Gold And Oil Are At Key Inflection Points

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Inflection Points

An Inflection Point is where a curve changes from Concave upward to Concave downward (or vice versa)

So what is concave upward / downward ?

Concave upward is when the slope increases:
Concave downward is when the slope decreases:

Here are some more examples:

Finding where .

So our task is to find where a curve goes from concave upward to concave downward (or vice versa).

Calculus

The derivative of a function gives the slope.

The second derivative tells us if the slope increases or decreases.

  • When the second derivative is positive, the function is concave upward.
  • When the second derivative is negative, the function is concave downward.

And the inflection point is where it goes from concave upward to concave downward (or vice versa).

Example: y = 5x 3 + 2x 2 − 3x

Let’s work out the second derivative:

  • The derivative is y’ = 15x 2 + 4x − 3
  • The second derivative is y” = 30x + 4

And 30x + 4 is negative up to x = −4/30 = −2/15, positive from there onwards. So:

And the inflection point is at x = −2/15

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A Quick Refresher on Derivatives

In the previous example we took this:

y = 5x 3 + 2x 2 − 3x

and came up with this derivative:

y’ = 15x 2 + 4x − 3

There are rules you can follow to find derivatives, and we used the “Power Rule”:

  • x 3 has a slope of 3x 2 , so 5x 3 has a slope of 5(3x 2 ) = 15x 2
  • x 2 has a slope of 2x, so 2x 2 has a slope of 2(2x) = 4x
  • The slope of the line 3x is 3

Another example for you:

Example: y = x 3 − 6x 2 + 12x − 5

The derivative is: y’ = 3x 2 − 12x + 12

The second derivative is: y” = 6x − 12

And 6x − 12 is negative up to x = 2, positive from there onwards. So:

Are Precious Metals At An Inflection Point?

My last missive was entitled ” Gold’s Relative Strength Index Indicating A Bottom Is Here ,” and it was dispatched at noon on Thursday but was written that morning after I had tweeted out the following:

With the move in the relative strength to sub-30, I am opening a 25% position in the GLD July $120 calls @ $1.40 looking for $127 by expiry.
6:35 AM – 21 Jun 2020

That morning the gold market plunged to $1,262.40 and it was that drop that enabled me to scoop those calls at $0.05 above the all-time contract low at $1.40. I have since added and expect that the lows are in for the gold and silver markets for 2020. We might have one final attempt in the next three weeks to probe the sub-$1,270 zone but the RSI reading at 125 last Thursday in the latter part of the session spoke volumes but only after we got the reversal back above the $1,270 level and the coincident bounce in RSI back to the mid-40s (on the 10-day chart).

In a nutshell, what we have in place now for the precious metals is a perfect storm of oversold technicals, compelling fundamentals, geopolitical drivers, and absolutely abysmal sentiment going into the month of July, which typically marks the onset of the positive gold-silver seasonality period that extends through to November. There is also one other condition that is overwhelmingly bullish and it is that the precious metals are the unequivocal recipients of a MASSIVE serving of total and abject investor APATHY.

Here is why I say that. I am a member of a marina in Honey Harbour that has a parking lot full of Mercedes, BMW, Audi and high-end trucks all blown out with the maximum of toys, not to mention the million-dollar vessels tied up in their slips. We had a “Member Appreciation Night” a week ago and as I was wandering around saying hello to all of the members (“working the room”), I asked each and every one of them this question: “What importance do you place on gold and silver as a strategic portfolio weighting?” IF I got a look that implied a “WTF are you talking about?” I countered with, “Sorry, Buffy, what I meant to say was “Do you have any gold or silver in any of your accounts?” If the response was “I leave that to my advisor but tell me—SHOULD I?”, biting upon the knuckles of my right fist, I immediately avoided the urge to mount the nearest soapbox and sound off with one of my classic rants and simply “took note.”

Well, you can imagine the results of my totally biased and unscientific survey—not one of my fellow yachting compadres has any degree of interest in gold and/or silver. No one cares. Not one person. Adding insult to injury, they were, to a soul, absolute EXPERTS on condominiums, rental properties, residential real estate and REITS, all of which have been exceptionally superb investments for them all and especially since they reside in the heart of the largest bubble in global real estate prices EVER. I can’t blame them for being focused on “that which has worked” and ignorant of “that which has sucked,” which is always the state of investor psychology AT MAJOR INFLECTION POINTS. And that is, in my opinion, precisely where we are—at a major inflection point in global trends. It might be the singular most important inflection point in history.

It is a different ball game this summer versus any other summer since 2008 because the Federal Reserve has made a watermark shift in policy. It is applying the brakes to a steamrolling economy, one which is finally responding to unprecedented monetary stimulus and market interventions. It is rolling back all of the market safeguards that allowed the “Buy the Dip” crowd to puff out their chests and strut their collective “stuff” in an all-encompassing mass confusion of the importance of brains relative to Fed-induced bull markets. I won’t bore you all with my anti-bank, anti-government vitriol that you have all heard before because the reality is that blind idiocy has made obscene fortunes in the last ten years since the world all agreed to bail out the thieving bankers as opposed to those of us that have adhered to the principles of sound money and constitutional prudence.

