the gryphon review a global market analysis...

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T H E G R Y P H O N R E V I E W

A G L O B A L M A R K E T A N A L Y S I S


H I G H L I G H T S

H I G H L I G H T S O F T H E W E E K B Y D A V I D C H A P M A N J U L Y 1 , 2 0 1 6

T O R O N T O , O N T A R I O The Brexit: Get out the pitchforks

• The rise of populism • The trouble with the EU • Political uncertainty galore • But financial and economic

uncertainty as well • But will the UK be worse off or

better off out of the EU in the long run

• Globalization has created winners and losers

• More uncertainty sure to come Stock market weekly review Bond Market weekly review Currencies weekly review

Gold and precious metals weekly Review David Chapman BMG Chief Economist T . 9 0 5 . 4 1 5 . 2 9 4 7 [email protected]

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On Friday, June 24, 2016, after the results of the Brexit vote were known, global stock markets lost $2 trillion. That was apparently more than what was lost in the initial rout of the financial panic of 2008 when Lehman Brothers collapsed. In 2008 the rout didn’t stop until global stock markets were down 50% or more. Are we about to have another panic get underway?

In a completely unexpected move, the United Kingdom voted for the Brexit by a margin of 52% to 48%. We say unexpected because the betting odds on the Brexit not succeeding were as high as 75%, even though actual polls continued to show it was too close to call. Markets also seemed to be voting that the Brexit would fail, as stock markets rallied and gold prices fell prior to the Brexit vote. So much for the betting crowd. And even so much for ourselves, as we thought that the assassination of British MP Jo Cox would help swing the Brexit in favour of the ‘remain’ camp. As well, there was just too much at stake to allow the Brexit to win. But win it did, and now the genie is out of the bottle.

With the genie out of the bottle, it has given new life to anti-EU parties everywhere. The Brexit could be followed by the Grexit (actually that’s an old one), the Frexit, the Nethxit, the Italxit, the Oexit or Auxit, and the Swexit. Or for those who can’t figure out all of the ‘-xits’, they are Greece, France, Netherlands, Italy, Austria and Sweden. We are sure Spain, Portugal, Hungary, the Czech Republic and a few others are not far behind. Everywhere we look, anti-EU parties have sprung up. Many are also anti-immigrant and xenophobic, and some have right-wing neo-fascist leaders.

So the people have risen up to take on the monster (the EU), and now they want to destroy it or at least get rid of it, because it has played havoc with their lives. Globalization and the creation of a one-market EU were supposed to be the answer to a new world order. Instead it created winners and losers and the rich got richer and the poor, well… It also created what many believe is a suffocating bureaucracy.

T H E B R E X I T : G E T O U T T H E P I T C H F O R K S

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All of this reminds us of the angry mob chasing down the street after the monster armed with their torches and pitchforks. The monster is to be tied to a stake or whatever, and burnt to a crisp. The monster this time was the EU, and the people rose up. They got out their pitchforks.

The rise of populism is not new. Populism has been around for a long time. There are left wing, right wing, and even moderate populists. It is during times of economic stress that populism can take on a darker tone and not only overthrow the old order, but install a new order that in the end can prove worse that that which it replaced. The rise of Nazism in 1920s and 1930s Germany is an excellent example of that. There are numerous other examples. Today populist parties are on the ascendency in many EU countries and elsewhere, as well in the US, where it emerges in the platforms of both Donald Trump on the right and Bernie Sanders on the left. All are a threat to the ruling order.

The creation of the Eurozone was a great project that tried to bring together the disparate states of Europe, which had been, off and on, in a constant state of war for hundreds of years. The last one was WW2, where 60 million died. The EU started out well, but then it faltered. Major mistakes were made. The European Central Bank (ECB) did not have the ability to act as a lender of last resort. Rather than a federal reserve system, as there is in the US, every country kept its own central bank that could act separately from the ECB. There was a currency union under the euro, but no fiscal union. And finally the EU was cloaked (some say choked) in a bureaucracy in Brussels that was not only perceived to be made up of faceless, overpaid fat cats, but which made rules and regulations that were applied across the EU without taking into consideration local customs and mores. The result is that many believe the EU Parliament is distant and lacking knowledge of other parts of the EU. The people have rebelled, and it has manifested itself in anti-EU parties that want to take their country out of the EU and close their borders to the thousands of refugees fleeing war in the Middle East and Africa. Hence the Brexit.

