for gold. In fact, the whole talk of year 2016 being the start of gold bull market is no longer valid.

Scenario 3   If DXY never runs back up to retest its triple-top resistance, gold price will simply run up to break out of the long term downtrend resistance that i wrote in great lengths in part 1 and part 2 of articles entitled The Final Technical Resistance of the Gold Bull Market. This scenario is the most bullish for gold prices.  As i said above, this is the least likely outcome.


Footnote 1
Have you noticed that lately (in the last few weeks) while USD was going up, gold price held up quite well? This is the gold market's way of telling us that it's expecting the DXY run-up is coming to an end when its triple-top formation is completely playing out.


Footnote 2
The DXY's triple tops in the early 2000s is higher than the triple tops that's developing since early last year in 2015. This is lower low. In other words, DXY is in a secular bear market.

By the same token, this year's gold bottom ($1050/oz) is far higher than the bottom ($250/oz) in the corresponding period in the early 2000s. In other words, gold market is in a secular bull market as well as at the 1st inning of the a new cyclical bull market (if we are indeed in a bull market).

Similarly, the DXY's bottom in year 2011 corresponds to the top in gold and the start of bear market.

So, if DXY puts in a triple top here - and there's a good chance, but not an absolute must - gold is on the rise until DXY bottoms. This would likely take several years.


To read the follow-up to this article