The logic of owning an asset that has survived 5,000 years of parliamentary, dictatorial, oligarchial, and omni-sectarian profligracy seemed brilliant in 2007 for all of the right reasons but let’s face it, you can only listen to your car saleman brother-in-law boasting about his FANG profits for so long before your head goes into a serious speed wobble. (I know mine has…) My point is this: One needs the patience of a cheetah, crouching in the sub-African grasslands, slowly awaiting the arrival of the herd of dehydrated elands all moving in a dangerous and desperate course toward the waterhole, ready at first notice to set off on a rip-roaring assault at the unfortunate slowest of the herd. I will NOT submit myself either in investment posturing or psychological capitulation to do anything but await the arrival of the herd. It is coming; the spoils are just beyond the tree line; the feast will be wondrous.

Never doubt it for as much as a breath. If you blink, it will be gone.

Originally trained during the inflationary 1970s, Michael Ballanger is a graduate of Saint Louis University where he earned a Bachelor of Science in finance and a Bachelor of Art in marketing before completing post-graduate work at the Wharton School of Finance. With more than 30 years of experience as a junior mining and exploration specialist, as well as a solid background in corporate finance, Ballanger’s adherence to the concept of “Hard Assets” allows him to focus the practice on selecting opportunities in the global resource sector with emphasis on the precious metals exploration and development sector. Ballanger takes great pleasure in visiting mineral properties around the globe in the never-ending hunt for early-stage opportunities.

Disclosure
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2) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
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Charts courtesy of Michael Ballanger.

Michael Ballanger Disclaimer:
This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.

After a Moderate Q1, What Lies Ahead for Gold ETFs in Q2?

Gold had a decent first quarter, thanks to an equity market crash and the resultant safe-haven rally. Middle-East tensions and the coronavirus outbreak kept global markets edgy since the start of the year. Gold bullion ETF SPDR Gold Shares (NYSE: GLD ) GLD has added about 6.8% so far this year. The global stash of gold in exchange-traded funds touched the highest level in seven years in the middle of the first quarter (read: Beyond Coronavirus, What’s Driving Gold ETFs?).

The Q1 performance was moderate for bullion as the greenback strength capped gains of the bullion. Investors should note that U.S. dollar ETF Invesco DB US Dollar Index Bullish Fund UUP is up 5.1% this year (as of Apr 6) as need for cash amid the pandemic boosted demand for greenback materially.

What Lies in Q2?

Gold futures topped $1,700 an ounce to the highest since 2020 on rollout of massive stimulus. The unprecedented amount of global stimulus has been injected into the financial system, with the Fed taking the anchoring position. The Fed cut rates to zero and launched a fresh set of stimuli on Mar 23.

The Fed said that the purchases of Treasury and mortgage securities are unlimited. Among other steps, the Fed confirmed it would buy investment-grade exchange-traded funds that track the corporate bond market, a first for the U.S. central bank (read: All-Out Fed Support: Buy Highly-Rated Corporate Bond ETFs).

Along with the Fed, there is the U.S. stimulus worth about $2 trillion. This should inject ample liquidity into the U.S. economy, keeping the greenback strength at check. The U.S. government’s stimulus package led Goldman Sachs (NYSE: GS ) to forecast an “inflection point” for gold and the investment house is now endorsing the commodity, per an article published on Bloomberg.

Not only the Fed, most developed and emerging economies have been on a policy easing mode, offering a hefty stimulus to fight the novel coronavirus. The ECB and the BoJ have benchmark interest rates in the negative territory. Right now, real 10-year U.S. treasury yield is negative and this lowers the opportunity cost of holding a non-interest-bearing asset like bullion.

“Gold prices tend to rise when the fiscal deficit as a percent of GDP is rising,” per an analyst. “Some expect the deficit to expand by a much greater degree in the current crisis than it did a decade ago as a result of the combination of record fiscal stimulus paired with falling revenue. If so, gold would very likely break out above the high it set in 2020,” the analyst commented.

Any Glitches Ahead?

Having said all, we would like to note that there are some headwinds too. Logistics issues are also cropping up. A South African refinery said gold shipments to London have been interrupted because of lack of commercial flights, dealing a blow to the physical bullion market, though the company is planning to resort to chartered planes.

DoubleLine CEO and Wall Street’s Bond King Jeffrey Gundlach indicated that buying “paper gold [ETFs] could be a huge failure in entire gold-delivery system” as there is not sufficient physical gold to meet all the paper demand.

While flight issues will keep acting as a hurdle in Q2, production turmoil will ease as three key plants in the Swiss canton of Ticino, Europe’s biggest gold-refining hub, received permission from local authorities to run operations at a restricted rate. The plants were locked down for about two weeks due to the virus outbreak.

Overall, with tailwinds and headwinds weighing on both sides, we expect a moderately strong Q2 for gold ETFs. However, a few analysts are projecting that gold may top $2,000-mark (marking about 16% jump from the current level), thanks to the massive central bank stimulus, which could boost inflation. And gold is normally viewed as an inflation-protected asset.

ETFs in Focus

Against this backdrop, investors can bet on regular gold ETFs like GLD, iShares Gold Trust IAU, Aberdeen Standard Physical Gold Shares ETF (SGOL and SPDR Gold MiniShares Trust GLDM (see all precious metals ETFs here).

Investors should also note that GLD costs 9.44 times of GLDM per share at the current level. So, GLDM may be a better bet if you want to put small dollar amount of money in gold or if you are a retail investor, or facing issues like cash crunch. However, each share of GLDM represents 1/100 th of an ounce of gold, while the same of GLD represents about 1/10 th of an ounce of gold.

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Oil trading in Asia at an inflection point

Oil markets have been roiled by the increasing influence of the trading arms of China’s state-controlled giants, PetroChina and Sinopec

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