The Day of Reckoning is coming, and it won’t be pretty for the overall markets. While the Fed liquidity has pushed the major U.S. indexes to new highs, the underlying fundamentals in the economy continue to deteriorate. Without the record amount of Fed QE and Repo Operations, the market and economy would have gone into a tailspin in 2019.

Now, to give credit where credit is due, the term, “The Day of Reckoning” was the title from the Northman Trader’s most recent public article. What I like about Sven Heinrich’s work (the Northman Trader), is his ability to use technical and fundamental analysis to provide “PRICE DISCOVERY” in the markets.

Unfortunately, we don’t have price discovery anymore due to the Fed and Central bank decade-long propping up of the markets. This chart from the Northman Trader shows how the Fed’s interventions have come in to support the markets at key technical levels:

What is quite interesting more recently (2019) is the substantial Fed’s rate cuts, QE, and Repo Operations at a time when there isn’t a downturn in the U.S. economy. When the Fed started QE1 in 2009, the stock market had crashed to a low, and the economy was in a severe recession. The Fed continued to support the economy and markets with QE2, TWIST, and QE3 into 2013. Again, these Fed interventions took place during a struggling economy.

Today, the Fed is pulling out all the FIREPOWER when the markets are at new highs, and the economy is still rolling along nicely. This is a recipe for DISASTER at some point. Furthermore, the energy market that is one of the driving forces of the U.S. economy is in serious trouble.

As I mentioned in my last article, The U.S. Shale Industry Hit A Brick Wall In 2019. I posted this chart showing how U.S. shale oil production seemed to be peaking even though the well profile continued in the same trend:

The top right-hand chart displays the shale oil production from the top four fields in 2017-2019 (all prior years excluded), and the bottom right-hand graph shows the number of new wells added. Even though the industry continues to add more wells in the same upward trend, overall production is cresting.  This is due to the negative impact of the rapid decline rate in the shale industry.

What took 20 months for 2017’s production to lose 2 million barrels per day (mbd), only took eight months in 2018’s production. The U.S. shale industry is now at a serious inflection point. If the Shale Industry doesn’t continue to increase the number of wells each year, production will ultimately peak and decline.

And, that is precisely what we see already. In 2018, the industry added 9,953 wells in these four fields but had only added 6,000 wells so far as of August. If the current trend continues, the total amount of wells would only reach approximately 9,000 for 2019.

Moreover, many shale companies are lowering their CAPEX spending for 2020. According to the article, U.S. Oil Producers To Slash Spending For Second Straight Year In 2020:

Occidental Petroleum Corp said it plans to slash capital spending by 40% next year to about $5.4 billion to generate cash and help pay down debt taken on to buy rival Anadarko Petroleum Corp.

Apache Corp expects to cut its upstream capital by 10% to 20% from this year’s $2.4 billion budget and plans to lay off 10% to 15% of its workforce by the end of March.

The Permian Basin, the top U.S. shale field, pumping 4.6 million bpd of oil, will likely “slow down significantly over the next several years,” Pioneer Natural Resources Co Chief Executive Scott Sheffield said during the company’s latest earnings call.

With many shale companies cutting CAPEX spending and staff, 2020 may turn out to be quite an interesting year. Although, industry analysts are still forecasting U.S. shale oil growth to slow next year between 400,000-780,000 bopd. I find those estimates quite optimistic based on the lackluster 2% growth for the first eight months of 2019 (based on Shaleprofile.com data, not including revisions).

Again, we must remember, the 6,000 wells added so far this year in the Bakken, Niobrara, Eagle Ford, and Permian shale fields had to offset the 2 million barrels per day of declines from 2018.

When the Day of Reckoning finally arrives in the U.S. markets, it will also take place in the shale industry. Without oil production growth, economic growth isn’t possible.

Gold & Silver Update: The Metals Continue To Consolidate Setting Up For The Next Leg Higher In 2020

The precious metals continue to consolidate from their summer breakouts. While some analysts debate whether or not silver “Broke Out” this year, I am in the camp that a close above the 50 Month Moving Average was a BIG DEAL. But first, here is the daily silver chart:

After silver reached a high of $19.75 at the beginning of September, it’s been consolidating lower, back to the $16.20 breakout level. I believe silver may experience a bit of a move higher to the $17.68 level (50 Day Moving Average) before heading lower to retest the $16.20 level. There was also a nice liquidation of Commerical Silver Shorts during least weeks COT Report.

By looking at these charts, the crucial long-term level for silver is the 50 Month Moving Average of $16.45:

There is no coincidence that silver closed on the 200 Month Moving Average (RED LINE) for the past three months. However, the key level is the 50 Month Moving Average (BLUE LINE). The Dashed Blue line is the Strong 15-Year Support Level for silver, which denotes the cost of production for the overall industry. Thus, I highly doubt silver will fall below this level and remain there for an extended period.

In this last monthly chart of silver, there is another crucial KEY LEVEL shown. The Dashed Black Line was support for the silver price from 2011-2012.  But, when silver fell below this support line and the 50 Month Moving Average (MMA), it remained below it since 2013. With silver breaking above both the Dashed Blackline and the 50 MMA, it is a very positive sign.

With the silver price right at its 200 Month Moving Average while the broader indexes are 90-130% above their 200 MMA’s, my money is on silver. Again, the smart investor BUYS AT THE BOTTOM and SELLS AT THE TOP. While silver may continue to consolidate lower over the next few months, it is primed for the next BIG MOVE higher when the Day of Reckoning guts the markets in 2020.

Lastly, here is the monthly gold chart. I believe gold will likely fall back down to the $1,360 level before setting up for the next leg higher in 2020.

When gold broke above the $700 level at the end of 2007, it quickly ran up to $1,050. Then over the next eight months, it consolidated lower back to the $700 level before setting up for the next stage higher. After gold broke through the $1,360 level July this year, it shot up quickly to the next resistance level of $1,550. Again, I believe gold will fall back to the $1,360 level to wash out the majority of Commercial Short positions before the next BIG MOVE higher in 2020.

My Thoughts On Precious Metals Manipulation

I continue to read articles on the subject of precious metals manipulation from analysts on the various gold and silver websites. While there is no doubt that the precious metals are being manipulated, so is everything else. I also read analysts suggested that the significant increase in Commercial gold and silver shorts two weeks ago was an attempt to smash the precious metals prices. Maybe. However, if the market realizes the Fed is now backstopping everything, then it’s no surprise that gold and silver will correct lower while the broader markets reach new highs.

So, we also shouldn’t be surprised to see the Commercials add more gold and silver shorts when the Fed is now propping up EVERYTHING. But, you CANNOT prop up an economy with paper forever. And, this is the problem the Fed and Central banks will have to deal with in 2020.

In conclusion, gold and silver prices will likely consolidate lower as the BUBBLE MARKETS continue higher by defying gravity and all fundamental valuations. However, when the DAY OF RECKONING FINALLY COMES, likely in 2020, I would make sure I had purchased some gold and silver insurance.