The Case For Gold
Featuring Greg Weldon
Published on: July 18th, 2019 • Duration: 18 minutesIf the next global recession is approaching, is it time to turn to gold? That’s the case that noted trader Greg Weldon makes. Weldon believes that central banks’ response to the potential downturn will create very bullish conditions for gold prices. Weldon also provides his commentary on emerging markets and on commodities more broadly. Filmed on July 12, 2019 in Jupiter, Florida. For more of Greg Weldon’s views about gold, see gold-guru.com.
GREG WELDON: Hi, Greg Weldon here for Real Vision and this is Tech Trader. We're going to be discussing a big picture trade, we're going to break it down into a couple of different ways you might play it, depending if you have a futures account, you trade the equities, ETFs, whatever your preference might be, we're going to give you some options on this one. But it is big picture, we're going to come back at you here on Real Vision with more of the big picture theme as to exactly why fundamentally, you need to be involved in the precious metals. I wrote my book, Gold Trading Boot Camp in 2006.
We called a monetary Armageddon, which at that point was Fed monetizing Treasury debt and printing money and having a bailout, the consumer and so on and so forth. Stuff that was considered unthinkable at the time was not only thinkable, it was done. We see a similar situation developing here times 10, like that situation on steroids, lot of differences, admittedly, but a lot of similarities, the main one being. If you have another wave of deflation risk, central banks are in a much weaker position here in terms of trying to do something about it. But then that begets the question.
They always seem to have their backs against the wall. And they come up with increasingly creative ways to print money and to stimulate the economies and to reflate the consumer and to avoid a debt deflation, because at all cost, that's what central banks want to do right now, is avoid a debt deflation. And they're going to be tested in the next 18 to 24 months, really, within the next three to five years, like gold was at four and a quarter in 2006. Very cheap, tripling quadrupling in price. Same thing here, I would say gold at 1300 here, 1400 now is about as cheap as it was then at four and a quarter.
We're going to talk about the market in terms of the currency dynamic, because this is really important as the ECB, the central bank that is really on the hot seat here, sitting on the hot seat. They have negative 40 basis point official deposit rate. They're pricing in another cut to minus 20. The problem is you get more and more debt in Europe with negative nominal yields. And you're basically having consumers, investors and savers paying governments to hold their money.
This sucks money out of the equation, they can't let this stand. The ECB is discussing what would be an unprecedented plan, another revolutionary type of monetary situation, that would be QE on steroids to deal with the deflation on steroids when you have economies that are really coming on glue quickly in Europe, despite the fact that you have all these negative yields. It's just not working, something's got to change, something's got to give, and it will, and the ECB is going to be at the forefront watching the euro and keeping in mind that what comes next, outside of why we feel so strongly about precious metals, could change the entire dynamic for bond markets, for currencies, and for stock index futures.
So, we got to keep all that in mind. And looking at that, you look at the Euro, on the verge here, you had literally in the euro, ran into overhead resistance right where it should have. And now, it's threatening to break down again when the ECB potentially makes another stellar surprising, pulls a rabbit out of the hat, monetary move, you really could see some fireworks in the euro, frankly, could be down first and then much higher, even. So, we'll keep an eye on all that.
And you see the long term picture, a move below 111.25 would be really negative for the euro and would easily set up a test of the 103 to 104 level. But really, it comes down to gold. Because this is a situation where the euro is higher than the euro was lower, the dollar was lower and now, it is higher. And at the end of the day, gold is higher against all these currencies, because gold and the dollar link has broken down. And now, gold is where he wants to be in its sweet spot, appreciating against all paper currencies, arising concern about abilities of central banks to keep papering over these issues, rising mistrust and uncertainty around any paper, any IOU, IOUs, currencies, bonds, they're both IOUs, it's the same thing, backed by nothing.
And in the sense of gold and euro breaking out, it's a long-term breakout. You can see this above 123.7 euro now, pretending a move here at the very least, to test the all-time highs set in 2012 if not violate them, probably significantly so. At the same time, the dollar has bounced again off the 2- Year Moving Average, boom, there, boom, boom, here and then again, off the 2- Year Moving Average. And with this flat top of overhead resistance, the problem here for the dollar is really when it comes down to the rate of change.
Because right now, your 1-year, 2-year rate of change is about four and a half. If you get this thing to break out, and you get back up to 104, the rate of change is going to accelerate. And particularly, the longer-term rate of change, the 5- year rate of change right now, is threatening 20%. And if you get above this 98.5 level, and you accelerate up to 104, that's going to really extend the appreciation of the dollar to the point where it starts to weigh on commodities, it starts to bring emerging markets and currencies and bond markets and stock indexes back into the Fed's purvey as a potential risk.