The Monster and the Mob with the Pitchforks

Source: Frankenstein 1931, Universal Pictures, Directed by James Whale, Boris Karloff as the Monster

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The EU started its formation in 1957 when six member states banded together – Germany, France, Italy, Luxemburg, Belgium and the Netherlands. The United Kingdom, Ireland and Denmark expanded it to nine in 1973, and Greece joined in 1981. Spain and Portugal were admitted in 1986. Then came the explosive growth with Austria, Finland and Sweden joining in 1995, followed by the really big one in 2004 when ten new countries were admitted, mostly from Eastern Europe and the dismantled Soviet Union. A couple of more joined in 2007, and the last one admitted was Croatia in 2013, bringing the membership to 28. Trouble was many of them shouldn’t have been allowed to join, as they had difficulty fulfilling the entry criteria.

Many of them were too willing to do whatever it took to bring their levels up to the top country in the EU – Germany. The financial crisis of 2008 revealed the weakness of the EU, and then the Greek crisis got underway in 2009, peaking in 2011. Greece had cooked its books. Factions in Greece wanted out, but by then it was too late. They couldn’t allow Greece to leave. Too much depended on keeping Greece in the EU, because an exit might trigger others wanting to leave. The Grexit was born, and before long even more -xits were born. The Brexit marked the first time a country actually vote itself out of the EU.

That of course is not the end of it. The purveyors of the Brexit vote had to resign. Conservative British Prime Minister David Cameron rolled the dice on allowing the Brexit vote, and he lost. He may well become known as the Neville Chamberlain of his day. Many others followed, including numerous shadow cabinet ministers in the Labour party led by Jeremy Corbyn. They revolted against Corbyn because he supported the ‘remain’ side. There have been calls for others to resign, including Bank of England head Mark Carney, because of his open support for the ‘remain’ side.

The ‘remain’ side is so upset that they lost, they started a petition to hold another referendum that now apparently has over three million signatures, as if this were a sporting contest with a best two out of three series. PM Cameron has rightly rejected it. All of this is contributing to a high degree of economic, financial and political uncertainty. Stock markets have reeled. Gold has soared. The British pound has sunk to a thirty-year low. To add insult to injury, S&P has downgraded the United Kingdom’s debt to AA from AAA.

Political uncertainty is enveloping the UK’s Conservative and Labour parties with one leaderless, even as Cameron won’t step down until October 2016, and the other with the leader under severe pressure to resign. Scotland and Northern Ireland both supported the ‘remain’ side, and Scotland is now considering another vote to secede from the UK and remain in the EU. Northern Ireland is exploring becoming a part of Ireland. If successful, it would lead to the break up of the UK itself.

Is the breakup of the UK such a bad thing? Well, a UK divorce could be messy, just as the UK’s divorce from the EU could be quite messy. The UK government needs to invoke Article 50 of the Lisbon Treaty in order to start the process of extricating itself from the EU. The negotiations could take two years. Many EU officials are urging a quick departure, and there is also a desire to punish the UK for having the audacity to vote to leave. Nigel Farage, the leader of the UKIP party in the UK, who was one of the leaders of the ‘leave’ side, met with an icy reception when he spoke at the EU Parliament. It didn’t help that Farage lectured them. Many in the EU believe they need to make things difficult for the UK in order to show the other anti-EU parties that there is a steep price to be paid to leave the EU. Despite the vote, the Brexit is no sure thing. The vote was non-binding.

But would the UK be worse off or better off if it leaves? That is hard to say. Initially it could be worse off, but further down the road it might pay off handsomely. Switzerland has never joined the EU, nor has it assumed the euro as its

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currency. At one time the Swiss franc was tied to the euro, but that didn’t work, and the Swiss unpegged the Swiss franc once again. Switzerland enjoys one of the highest standards of living in Europe, is a major exporter with a positive balance of trade, and has low debt. Britain on the other hand is one of the most indebted countries in the EU with a total debt-to-GDP ratio in excess of 600%. This includes not only public (government) debt, but private debt as well (household, corporate and financial). Japan is the only other country with a total debt-to-GDP in excess of 600%. Much of this debt has been added since the financial crash of 2008. The UK, unlike Switzerland is a net importer with a negative balance of trade.

What the Brexit might give the UK is the ability to reform itself, so as to make itself more attractive going forward. As a smaller unit, it might allow the UK (assuming its survival in current form) to become nimbler and more dynamic on the global stage. But that might take some time, and initially the UK could be worse off. Besides the example of Switzerland, there is also Iceland, which suffered immensely from the financial crash of 2008, including taking down almost its entire banking system. Iceland has emerged stronger because of reforms that have allowed it to shake off the worst of the 2008 crash.

