Tuesday 7 November 2017

 “Nothing whets the intelligence more than a passionate suspicion, nothing develops all the faculties of an immature mind more than a trail running away into the dark.”   ― Stefan Zweig,

The Burning Secret and other stories

Time to sell gold? The Mr. Elliott we know thinks so…  

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Our rendition of an Elliott Wave chart shown on the next page says it’s time to sell gold; i.e. once minor corrective rally Wave ii completes—that may be today). Targets lower are 1,210; then 1180-level. And if the US dollar catches a major bid, there is scope to test the swing low of 1,123 from mid-December 2016 (gold vs. dollar weekly chart page 3). Note: The 55-week gold to US dollar index correlation is a whopping -84.3%; i.e. as gold goes up, the dollar goes down, and vice versa.          

Gold Futures Daily Wave Chart Next Page   

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Gold Futures vs. US Dollar Index Weekly Chart Next Page     

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 We should find out soon whether Mr. Elliott is correct.

Now, let’s talk about Junk Bonds.

If This Line Breaks, We're in Serious Trouble

Junk Bonds are corporate debt issued by companies that have a significant chance of defaulting (meaning they don’t pay you back).

Why would anyone want to lend these companies money?

Because these bonds are risky, they typically pay very large yields to compensate for the increased risk. Think yields of 8% or even 10%.

Put simply, these are high risk, high reward bonds. They typically rally more than safer bonds when the bond market is healthy… and conversely, they typically crash a lot harder when the bond market is in trouble.

With that in mind, take a look at this chart:

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The Junk Bond Index is beginning to roll over. As I write this, it’s right at THE line for its two-year bull-market run.

This is a MAJOR warning that the bond market is beginning to enter a “risk-off” stage. If we take out this line, Junk Bonds will be in very serious trouble.

What could be triggering this?

Inflation.

As I’ve explained time and again, bonds trade based on inflation expectations among other things. So to see Junk Bonds starting to roll over (meaning Junk Bond yields are rising) "tells" us that the riskiest segment of the bond market is beginning to adjust to the future threat of inflation.

It's not alone.

The yields on the 10-Year US Treasury are beginning to rise as well, breaking a multi-year downtrend. Remember, this is the single most important bond in the world. And it's signalling that inflation is on the rise.

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Put simply, we are getting numerous signs that the markets are shifting into a new major trend. And when I saw “major” I mean MAJOR.

So how do you make money from all of this?

Best Regards.

Deo Talaverano.

Chief Market Strategist DHF.

George Town. Cayman Islands.