You have had five Fed regional bank presidents in the last 60 days, March out, and they have all said the same phrase. And that doesn't happen unless it's meant to happen. And that phrase is they are concerned about the credibility of their inflation target. And if that is true, they cannot allow the dollar to break out because their inflation target is already somewhat being called into question with inflation, 50 basis points below where they really wanted to be. And now, all of a sudden, because inflation is formed, they're not just neutral, they're actually tight. And they're going to have to cut rates just to stay neutral.
So, that is interesting, and really the reason where if the dollar were to look like it was breaking out, and whether this might even be a sign of some dollar debt issue globally, Turkey comes to mind almost immediately, that would be even more problematic, because it would be on the Fed to be the one to act almost as the central banker to the world, which is I think a dynamic that is slowly beginning to evolve here too. So, in that case, a dollar move up here would bring the Fed more aggressively into play. And of course, that would be positive for gold.
In terms of the renminbi, of course, we'll look at the three currencies, euro, dollar, renminbi. But again, gold breaking out and Ozzy dollar are record highs, breaking down against the lengthening list of currencies. Okay, now, the renminbi. Renminbi had a rally here, and then it's had this big decline. I'll tell you what, I think the Chinese have played this trade situation just very, very well, if their point here was we know, we're going to cut a deal. But if we walk away from the table, we can get some depreciation in our currency and no one's going to say a word. And that's exactly what's happened.
And when you get that depreciation, and really, it's about squelching the appreciation. But if you look, the appreciation of the renminbi over the last 12 months had reached a new all-time high, and it was above 9% for a period of time on a rolling 12- month basis, that's problematic. And then signing a trade deal then would have been equally problematic. Now, they've taken this walk away plan and likely to come back to the bargaining table when the renminbi has depreciated to some degree. The bigger question is, can the renminbi depreciate through this 698 level? And I think the answer to that longer-term is yes, but that means a higher dollar.
But this is really where you start not to care in terms of gold, because gold is rallying against all these currencies. Okay, the renminbi is up, the renminbi is down. One is up and for sure, breaking out, it's gold priced in Chinese renminbi. And you see that here. And you see that here on the long-term basis where it's above this 9000 renminbi per ounce level, and basically now, targeting its own record highs around 12,000 renminbi.
Now, as it relates back to the dollar. Here is where it gets most interesting because the dollar has delinked from gold. And more importantly, gold has delinked from the dollar. And we see that in the sense that the dollar is almost at new highs here, almost breaking out and it's appreciating 5% over the last two years, when at the same time if the correlations had held, gold would be between $1,050 and $1,100. It's not, it's $1,400. And it's breaking out. And when you look at the gold adjusted value of the dollar index, which is very simply the dollar index divided by gold, no rocket science here but very telling it's a gauge of monetary policy.
And you can see, the Fed got a little too tight in here, dollar in gold terms was rallying. It has now reversed. It's on the verge of a major breakdown, the longer-term trend to the upside violated, retested, and now, re-violated. And this tells us that the Fed's move here towards easing bias is for real and they're going to have to keep up with the timeline, lay down the Fed Funds futures market but that's a whole another trade for another time. Bottom line here is dollar, adjusted by gold, is breaking down on a long-term basis and is now, down almost 10% on a 52-week basis. That's huge and very bullish in the backdrop. And we look at the long-term moving averages on the same dynamic, you just crossed bearishly, you want to talk to Tech Trader, this is just beautiful stuff for long-term tech trading. We have the 2-Year, 5-Year and 10-Year Moving Averages of the gold adjusted value of the dollar. And this just rolled over to where the 2-year move back below the 5-year in May, end of May. So, we're talking five weeks ago, major long-term secular stuff doesn't whipsaw a lot. Now, turning in favor of gold and against the dollar.
And again, Yogi Berra would be proud, it's d?j? vu all over again. Bottom line is the dollar has been, is now, and will be even more so in the future, the relief off. It's just the way it is as the world reserve currency. And now, that the Fed was among the few central banks actually created some room for themselves to cut rates by raising rates, an opportunity the ECB really missed in the beginning of 2018, leaves this to the Fed. And I think that this is really part and parcel of what's happening in terms of gold breaking out despite the fact that the dollar is on the verge of its own breakout. That couldn't be more telling.
The long-term picture here is very bullish for gold from a technical structure. When you talk about the secular trends, this decline- I remember the days we were tracking when gold was flirting with $1,050. And you had this level, the 50% retracement from the 1976 low, the entire run from $100 to almost $2,000 right around as you might suspect, the 50% level was $1,050. How many days in a row on the candlestick chart on the daily candlestick did you have move below the 50% retracement during the day and it closed above it? It was uncanny how many days that happened and watching the market every day. It's such a tell, there's demand for gold below $1,050 and my guess would be the Chinese was eating it up there. And of course, the statistics later on proved it was the Chinese that were buying their various do traders.