The EU itself may be worse off without the UK, as the UK would leave what is becoming a fragile union, with a shaky currency and a number of highly indebted countries, against the background of a fragile global macro economy. The EU itself could be at risk. With rising protectionism and nationalism in countries, it could lead to more economic tensions and a depression. In a worst-case scenario, it could even lead to another European civil war, as it has in the past. That is not a scenario anyone wants. The EU has its serious flaws, but a return to the internecine warfare waged for centuries on the continent is not a good plan. The EU needs serious reform, not its breakup into warring parties once again.

But getting there won’t be easy, as the UK and the EU will be wracked by uncertainty for an unknown period. The Chancellor of the Exchequer, George Osborne, has stated that taxes will have to be hiked and spending cut as a result of the Brexit. Osborne was a major supporter of the ‘remain’ side. The battle between the ‘remain’ and the ‘leave’ sides could take on more twists over the next several months. As noted, the UK has to invoke Article 50 of the Lisbon Treaty to get the Brexit going. That may not be forthcoming. PM Cameron has said he will leave that to a new leader. A new leader won’t be in place until October. And what if the new leader is from the ‘remain’ camp? The referendum is non-binding, meaning the Brexit could be dragged out forever and may not even happen. That decision is now up to Parliament, a Parliament that is split just like the vote.

Political, financial and economic uncertainty are gripping the UK, and none of it appears likely to go away any time soon. Both major UK parties are split with ‘remain’ and ‘leave’ MPs. The parties themselves could split. Nipping at their heels is UKIP, an anti-EU party led by anti-immigrant leader Nigel Farage. Racist attacks have increased since the Brexit vote, and the potential for further social unrest is clearly present.

Globalization, one of the cornerstones behind the Brexit, created many winners and just as many losers. It doesn’t matter whether it created losers in the UK, in the EU or in North America; the divide between rich and poor, haves and have nots has only increased with globalization. The policies put in place by the financial authorities since the financial crash of 2008 have only exacerbated the situation, resulting in a stock market and bond bubble that has benefited the well off, but has left behind millions that have been pushed to—and even fallen off—the edge.

But the political, financial and economic uncertainty is not limited to the UK. It is present in the EU and in North America as well (the US and Canada). If the UK were to actually proceed with the Brexit, it could upset the power structure in the EU, leaving Germany and France as the leaders without the buffer of the UK. Germany and France

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France could find themselves being pushed more for redistribution with the financially weaker nations in Eastern and Southern Europe, except there would be less to redistribute without the UK. And immigrants from those countries would no longer have the option of moving to the UK for work, as they currently do with the open borders of the EU. The UK could also go the Norwegian route of contributing to the EU but not actually having a vote. That is not a viable solution. You are either in, or you are not.

A lot of ink has been spent on the Brexit over the past week. Brexit fatigue could well set in. Just because the Brexit could take place doesn’t mean that the UK and the EU are going to stop dealing and trading with one another. Nor does it mean that the UK is about to exit the global economy. A mini-panic has taken place, and more uncertainty is sure to roil the markets in the coming months. There is more amiss in the world economy than just the Brexit. If one wants uncertainty, then one need look no further than the upcoming US elections in November. The Republican convention is coming up in July, and it could well turn into the Democratic convention of 1968. The pundits got the Brexit wrong, so they could also get the US elections wrong and another political earthquake could be unleashed.

If one thing is certain, volatility is expected to continue. Many after-effects of the Brexit are not yet priced into the market and may not yet even be known. The Brexit may be just the start of a shaky second half to 2016. Currencies were getting crushed as a result of the Brexit, but in its place gold, an alternative currency, soared. Prior to the Brexit vote, gold sales soared to such an extent that there were reports of illiquidity in the physical market. But those who purchased gold were rewarded. With more uncertainty to come and paper assets getting crushed, the time may be here to ensure one has a hard currency asset to protect the downside.

