SD Outlook: From the launch of the petroyuan to U.S. markets closed for Good Friday, we could be seeing a lot of action in a short amount of time…
This is a short trading week but that doesn’t stop the Fed from trying to jawbone the markets:
We’ve got Fed Heads going at it every day this week, and we have early afternoon and late afternoon speeches today just to make sure the markets start off in their Fed approved ways.
But today, in China anyway, and to a lesser extent here, there was another story that stole the show: The petroyuan.
Last night (Monday in China) the petroyuan was officially born:
West Texas Intermediate (WTI) is the global benchmark for crude oil prices.
INE is the crude oil futures contract that trades on the Shanghai International Energy Exchange. Here’s some boring legalese about the oil contract if anybody is so inclined to read some Google translated Mandarin Chinese (I presume).
While we are not seeing an immediate implosion of the oil markets or anything like that, it is important to note that China is the number one oil importer in the world, so it stands to reason that over time, the petroyuan will come to dominate the global oil market and take over as the benchmark oil price.
What is good for the petroyuan is bad for the petro-dollar, but for now, the importance of the petroyuan is that it is just another step away from the dollar.
China now has an oil futures market. A few years back China began trading gold via the Shanghai Gold Exchange (2014). A couple of years after that (2016), the Renminbi, another name for Chinese Yuan, was included in the International Monetary Fund’s ‘Special Drawing Rights’ basket of currencies, boosting Chinese currency to “reserve” status right alongside of the dollar, the euro, yen, and the British pound.
There has been more than just those concrete stepping stones as well. There have been actions that show the pivot to China and away from the United States. China and Russia have been creating bi-lateral trade deals, there have been alternative, parallel systems brought on line for international clearing of payments, development banks born to facilitate capital formation and commercial infrastructure lending, and a whole host of other initiatives and programs that, when taken together as a whole, spell out the death of the petrodollar.
This inevitable death of the greenback is one of the reasons we harp on gold & silver so much.
Gold & silver, among many things, are a hedge against currency destruction, which the dollar, albeit slowly, is ultimately undergoing. There will come a point when the confidence in the dollar becomes lost, and the destruction enters the terminal, rapid decline stage. The theory goes that the loss of confidence comes from sovereign nations holding U.S. Treasuries, and they begin selling their treasuries, and those dollars begin to flood back into the United States. This flood of dollars will be compounded now that there is no need for dollars as much around the globe as nations begin to gravitate towards China’s oil futures contracts. Once the flood of dollars reaches the U.S. shores, and the prices of limited amounts of goods & services gets bid up due to excess currency sloshing around the nation, the loss of confidence will transition from the sovereign psyche to the individual psyche, where American Citizens themselves realize it no longer makes sense to save in dollars or even hold in dollars. With all end-stage currency destruction events, including hyperinflation, it makes sense to convert those dollars into tangible assets.
At that point, the velocity of money will start picking up speed as people will look to get rid of their dollars that are quickly depreciating in value. Forget about the Fed’s 2% destruction target rate because that will be blown out of the water.
That is just one of the reasons why we stack.
For now, however, baby steps. And we just took another one: The petroyuan. Sooner or later we will see that China matters, globally, much more than the United States, and if other nations are given options with China instead of ultimatums with the United States, we don’t even need to wait until the end of the chapter because it was like a homeless guy once told me: You catch as many flies with honey as you do with crap (although he used a stronger word).
Back to the short-term outlook of this week, however.
Keeping in line with oil, Crude looks like it is setting-up to test recent highs:
Overnight crude has consolidated just under the $66 level, so we’ll be looking for a break-out, aided by dollar weakness which we will get to later.
Crude oil’s divergence with copper, however, continued overnight and this morning:
Last week copper fell below its 200-day moving average, and now, copper is testing support at $2.95.
Recall that much of silver production is a byproduct of copper and other base metal mining. If base metal miners are looking for “lower for longer”, decreased production decisions, mine closure decisions of unprofitable mines, and other copper supply constraining actions could cause silver supply constraining actions as well. That is one of the reasons we look at copper so much.
Moving on to the metals, we can see that overnight and into this morning, palladium has held:
We really want to see the palladium price stay above the 200-day moving average. That is the most immediate concern. Beyond that, we want to get back above the 50-day moving average as soon as possible to get that blue line pointing back up again.
Platinum, is stuck straddling either side of the 200-day:
If the metals are going to rally, platinum will rally. Platinum has just been beaten-up for the better part of a year, and you wouldn’t know it by looking at that chart at first glance, but platinum is actually up on the year.
Looking at the gold to silver ratio with Friday’s trading action, we can see the we were over 81:
We closed at nearly 81.5 ounces of silver required to purchase just one single ounce of gold.
Silver has now severely under-performed gold since the beginning of the year, and the under-performance has only worsened. We’re right at that extreme where if by nothing but pure arbitrage, the ratio will have to start moving down. That’s one of the reasons why over the last several months, anytime I have made a purchase it has been silver.
The technicals are looking better for gold & silver coming off of the rate hike.
Gold had two solid days last week:
Everybody wanted to count the yellow metal out, including many respected and influential commodities traders, but gold really broke-out through the 50-day moving average with determination. Notice it was on volume too. That’s a good sign. And notice the MACD is signaling bullishness.
Silver is showing the same signs as gold, albeit with one major difference:
Silver still has to get above the 50-day moving average.
This should not be difficult, because the average is at $16.70, well within the range of $16.20 – $16.80. I would be looking for follow though in silver to get us above the 50-day this week. I would not be surprised if we take out the 200-day as well. The MACD is bullish and silver is showing increasing volume again. All signs we want to see.
The dollar is not showing signs of strength right now:
If the dollar index is going to be moving down, like it has now for the last three of four days, this will add to the bullish case for the metals.
Of course, all eyes will be on the bond market:
Just like this could be a week of break-outs, if we get a break-out in yield, finally towards that 3.0% psychological level on the 10-Year Note, we could see contagion from the bond market affecting other markets.
One of which would be the stock market:
The S&P 500 tested the spike low of February 9th, which also happens to be right at the 200-day moving average. If bod yields rise, this could put additional pressure on the stock market. Either way, the technicals are horrible, especially the Moving Averages Convergence – Divergence (MACD). We could also have a spike down on the Relative Strength Index, and while we might be quick to scream “oversold”, I would point your attention to just how long the S&P stayed in “overbought” territory – basically for the better part of a year.
Volatility looks to have subsided somewhat:
The world didn’t fall apart when the INE oil futures opened, but if the dollar is going to weaken, if bond yields are going to rise, and if the stock market is going to come under pressure, we could see the VIX waking up over the course of this short trading week.
Bitcoin could be back to a 7-handle real soon:
Of course, when there’s oil-backed cryptocurrencies, chili-pepper backed cryptos, gold & silver backed cryptos, what purpose does Bitcoin serve again?
It can’t serve any of the utilities and functions that gold and silver can, a few of which were mentioned right here in this market outlook.
– Half Dollar