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Stocks Mayhem: Is Evergrande A Perfect Scapegoat?

By Sunshine Profits (Przemyslaw Radomski, CFA)CommoditiesSep 22, 2021 02:17AM ET
Stocks Mayhem: Is Evergrande A Perfect Scapegoat?
By Sunshine Profits (Przemyslaw Radomski, CFA)   |  Sep 22, 2021 02:17AM ET
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The topic everyone requested me to cover, so I will. But before I do, I would like to emphasize that I’ve been writing about it for months. No, not about Evergrande (OTC:EGRNY) per se, but about the situation being similar to 2008. The exact trigger and the name of the company are not really relevant. What is important is that the storm has been brewing for some time, and now, when we finally see the straw that broke the camel’s neck, it seems like a game-changer. But it’s not a game-changer. It’s a milestone telling us that the game is going very similarly to how it was played 13 years ago (in 2008).

Can the markets repeat both previous patterns at the same time (2008 and 2013)? Sure, why not. History doesn’t repeat itself to the letter, it rhymes instead. And the current rhyme is somewhat similar to both previous situations.

Previously, gold and gold stocks have been quite clear with the repeat of their respective 2011-2013 price actions. The USD Index is moving steadily (with corrections) higher this year, also similarly to what we saw then.

However, if the general stock market is about to plunge, then we might lean more toward its 2008 counterpart, as that was the key thing on the charts at that time (as far as the main markets are concerned). The USD Index soared at that time, which might happen this time as well. But the most important implication from the point of view of a precious metals investor and trader is the dramatic slide in mining stocks and in silver that we saw in 2008.

Yes, I’ve been repeating that these two parts of the precious metals sector were likely to fall the most (perhaps miners first, silver a bit later – à la 2020), but what we’re seeing now in the general stock market and what kind of news accompanies it (major bankruptcy threat related to the real estate market) has 2008 written all over it.

The Plunge Protection Team

And yet, there is one thing I haven’t considered previously that hit me today regarding Evergrande. There is something different this time that makes the declines in stocks and the precious metals sector (especially silver, gold stocks, and silver stocks) even more likely.

SPX Weekly Chart
SPX Weekly Chart

One might say that the thing that prevented the stock market from declining was the rising dashed line. Or the 50-day moving average. And they have likely indeed played an important part on a technical level. But the thing that really prevented the stock market from declining was… the issue of blame.

You know, it’s not rocket science that the stock markets are overheated. There are myriads of indicators pointing to the overbought status, and I’ve been featuring them for months. Furthermore, the authorities know that.

Earlier this year, the largest U.S. banks had to prove that they would be able to withstand a 55% crash in the stock market. Interesting, right? Of course, one could say that it was just a normal precautionary test, irrelevant to the authorities knowing that stocks will need to crash eventually.

If the Powers That Be know that stocks have to crash and that banks can take it, then it’s safe to let the markets do their thing, right?

Wrong. People might put the blame on those Powers, and the Powers wouldn’t like that, as they like votes, power, money, and such. Blame doesn’t go well with those.

So, if there is indeed the “Plunge Protection Team” that’s been actively working on keeping the stock market afloat until it’s obvious that the blame can be placed somewhere else, ideally on a political adversary, then they just had their dreams fulfilled.

The Evergrande Group—a Chinese real estate developer—is a perfect scapegoat here. Of course, the real reason that the stock markets got too high practically all over the world is caused by excessive money printing/stimulus of all kinds. But from the political point of view, it can now be narrated to be someone else’s fault.

“Yes, folks, it’s very unfortunate that you lost your retirement money, and your kids will have trouble finding jobs in this stagflation… But it’s all because of China! We did all we could, but they caused all this – we couldn’t prevent it despite all our best efforts. Good luck to you and vote for us again so that we may fight for your rights and your financial safety on your behalf!”

Or something along those lines. That’s what the narrative might be once the stock markets crash globally and once the real-life implications kick in.

I’m not sure if anyone already called it “the Chinese crisis,” but if not, please mark it in your calendars that I was forecasting yesterday (Sept. 21, 2021) that this name will emerge sooner or later. Also, please keep in mind that months ago, I wrote that Bitcoin was topping (at least in the medium term) at about $50,000. It then moved higher somewhat, but overall, it seems that we’re seeing a broad top in this market. The rising USDX is unlikely to help it, either way.

Also, please don’t get me wrong. I’m not “cheering for China” here, defending China, etc. In fact, I’m not cheering at all. I’m just analyzing the situation as realistically (perhaps even “brutally”) as I can, and I’m reporting my findings to you, along with discussing the implications for the precious metals sector.

And the implications for the precious metals sector of the above are very bearish.

Where Are The Metals Headed?

Now, on a short-term basis, the reactions might be relatively chaotic, as on one hand, the situation getting out of hand might trigger safe-haven buying for gold, and on the other hand, it might trigger safe-haven buying for the USD Index. This might trigger quite a lot of erratic price swings in the short run.

Gold Daily Chart
Gold Daily Chart

Gold moved higher by $12 Monday, but this move seems to have just been a breather after a powerful daily decline.

Why? Because gold miners were confirming their breakdown and they completely ignored gold’s rally, for instance.

GDX Daily Chart
GDX Daily Chart

The GDX ETF (NYSE:GDX) closed below the previous 2021 lows for the second consecutive trading day. If we get a daily close below these lows, the breakdown will be fully confirmed, and the road to new lows will be fully open.

Just as I wrote previously, the outlook for the precious metals market remains extremely bearish for the next several months.

GDXJ Daily Chart
GDXJ Daily Chart

Junior miners moved lower Monday, catching up with the GDX’s decline. The VanEck Junior Gold Miners ETF (NYSE:GDXJ) didn’t close below the August lows yet, but it’s very close to them. The outlook for the junior mining stocks remains very bearish, especially given the likely declines in the general stock market. Remember how profoundly juniors plunged in 2020 when the general stock market declined? In my view, we’ll likely see something similar also this time.

Silver Daily Chart
Silver Daily Chart

In Monday's analysis, I wrote that silver moved to a new yearly low in terms of the daily closing prices. This move was confirmed, and the bearish outlook was emphasized by the move to new intraday 2021 lows. The losses of those who purchased silver close to its yearly top are now very significant. And it’s going to get worse, as silver is likely to decline more—likely much more —before it rallies back up.

The USD Index suggests caution in the very short term, as it reversed before the end of Monday's session, and it did so after moving to its March highs.

USD/Gold Daily Chart
USD/Gold Daily Chart

Indeed, the USD Index was declining in yesterday's pre-market trading. But did it change much? It didn't. Even if the USD Index had declined a bit here (and PMs moved a bit higher), it was still likely to soar soon (and PMs are likely to plunge soon).

USD Weekly Chart
USD Weekly Chart

The long-term USD Index chart and the analogy to its previous performance after mid-year bottoms continue to have bullish implications for the medium term. In particular, the analogies to 2014 and 2008 are particularly bullish.

Stocks Mayhem: Is Evergrande A Perfect Scapegoat?

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Stocks Mayhem: Is Evergrande A Perfect Scapegoat?

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