The British Pound Gets Crushed

Source: www.stockcharts.com

http://www.stockcharts.com/

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But Gold in British Pounds Soars



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K E Y E C O N O M I C I N D I C A T O R S

CURRENT YEAR AGO CURRENT YEAR AGO US YIELDS CANADA YIELDS Fed Rate 0.25%-

0.50% 0%-0.25% BofC Rate 0.50% 0.75%

3-month T-Bill 0.26% 0.02% 3-month T-Bill 0.49% 0.58% Real Interest Rate (3 mth

T-Bill-% chg. CPI) (0.74%) 0.06% Real Interest Rate (3 mth

T-Bill-% chg. CPI) (1.01%) (0.42%)

GDP GROWTH GDP GROWTH GDP $18.3 trillion $17.6 trillion GDP $2.0 trillion $2.0 trillion

USA (official) 2.0% 2.9% Canada (official) 1.1% 2.0% USA (Shadow Stats) (1.8%) (1.3%) UNEMPLOYMENT UNEMPLOYMENT

USA (U3) 4.7% 5.5% Canada (official R4) 6.9% 7.1% USA (U6) 9.7% 10.7% Canada (R8) 9.9% 10.1%

USA (Shadow Stats) 23.0% 23.0% US Labour Force 158.5 million 157.4 million Can Labour Force 19.4 million 19.2 million

USA Part Time Workers %

17.7% 17.5% Can Part Time Workers % 18.8% 19.0%

USA Labour Force Participation Rate

62.6% 62.8% Can Labour Force Participation Rate

65.7% 65.9%

Not in Labour Force 94.8 million 93.1 million Not in Labour Force 10.3 million 10.0 million DEBT & MONEY (US$) DEBT & MONEY (CDN$)

US National Debt $19.3 trillion $18.2 trillion Canada National Debt $1.05 trillion $1.05 trillion US Total Debt $65.7 trillion $61.8 trillion Canada Total Debt $5.2 trillion Debt per family $803,921

Savings per family $9,870 Unfunded Liabilities $102.6

trillion Canada M2 Money Supply

Liability per taxpayer $857,382 US M2 Money Supply $12.7 trillion $12.0 trillion Canada Debt to GDP $1.4 trillion $1.3 trillion

US Monetary Base $3.8 trillion $3.9 trillion Canada Total Debt to GDP US Debt to GDP 105.3% 102.8% 91.5% 86.2%

US Total Debt to GDP 358.5% 351.1% 274% INFLATION INFLATION

US Inflation (official) 1.0% (0.04%) Cdn Inflation 1.5% 0.9% Shadow Stats Inflation 8.7% 7.6%

OTHER OTHER Baltic Dry Index 640 794

US Living in Poverty 46.8 million 45.3 million

Food Stamp Recipients 43.9 million US Recession Probabilities

15.7% 7.9%

USA CANADA

Source: www.research.stlouisfed.org, www.bankofcanada.ca, www.shadowstats.com , www.statcan.gc.ca



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http://www.research.stlouisfed.org/

http://www.bankofcanada.ca/

http://www.shadowstats.com/

http://www.statcan.gc.ca/

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W E E K L Y M A R K E T R E V I E W

S T O C K M A R K E T S


Call it the $2 trillion day. The unexpected Brexit vote triggered one of the largest stock market drops in history, at least dollar wise, on Friday June 24, 2016, the day after the Brexit vote. The following Monday saw global stock markets lose upwards of another $1 trillion. The bounce back over the past couple of days is often a typical response following a steep drop as support zones are tested. It is difficult to assess at this time as to whether the hand of the Plunge Protection Team (PPT) is at work trying to rebound the market. The bounce back occurred as Brexit fears subsided.

The S&P 500 broke key support around 2,025 and briefly plunged under 2,000. The bounce back has taken the S&P 500 back above the 100- and 200-day MA, but the 50-day MA lies just above where resistance could be stronger. The S&P 500 broke down from a distribution pattern. Potential objectives could be down to at least 1,925, with further objectives down to 1,865 and 1,770. Only regaining above the pre-Brexit high of 2,113 could suggest that the trend might change to upward, and new highs could be seen. Short-term trends have turned down, while the intermediate trend has turned neutral.


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The Brexit has changed the equation. The Fed had already suggested they were concerned about the global economic situation at the last FOMC meeting a week prior to the Brexit. The Brexit should give them more cause for concern. The Brexit casts a pall of uncertainty on the markets, and markets do not like uncertainty. The past couple of days appear to be a typical bounce back following a rapid plunge. It seems there remain many out there who are following the “buy the dip” strategy.

A stronger bounce back cannot be dismissed, even if the background news is negative (Brexit). Easing of Brexit fears can have a positive impact on the markets. The VIX volatility Index leaped, but has thus far failed to take out previous highs. There are a large number of unknowns going forward but if the markets are supported by the PPT, then instead of breaking down they could leap to the upside, fooling the bears.

