Dollars, Gold and Technology - Mine Digital
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Dollars, Gold and Technology

July 26, 2020 • 
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With the U.S. dollar sliding during the week we saw gold and digital assets bid. The re-orientation of expectations for the year include inflation.

The Numbers

What we see from the numbers this week is a bid in precious metals that comes with a continuation of the selloff in U.S. dollars. Some energy products have been bid. There was a sense of a minor market correction beginning in the S&P 500.

The Events

Risk-Off

The beginnings of risk-off were showing in the markets towards the later half of last week and traders should be careful in navigating this the coming fortnight.

We can see some serious sliding in the S&P500 priced in gold, in which as long as gold is strong, the index does not have to selloff priced in USD. Traders on the short-side have been able to use gold as a reference rate and engage in textbook trading in the coronavirus selloff.

Whether the market continues on its way in scenario 1, or bounced before realising something like the second scenario, this chart is likely to continue to show a bearish reality, regardless of what the false, USD denominated index does.

China

The pressure remains on China at the moment, with the US committing serious military hardware to South East Asia. This week Mike Pompeo was reported as stating that the ‘free world must change China or China will change us’ and the US shut down the Chinese consulate in Houston signalled a full-frontal attack on Chinse espionage.

There have been some clear changes in tactics in China and with such a tightly controlled, self-referential system there is not a lot of room for nuance and we can see the latest thinking of the CCP leadership.

The main Chinese tactics are

  1. Symmetrical losses – unlike Western nations, China is willing to sacrifice itself in measured amounts to the damage it does
  2. An eye for an eye. China is responding with any perceived sleight with an equal or greater response.
  3. Wolf Warrior Diplomacy. This has been a catastrophic failure in one of its iterations, when Chinese nationalists signaled that they were interested in claiming the Russian city Vladivostok as their own. Knowing that this undercurrent exists in Chinese political realities puts a hard limit on the Russian/Chinese relationship.

Although this may be seen as a type of confidence, it is more likely a feint, something like a warning to neighbours and competitors that if they co-operate with the US that they will take action against them and to the U.S. that they mean business.

For Australia, it was tactical restrictions on some commodities – barley, sorghum, beef, as well as creating new rules for iron ore imports as a way of changing the rules of the game to keep control of desperately needed iron ore and coal imports. Australia has had years to figure this out – the Australian government ignored China’s arrest of a Rio Tinto executive on trumped up charges years ago.

Chinese interventions in markets probably include the stock-market, which was bought heavily (with newspapers asking the public to buy) after the CCP seized Hong Kong and it was announced that Hong Kong would lose its status as an international banking and financial centre. Since making a high there has now been 2x 4-5% down days.

China can use its power during times of stability to create the appearance of the reality it wants to promote, but it is going to have an increasingly difficult time in creating that impression. Non-performing loans are increasing rapidly, they are cut off from markets, they have lost Hong Kong, they have immense amounts of debt, they are bailing out financial institutions and they could lose control of their currency by the end of the year.

Tech Investment

Digital assets came off with tech stocks late last week, but have since turned around significantly. It looks like digital assets are de-coupling from risk assets a little and are prepared to go it alone. We wait for Ethereum to finish a move between 310-320 before it becomes obvious that Bitcoin needs to come along for the ride.

Big Tech

The CEO’s of Facebook, Apple, Amazon and Google/Alphabet will give testimonies to a congressional antitrust investigation into big tech companies on Monday. Facebook is on the hook as a neutral actor which has been a dangerous position the last 5-7 years, Apple may have surprisingly little to be worried about given their apolitical role, Amazon has something to worry about with a huge number of people believing they have some right to discuss Jeff Bezos’ bank account and Google/Alphabet are the targets of this investigation. It is hard to see Alphabet escape without some type of outcome that disempowers its ability to interfere with the political process.

Bitcoin

Bitcoin has begun to creep along as the last to come in a broad digital asset rally the last month.

Sitting below major technical levels, the price change would represent institutional buying into the market fundamentally changing the market structure.

If this institutional buying exists, short positions will be operating with fundamentally incorrect assumptions and given the time that the market has traded at these levels, could be a remarkable stop-out event.

The major levels are barely above the current price, and then $10k, then $10,400.

The order book has interest all the way to $12k, after which there are open skies for Bitcoin.

We have to consider a failure of the move trading dramatically lower.

Bitcoin/USD Chart

Volume

In volume over the last 6 months, we can see volume getting lower and lower, with a slight tick up in volume the last week.

Volatility

Volatility sellers have had another great week, with historical volatility around 50% of the implied vol traded in options markets.

Sentiment

Digital asset sentiment is up the last week marginally, although still neutral for all intents and purposes.

Bitcoin Dominance

BTC Dominance has slid the last month since breaking its up-trend. Having completed the technical pattern, it sits at the exact half-way point of our higher and lower bound of dominance.

Money

The U.S. dollar has had another tough week. With the interest in gold and precious metals, the selloff is starting to become a bit of a rout and, with inflation expectations showing in soft commodities and TIPS, starts to look like the acceptance of major systemic problems in using the U.S. dollar as money. We have been covering this every week for some months and expect that this continues.

It underlines serious concerns in the U.S. dollar and its global role, especially with an impending fiscal expenditure that has not even been announced yet. So far, precious metals and digital assets have been the benefactors.

Comex delivered 170 tons of physical gold in June with the next major futures expiry date on August 27th.

That amount of gold delivered monthly for a year is just shy of the entire Russian national reserve holding for gold.

Gold

Gold has broken out of its trend-channel cleanly, with no clear end-point in mind. Although 2000 is a clear target, the major Comex expiry is August 27th and it is conceivable that the price rallies into this.

There has also been a lack of panic buying, major stop-outs and significant 1-day moves and we expect all of these things before the move pulls itself up.

DXY

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Written By
Operations & Trading Manager
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