Q. You have been very negative on the future of the Euro, yet I keep reading where Merkel and company will never let the Euro collapse. What makes you so sure of the Euro’s demise?
A. The Euro is doomed for a number of reasons, all of which we have chronicled many times in issues of The Trend Letter & in these Market Musings.
The first problem is that they created a Monetary Union where the 19 of the 28 Eurozone countries share the same currency, but they did not create a Fiscal Union where they share the debt.
For most countries, when they run into economic trouble, they can make adjustments with their Fiscal & Monetary policies to help the economy recover. The big problem for the Euro countries is that their economies are not all the same, each country has its own issues.
Some countries are big exporters outside the Euro zone, & would therefore prefer a lower currency rate. Germany exports a lot of their goods & services within the euro-zone, so they typically like a strong Euro.
So we have all these countries with their own unique economic issues, yet there is only one Monetary policy for all. The recent Greek crisis demonstrated this perfectly. Greece needs a very cheap currency to boost its economy, but they had no control over the currency.
While the single Monetary policy is a big part of Europe’s problems, there are many others. Germany has always been the ‘engine’ that drove the European economy. But now with issues like the Volkswagen emissions crisis, that engine is sputtering.
And now we have the huge migrant & refugee crisis that is hammering the economies of these already stretched economies. We are seeing demonstrations & riots, as many nationalists see these refugees & migrants as coming to steal their jobs, threaten social cohesion, & raise welfare spending.
With millions more expected to arrive, this economic & social crisis is going to ramp up dramatically. With already high unemployment numbers, these new migrants are going to fuel more & more racial, religious, & other social unrest in these regions.
While Merkel & the other politicians may wish to save the Euro, the trend for the Euro remains down. Nothing goes straight up or straight down, but over time we expect to see the Euro below par with the US dollar.
Over the past 7 years the Euro has lost almost 35% of its value. We expect that trend to continue, likely to the point where the Euro collapses.
Q. You have emphasized a number of times in The Trend Letter how 1862 was Key Support for the S&P 500. That level was tested in August & September and held. Does that mean this current rally is the start of the next phase of the bull market?
A, We can’t give our targets in this publication, as it would not be fair to the paid subscribers. But we can tell you that along with our models, we use a number of indicators to determine what the trend is.
For the S&P 500, we were looking for a significant correction, one that would drive all the bulls out of the market. Such a move would trigger a major BUY signal for us, as we are ultimately expecting a very strong US equity market. While we do have a current long position with the S&P 500, there are some issues with this current rally that suggest we are not out of the woods yet.
One of the indicators we like to use is the 300 day Moving Average. As we can see on the following chart, over the past 15 years, the 300 day MA has been a dependable indicator of a trend change. We have highlighted with green arrows when the S&P 5000 crossed above its 300 day MA, & with a red arrow when it has crossed below that line.
We also highlighted in yellow where in late 2011 it had a very brief decline & also today’s time frame where it briefly dropped below, & is now above that line.
Right now we need to wait & give the markets a bit more time to determine if this is indeed the start of the next big run, or if it is just a brief breach of that threshold, & another leg down is imminent.
Q. You have been very bearish for gold since its high in 2011. When do you see yourselves turning bullish again?
A. Technically, gold is still in a downtrend channel, as we can see on the chart below, Other than a few rallies & steep declines, it has remained in that channel since August of 2011, when we gave our SELL signal to get out of gold.
From here gold needs to break out of this channel, meaning that it needs to break above 1200, & stay above that trend line. Given its failure recently to have a weekly close above 1180, gold is looking weak here.
In 2013 when gold was over 1500, we forecast that gold would ultimately hit the 1070-1090 level. Last year, we told The Trend Letter subscribers that our models had added a potential low of less than 1000, with a target of 875-925.
Watch 1070 closely, if it is breached then that sub 1000 target becomes valid.