As Brexit fears eased the stock markets, while closing down on the week, recouped most of the losses seen on Friday and Monday, the two business days following the Brexit.


Irrespective of what happens in the short term, the long term still looks negative. Below is a monthly chart of the


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S&P 500 with what is known as a Coppock Curve. The Coppock Curve is used exclusively with monthly charts. It is a trend-following indicator that, like many technical analysis indicators, is momentum based. The curve has been rolling over for months. This is not unusual. The Curve is a better buy signal indicator than it is a sell signal indicator. All it can do is signal that momentum is waning, which is not a sell signal in and of itself.

The Coppock Curve has recently fallen below zero, a negative sign. Throughout the great 1990s bull market, the Coppock Curve never fell below zero. The first breakdown came in February 2001 and signaled the collapse into October 2002. The second breakdown came in June 2008, and it too signaled a collapse that was forthcoming into March 2009. Now the Coppock Curve has gone negative once again. If the signal is correct, the rebound that appears to be under way may not last all that long before another waterfall decline gets underway.


The market had a very volatile week with the Brexit. However, by week’s end fears of the Brexit were easing, leaving the markets only off roughly 0.5% on the week. An exception was the Dow Jones Transportations (DJT), which fell 2.5% on the week. Can the rally continue into next week? US markets are closed on Monday for the July 4 holiday (Canada is closed on Friday for the July 1 holiday). The longer-term picture suggests that rallies should continue to fail, but short term the markets could recoup their Brexit losses and even see new highs.


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Bonds


“Down, down (Aaaaaaah)”

Bund, German Bund (with apologies to the B-52’s “Rock Lobster”)

How low can they go? German bunds used to yield something—over 4.25% back in 2008. Now they are negative. There is upwards of $10 trillion of bonds in the EU that have a negative yield. Negative yields are quite a price to pay for safety. Yet bond yields have been plunging in the wake of the Brexit. Actually they have been falling for years, especially in the EU. But even back in late 2013, the 10-year bund still attracted around 1.50%. Not any more. The latest was actually -0.125%. No idea where the bottom is on this, but really—how negative can it become?

We hadn’t noted bonds for sometime, so we thought it appropriate in the wake of the Brexit to take a look at two of the largest bond markets in the world: the US and Germany. (In terms of size the US has the world’s largest bond market, followed by Japan, United Kingdom, France and Germany). Bond yields have been falling in the wake of the Brexit, as there is a rush to safety. Even the US 10-year Treasury note has fallen to new multi-year lows, taking out the 2012 low (yield) by a hair so far, as it has fallen to 1.46%. At least the US bond still pays something.

The commercial Commitment of Traders report (COT) recently flipped from net long to net short, even as the large speculators COT went further net long. The large speculators seem to believe that yields are just going to keep going lower. In the face of the Brexit, where the rush to bonds is a safety play, the next move might be to the upside rather than a continuance of the downward move.

Surprisingly, one area in the UK that didn’t get hit hard was the bond market. United Kingdom 10-year Gilts, rather


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than succumb to selling, actually saw prices rise (yields fall as yields move opposite to prices). That chart is also shown below. Considering that the UK was downgraded from AAA to AA by S&P, that is remarkable. But then bond yields have been doing nothing but fall. Bond sentiment has become quite high. The question that begs is what happens if they start going back up. We have seen bond panics in the past, so it is complacent to believe that it cannot happen. The 10-year UK Gilt is now just below 1% in yield.





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The Brexit gave rise to currency breakouts and breakdowns. One of the clear currency winners from the Brexit was the US$ Index (USDI) as it broke out of a multi-month decline. The target now appears to be the upper trend line just under 98. Initially, at least the USDI has run into some resistance at the 200-day MA. A firm break and close over 96.50 should send the USDI to its next target at 98. A breakout over 98 could suggest an even stronger move to potential objectives up around 106/107. That zone has been a long-held objective for us for the USDI to complete a possible five-wave advance from the 2008 lows. The USDI gained 4% following the Brexit vote, a far cry from the 13% that the British pound fell from the highs on the day of the vote. A decline back under 95 might throw the USDI rally in doubt.

