2015 has been an unusual year characterized by directionless markets.
The U.S. stock market has barely moved since December / January, precious metals and copper are trading at the same prices as on the first days of the year, and we see a similar picture in most grains. Bonds in the U.S. are trading at the same level as half a year ago. Only a few soft commodities are significantly lower for the year.
The most prominent “winners” so far in 2015 are the U.S. dollar and stocks in Europe, Japan and China. The inflationary effect of weakening currencies has driven most stock markets higher, except for those in the U.S.
We are witnessing serious conflicts (“battles”) in the markets. The monstrous rally in the U.S. dollar has created a deflationary trend, while global central banks are engaged in monetary inflation. Europe, Japan, and China have recently rolled out their version of “quantitative easing,” but real growth remains absent. As explained in our recent column, “This Financial Seismograph Signals A Monetary Earthquake” (also released on Zerohedge where it was read by more than 40,000 readers), global growth has returned to 2009 levels. The Baltic Dry Index, a global transportation index and indicator of global economic prosperity, has also collapsed to 2009 levels.
Moreover, the U.S. stock market shows a huge divergence: the transportation segment is truly suffering while the Dow Jones is at all-time highs. That hasn’t happened in the last 100 years. High readings in the stock market should result from a growing economy which is always associated with more transportation. Apparently those “classic” rules no longer apply in 2015.
The conflicts in the markets are intense. The credibility of the exceptional monetary policies from central bankers is clearly at stake.
Bullish and bearish forces in the gold market
The gold market is also in the midst of a strong battle, which is exactly what we told MarketWatch on Friday and were quoted. Secular Investor provides regular commentaries to large financial sites. Below we describe the bullish and bearish forces we currently see.
The price of gold has gone nowhere in the last two years and has created a 2-year basing pattern. That is constructive for gold prices as the stronger the base, the stronger the next trend. But a trendless market also indicates a battle between bullish and bearish forces.
The strong U.S. dollar has pressured precious metals since last summer. Also, the talk of interest rate hikes by the Fed is said to have negatively influenced gold. We have explained previously that we hold an alternate view on the relationship between interest rates and gold. Our opinion is that the inverse relationship between interest rates and the price of gold is primarily a narrative, rather than a fundamental market dynamic, because rising rates are likely to mark a new rate cycle and a new economic cycle.
A standout feature this week, negatively impacting precious metals, is the latest COT report (Commitment of Traders), which reveals the positions of large traders in the gold and silver futures markets. This week’s COT report, for positions at the close of trade on Tuesday May 19th, shows a very strong accumulation of short positions by commercial traders, which indicates the capping power that can oppose this rally. It is no coincidence that gold’s recent rally was stopped this week. Do not expect a strong continuation of the rally in the very short term.