So, the long-term picture is then here's your correction. You had A,B,C Fibonacci and you're rolling back to the upside. Well, this is basically 1, 2, 3, 4, 5 typical Elliott Wave dynamic where Wave 5 has just been ignited. We talked about ignition. And here we have liftoff in gold. So, how do we want to play that? Well, if you're not long any retracement down into this, you get below $1,300 and you get like a $1,295 print. It's a gift from the gold gods. You got to back the truck up in that case.
I don't know, that you're going to see that. I don't think you'll get much below $1,265 to $1,260 if you get a dip because this is a longer-term breakout. So, $1,345 would be a last guess on the downside, then frankly, you get below $1,290, then we're wrong and then $1,266 at risk, but I really don't see that happening. Not when I see stuff like this.
And here we get to the trade finally, yes right to the trade. All right, the GDX gold mining ETF really liked this year. It is now breaking out, look at this pattern. It makes new lows, this low was so unconfirmed by any technical momentum indicator you want to throw in, you got the breakout, you got the retest of the trend line that was violated. I love this pattern. 30 years in doing this, I'm telling you, it's one of the most reliable patterns when you get a long-term trend breakout. And it seems like it's running out of steam and it comes down, it might even make a lower low, but it holds above the violated trend line.
That's huge, that retest on the backside, particularly when it lays out right in the zone between the 50% and 61% Fibonacci retracements, in the meantime, you get back over the 2-Year Moving Average, which is now, accelerating to the upside and making a new high in line with price, a very bullish dynamic. And this is long-term stuff, man, here. Look at the 52-Week and the 2-Year Moving Averages crossing over here as well. Very bullish. The GDX would be the trade here in terms of what trade we're putting on here, one of them, GDX would be an option. And frankly, you just plow right in here, because the risk reward is still quite favorable.
What I love about this too is got to have confirmation that the GDX could potentially outperform. That's the whole reason for buying it. And in this case, the GDX breaking out against the price of gold. This is huge, not only in terms of this from the micro standpoint of this trade, but for the sector as a whole. It's something we have not seen since 2016. And we have a long-term retested on the back end, love that pattern, breakout in gold GDX mining against the spot price.
And not only that, there's a bonus here. And we said this a few weeks ago in one of our daily reports that this would set up to where you would actually get some rotation in the next phase of Fed moving towards an ease within the stock market itself, out of the highflying tech, out of some of the top performers over the last 10 years and into the precious metals mining shares. And you're seeing it because you're on the verge of a breakout in the GDX against the S&P 500. That would be massive.
Junior gold mining, same thing, looking at a breakout here. A breakout here really confirming as of yesterday, we're filming here on the 12th of July. And you can see the action here on Thursday, the 11th, was very positive for the junior gold mining for the weekly chart to close above 3504, that would be an option too. I just like to trade GDX for now. And in terms of them potentially, number to brave, you want to triple leverage and you treat this like a call option and be willing to basically risk every dollar you put in here, because these things are notoriously volatile, and whipsawing and there's all kinds of different crosswinds going on here.
But the Nugget, the NUGT, would be a call option or for risk capital really saying none but the brave for the adventurous, you would buy the Nugget because this would give you great upside potential if you are willing to lever up and understand the risk here. Understand the risk. The risk here is basically, as much as you're going to buy this thing for. You just have to look at it that way. It's the best way to manage the risk.
And then we come to silver, because this really may be the opportunity. We haven't had participation from silver. It's reflected in the fact that the silver, gold/silver ratio is at a 27-year high. Okay, silver is on the verge of a breakout, it hasn't performed. But that's okay, because this hasn't been a monetary thing until now. So, in that case, we're looking at 1555. And then you got 1565, the 2-Year Moving Average, these would be potential breakout pivots, and certainly above 1620 that would constitute liftoff for silver, which is sitting on the launching pad.
Look at this pattern, you have a 4-year in the making multi-touch low below $14. Between really $13.50 and $14.25. You can even go back five years coiled and look at the volatility. That's where it really gets interesting. The volatility of silver is at multi-decade lows in the long-term perspective, the historic volatility, which suggests call options could be a strategic opportunity here as would be the SIL. The SIL above 2819 would be a breakout. And from that perspective, above 2820 would be a long-term breakout with massive bullish divergence a great technical setup here for the SIL.
And our final bonus here and maybe our pic, silver miners breaking out against silver, really key, well, I see the mining shares outperform the metals in both cases. I haven't seen that in a long time, after a new low that was completely unconfirmed, very rare on my counter trend oscillator. But the bottom line here is First Majestic. We picked First Majestic as our topic when we did our fourth quarter 2015 piece actually before this third leg to the downside. And that was the outperformer.
We see the setup similar, it's already broken out. It's still in a good risk reward position here at $10. You risk $8.50 and you have potential upside to $20 or higher the FR traded in Canada. So, gold-guru.com is the new website we're debuting just to try and help people take advantage of this. Really, what I see is a once in a 10-year potential opportunity here in the precious metals. That's it for today. Greg Weldon for Real Vision.