C U R R E N C I E S


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If the USDI was breaking out following the Brexit, that means other currencies were breaking down. Earlier we showed the British pound, which fell to 30-year lows. But the euro was also a loser. Given that the euro is the largest component of the USDI, it shouldn’t be a surprise then that the USDI was up following the Brexit. The euro dropped 4% from the highs on the day of the Brexit vote. The euro has fallen under the 200-day MA, suggesting that it may have further to fall. Potential objectives for the euro are a decline to 99/100. Only a break above 112 could throw this breakdown in doubt.

If there was a winner on the week, it was the Japanese yen. The yen and the US dollar were the only gainers from the Brexit. The yen jumped 1.7%, and even made new 52-week highs.


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Percentage Gains Trends

Stock Market Indexes Close Dec 31

Close Jun 22

Week YTD Daily Weekly Monthly

S&P 500 2,043.94 2,070.77 (0.7) 1.3 down (weak) up (weak) up (topping)

Dow Jones Industrials 17,425.03 17,694.68 (0.5) 1.6 down (weak) up (weak) up (topping) Dow Jones Transports 7,508.71 7,412.95 (2.5) (1.3) down down neutral

(topping) NASDAQ 5007.41 4,779.25 (1.1) (4.6) down (weak) down (weak) up (weak

topping) S&P/TSX Composite 13,009.95 14,036.74 0.2

7.9 down (weak) neutral neutral

S&P/TSX Venture (CDNX) 525.59 721.10 1.8 37.2 up up down (weak bottoming)

Russell 2000 1,135.89 1,131.62 (0.4) (1.5) down (weak) neutral neutral MSCI World Index 1,693.06 1,597.84 (3.9) (5.6) down down down

Fixed Income Yields

U.S. 10-Year Treasury 2.27 1.50 (11.2) (33.9)

Cdn. 10-Year Bond 1.39 1.07 (14.4) (23.0)

Currencies

US$ Index 98.75 95.86 2.2 (2.9) up neutral up (topping?) Canadian $ 0.7233 0.7704 (1.1) 6.5 down (weak) up down

Euro 108.59 111.07 (1.8) 2.8 down neutral down British Pound 147.37 134.38 (new

lows) (9.0) (8.8) down down down

Japanese Yen 83.12 97.22 (new highs)

1.7

17.0 up up up (weak)

Precious Metals

Gold 1,060.50 1,321.80

(new highs) 4.2 24.6 up up up (weak)

Silver 13.82 18.37 (new highs)

6.0 32.9 up up neutral

Platinum 892.90 1,013.50 3.5 13.5

neutral up down (bottoming)

Palladium 562.00 589.65 5.1 4.9 up neutral down Copper 2.135 2.194 2.8 2.8 up neutral down

Gold Bugs Index (HUI) 111.18 242.72 (new highs)

6.7 118.3 up up up (weak)

TSX Gold Index (TGD) 129.30 248.94 (new highs)

7.9 92.5

up up up

Energy

WTI Oil 37.07 49.88 1.8 34.6 up up down

Natural Gas 2.35 2.863 5.6 21.8 up up down



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M A R K E T S A N D T R E N D S

S E E G LO S S A R Y A T E N D F OR A N E XP L A N A T IO N O F T H E T R E N D S

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Gold is a currency, given its role as a reserve currency in the world’s central banks (with Canada being the only G7 nation that has sold all its gold), alongside US$, Japanese yen, British pounds, euros and, increasingly, the Chinese yuan.

Gold acted as a safe haven from the storm over the Brexit. Gold also acted as a currency, gaining not only against the US$, but in all currencies. It was rather interesting that all this also occurred against the backdrop of former Federal Reserve Chairman Alan Greenspan warning that, as a result of the Brexit vote, the world is “in the very early days of a crisis which has got a way to go.” Greenspan noted that the Eurozone is a “very vulnerable institution.” Greenspan said that he “didn’t know how it’s going to be resolved, but there is going to be a crisis.” Greenspan went on to note that productivity had ground to a halt, and that the monetary authorities were preparing to provide “helicopter money,” which could unleash hyperinflation. Greenspan called for a return to the gold standard as it was prior to the creation of the Federal Reserve in 1913. He asked the question as to “why do central banks own gold now.”

This is coming from Alan Greenspan, who still remains one of the most revered Federal Reserve chairmen ever. It is well known that even when Greenspan was Fed chairman, he was not hesitant to voice positive opinions about gold. One of Greenspan’s best-known quotes is: “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value."

