Forex & commodities on July 17, 2017: thoughts & outlook


These are our sister fund’s thoughts on the currency and commodities markets. They trade gold/silver using a discretionary approach. We trade the S&P 500 using our quantitative models.
*Go to our homepage for their latest thoughts. We update this webpage throughout the day.

Thoughts

  1. Some traders are too bullish on gold/silver.
  2. Japan might be forced to end its easy money policy
  3. “Smart money” commercial hedgers are becoming increasingly bullish on gold and silver.
  4. The USD’s bear market will have bounces along the way.

5 pm: Some traders are too bullish on gold and silver
Our sister fund is medium-long term bullish on precious metals (gold and silver move together). However, some traders are too bullish. They think silver will shoot straight towards $21 and gold will shoot straight towards $1375 (the highs in July 2016). This scenario is highly unlikely.
Here’s silver’s weekly bar chart.

Here’s gold’s weekly bar chart.

Gold and silver soared in the first half of 2016, fell from July-December 2016, and have been slowly climbing back up. This is a standard pattern. Silver did this in 2004 and 2006.
Here’s silver in 2004.

Here’s silver in 2006.

As you can see, silver takes a long time to reclaim its old high! There are many pullbacks and corrections along the way. Hence, silver will probably slowly grind higher (with multiple corrections) in 2017. Gold/silver only start to SOAR when they make a new high. Hence, we’ll have to wait until 2018 before gold and silver are ready to soar.
5 pm: Japan might be forced to end its easy money policy
Zerohedge wrote a great piece on Japanese politics today (one of their few non-conspiracy articles). In essence, Japanese prime minister Shinzo Abe might resign in the next few months.
If this is true, then this is very bearish news for USDJPY in the medium-long term.
The only thing that’s trying to hold USDJPY up right now is Abe’s “infinite QE” policy. Market forces are already pushing Japanese yields higher, and the Bank of Japan is desperately trying to suppress yields. The BoJ can’t fight against the market forever.

  1. Europe’s economy is growing decently. Money Flow is moving from the U.S. to Europe. This is bullish for EURUSD.
  2. Without Abe’s easy money policy, USDJPY is dead in the medium-long term.

The USD is in a bear market.
7 am: The latest COT report for gold and silver.
Commercial hedgers are often considered “smart money” in the precious metals markets. The COT report for commodities tends to be useful, while the COT reports for stocks and currencies aren’t useful.
Commercial hedgers have become increasingly bullish because gold and silver have fallen a little. This is a medium term bullish sign.
Here’s silver.

Here’s gold.

7 am: The USD’s bear market will not go down in a straight line
We explained the similarities between the U.S. Dollar Index today and in 1985. This is why our sister fund thinks that the U.S. Dollar is in a bear market.
For the bear markets that began in 1985 and 2002, the U.S. dollar crashed straight down without any meaningful bounces along the way. Here’s what 1985 looked like.

Our sister fund thinks that the U.S. dollar will not crash in a straight line during the current bear market.

  1. Money Flow was extremely strong in 1985-1987. The Japanese bubble was clear as daylight, and money poured into Japan. That’s why the USD’s decline was so fierce.
  2. Money Flow was extremely strong in 2002-2005 (when the U.S. dollar crashed). China’s economic boom was historic, and the euro had just been introduced as a currency. Hence money poured into China.

Today, Money Flow is going towards Europe and China once again. However, the speed of this Money Flow isn’t as intense. Hence, the USD is unlikely to crash the way it did in 1985-1987.
The U.S. Dollar Index’ most likely target is approximately 93. That’s a massive prior low and the USD’s 200 weekly moving average. Expect the USD bulls to put up a fight here, which will generate a meaningful bounce.

Bottom line

Nothing has really changed since our sister fund’s July 14 market outlook.

  1. Our sister fund thinks that the U.S. dollar (USD Index) is in a bear market. Money Flow determines the U.S. dollar’s bull/bear markets. Right now, money is flowing away from the U.S. to Europe and emerging markets.
  2. Our sister fund thinks gold and silver are in bull markets.
  3. Our sister fund has been 100% long USLV (3x silver ETF) since June 30, 2017. Entry price: silver was at $16.62, USLV was at $11.84.
  4. Our sister fund makes medium-long term investments.

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