Could the world return to a gold standard? Yes. Will the world return to a gold standard? That is a harder question to answer, but the world may find itself in a financial crisis such that it will have no choice but to return to a gold standard. To get there the world would have to go through considerable opposition, as it was bankers and central bankers that called for the end of the gold standard; they found it too constraining. Since the end of the last gold standard in August 1971, the world has seen an explosion in money and debt growth that has brought us to today’s

If there was a big winner from the Brexit vote, it was gold and precious metals. Gold, silver, the Gold Bugs Index (HUI) and the TSX Gold Index (TGD) all leaped to new 52-week highs. Gold was up almost 9% following the Brexit vote, before settling back with a 4.6% gain on the week. Silver leaped 8% following the Brexit vote, and closed the week up 6.2%. The HUI leaped 6.7%, and the TGD was up 7.9% on the week.

Other currencies expressed in gold were the big winners, because the currencies fell as gold was rising against the US$. Gold in Cdn$ was up 5.8% on the week, gold in euros gained 6.3% and gold in Japanese yen was up 2.8%, but the big winner was gold in British pounds, jumping 14.8%.

Gold was up in all currencies this past week. This is a bullish sign, since gold is usually falls when the US$ rises. When gold is rising in all currencies, we have what we believe is the definition of a bull market.

G O L D A N D P R E C I O U S M E T A L S

GOLD INDICATORS

CURRENT (May 18, 2016)

YEAR AGO

Gold in US$ $1,321.80 $1,172.10 Gold in Cdn$ $1,722.35 $1,466.04 Gold in Euros €1,195.00 €1,052.00 Gold in British Pounds £987.00 £746.00 Gold in Japanese Yen ¥136,400 ¥143,600 Dow Jones/Gold ratio 13.34 15.03 Gold Volatility Index 19.26 15.34 Gold/Oil ratio 26.60 19.84 Gold/HUI ratio 5.47 7.83 Gold/Silver ratio 72.09 74.87 Gold Sentiment Index 136.50 86.00 PERFORMANCE (2000-Present)

Dow Jones Industrials (DJI)

53.9%

S&P 500 40.9% Gold 358.2% Silver 237.6% WTI Oil 94.8% DJI REITS 208.3 %

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today’s brink. Central banks are slowly losing control and no longer have the wherewithal to bail out the system. That is one prime reason why the bail-in regime has been set up in the Western economies—to replace the previous bailout regime that occurred following the financial crisis of 2008. Many believe that the Brexit could eventually usher in another round of quantitative easing (QE).

With gold (and silver) now rising in all currencies, as well as making new 52-week highs, it is no surprise that precious metals are now seeing all their trends—daily (short term), weekly (intermediate term) and monthly (long term)—turn to the upside for the first time since 2012. Yet gold, silver and precious metals remain under-owned compared to traditional assets such as stocks and bonds. Investment demand has been strong, and the gold miners who suffered the most during the bear market from 2011 to 2015 (losing some 80% or more) are now up over 100% in 2016.

Near term, gold has broken out of what appears as an expanding triangle. Potential objectives could be up to $1,400 before another round of consolidation takes place. The resistance-zone range is $1,380 to $1,400. The commercial COT for gold remains bearish, with last Friday’s report at 22% for gold and 28% for silver. The commercial COT’s short position jumped by roughly 20,000 contracts, but the long position was also up about 6,000 contracts. But gold and silver did rise against the backdrop of a negative commercial COT during the bull market from 2009 to 2011. Could it happen again?

Silver appears to have broken out of a head-and-shoulders consolidation pattern, with potential objectives up to $20.15. Silver is currently in a band of resistance that stretches up to $19, but a breakout over $19 should send silver up towards the $20 handle with an outside shot at making it to $21.

Platinum, palladium and even copper came along for the ride this past week, and their trends are turning up in line with gold and silver, although they currently lag. A resurgence by platinum would be key, as this is a precious metal that traditionally trades at higher prices than gold.

The gold stocks were leading the way once again this past week. This is what one wants to see in a true bull market for precious metals. As noted earlier, the HUI gained 6.7% this past week, and the TGD was up a stellar 7.9%. The HUI is now up 118% on the year, while the TGD is not far behind—up 92%. The gold stocks have been the best-performing stocks by a wide margin in 2016. Still, they remain grossly under-owned, even as many are waking up to the fact that they might be missing something. On the other hand, those that may dismiss the rise in the gold stocks are still believing the 80%-plus drop that took place from 2011 to 2015. It is noteworthy that pullbacks have been shallow thus far, another sign of a true bull market.

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A few charts follow below:


From roughly 2001 to 2011, the Dow Jones Industrials (DJI) Gold ratio favoured gold over the DJI. This all changed in 2013, when the DJI/Gold ratio broke out in favour of the DJI. But that changed recently when the ratio broke below the 65-week exponential MA in favour of gold once again. A test of that key EMA recently took place, and the ratio is again moving down in favour of gold over the DJI. The message is straightforward – own gold over stocks. A return to the 2011 lows just under six is likely, with the potential for even lower prices.




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The silver head and shoulders pattern that potentially projects to $20.




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We freely admit that the gold stocks (HUI, TGD) run has been quite remarkable. But when the bullish percent index leaps over 80, we also know that the market is getting a little frothy. Of course in a strong bull market, the pullbacks can be shallow, just enough to pull it back under 80, before another upward assault gets underway. Some caution is advised, but overall this market has been strong. Note that, at the other extreme, readings under ten were buying opportunities.


www.stockcharts.com

Gold in Cdn$ has had a nice rise, and now sits at over $1,700. That is only about $200 under its 2011 high. This chart says it is going to go higher. Some ongoing backing and filling would be positive for the bull case.



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Gold appears to have resistance up near $1,380. There was a nice rising triangle, a pattern that is not uncommon in rising bull markets. Major support should now be down to $1,265, with even stronger support down at $1,200. Again some backing and filling, with occasional shakedowns, would help keep the bull case alive. But the lows in December 2015 are beginning to look potentially quite important.

David has worked in the financial industry for over 40 years. He spent most of his career on the trading desks of a few large Canadian financial institutions where he was a manager and dealer in money markets, foreign exchange and financial derivative portfolios. These included Export Development Corporation (EDC), Canadian Imperial Bank of Commerce (CIBC) and Confederation Treasury Services Ltd. (CTSL), the treasury arm of Confederation Life Insurance Co. (CLIC). David moved into the brokerage industry in 1995, where he applied his experience in financial markets and technical analysis to writing market commentaries and articles as well as acting as an investment advisor. David spent several years writing columns for Investor’s Digest of Canada, as well as institutional and retail clients, and appearing as a guest market analyst on the Business News Network (BNN). David is a Fellow of the Canadian Securities Institute (FCSI) and a Canadian Investment Manager (CIM).


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H I G H L I G H T S O F T H E W E E K B Y D A V I D C H A P M A N J U L Y 1 , 2 0 1 6

T O R O N T O , O N T A R I O The Brexit: Get out the pitchforks

• The rise of populism • The trouble with the EU • Political uncertainty galore • But financial and economic

uncertainty as well • But will the UK be worse off or

better off out of the EU in the long run

• Globalization has created winners and losers

• More uncertainty sure to come Stock market weekly review Bond Market weekly review Currencies weekly review

Gold and precious metals weekly Review David Chapman BMG Chief Economist T . 9 0 5 . 4 1 5 . 2 9 4 7 [email protected]


H I G H L I G H T S

DAILY – Short-term trend WEEKLY – Intermediate-term trend MONTHLY – Long-term secular trend UP – The trend is up. DOWN – The trend is down NEUTRAL – Indicators are mostly neutral. A trend change might be in the offing. WEAK – The trend is still up or down but it is weakening. It is also a sign that the trend might change. TOPPING – Indicators are suggesting that, while the trend remains up, there are considerable signs that suggest that the market is topping. BOTTOMING – Indicators suggest that, while the trend is down, there are considerable signs that the market is bottoming. * - Indicates that the trend has changed.

Disclaimer This report is provided by BMG Inc. and BMG Marketing Services Inc. It is for informational and educational services only as of the date of writing, and may not be appropriate for other purposes. BMG Inc. and BMG Marketing Services Inc. may include information obtained from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made to ensure its accuracy or completeness. Opinions expressed are subject to change without notice. This letter is not intended as investment advice, and its use in any respect is entirely the responsibility of the user. Past performance is never a guarantee of future results.

G L O S S A R Y T R E N D S

B U L LI O N M A N A GE M E N T G R OU P IN C . 2 8 0 – 6 0 R e n f r e w D r i ve Ma rk ham , O n t a r i o C a na d a L 3R 0E 1 .

9 0 5 . 4 7 4 . 1 0 01 T o l l F re e . 1 .8 8 8 . 4 7 4 . 1 0 01 F . 90 5 . 47 4 .1 0 9 1 B M G B U L L IO N . C OM

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