Category: US Dollar Index

“Never try to catch a falling safe” warn the pundits …. “Wait for it to bounce.”

So far we have not seen much bounce. After finding short-term support at $1320 on the 2-hourly chart, gold rallied to $1400 before retreating to test $1360. The long tail at $1360 indicates buying pressure and we should see another test of $1400. Breakout would indicate a rally to $1440*, but bear market rallies are notoriously unreliable and prudent traders are likely to avoid. Reversal below $1360 is likely and would warn of another down-swing.

* Target calculation: 1400 + ( 1400 – 1360 ) = 1440

On the monthly chart we can see that $1300* is the obvious support level, but the severity of the fall indicates this is a bear market and will take time to recover. Breach of $1300 would signal another decline, with the next major support level at the 2008 high of $1000.

* Target calculation: 1550 – ( 1800 – 1550 ) = 1300

I am still bullish on gold in the long-term. We face a decade of easy monetary policy from central banks, with competing devaluations as each nation struggles to recover at the expense of the other. I would recommend this WSJ interview with PIMCO CEO Mohamed El-Erian for its realistic long-term outlook.

Dollar Index

There has been no major strengthening of the Dollar, which one would expect if gold fell because of downward revision of the market’s  inflation outlook. Breakout above resistance at 84.00 would signal an advance to 89.00/90.00, but there is still much work to be done.

Crude Oil

Crude oil prices fell sharply, signaling a primary down-trend. Interestingly, Brent Crude broke its primary support level at $106/barrel on April 8th, 4 days ahead of gold. Nymex WTI followed the next week and will soon be testing support at $84/barrel. Falling crude prices are a healthy long-term sign for the economy, but indicate medium-term weakness with weak demand anticipated in the year ahead.

Commodities

Dow Jones-UBS Commodity Index fell sharply in response to gold and oil. Divergence from the S&P 500 looks even more extreme and stock prices are likely to fall.

Slowing growth in China — the major driver of global commodity prices in recent years — is part of the problem, but aggressive action by Japan is also destabilizing global markets.

Quartz reports that Goldman Sachs recommend investors sell gold short:

Now Goldman Sachs commodities analysts suggest the selloff in the yellow metal could be about to gain momentum. In a research note Wednesday they write not even the stress over Cyprus could generate much of a rally in gold prices. And they come to the conclusion that “long” enthusiasm over gold prices is ebbing fast……..

A short trade with a stop at $1600 and target of $1450 (according to GS), for a breakout below $1550, seems a reasonable risk-reward ratio. But what is the probability of a downward breakout and should long-term investors consider selling?

Gold had several consolidations or corrections over the last decade, but each resolved in a continuation of the primary up-trend, with quantitative easing fueling the rise. Latest FOMC minutes indicate that bond purchases are likely to be scaled back in the second half of the year. Does this mean the end of QE and gold’s bull run?

Hussman Funds’ latest market comment includes a chart that shows the economy rallies whenever the Fed introduces QE, but falls when QE ends. The US economy may come off life support but is still going to need a lengthy convalescence. And possibly further episodes of QE to prevent a relapse.

Declining purchasing power of the dollar is also unlikely to reverse. The Dollar Index ($DXY) is in an up-trend, but we need to remember that it reflects values relative to major trading partners, with the Euro accounting for 57.6% of the total weighting, the Yen second highest at 13.6%, and Pound Sterling third at 11.9%. This is a race to the bottom. All four central banks are debasing their currencies. The Dollar only looks strong because it is sinking slower than the others. Purchasing power of the dollar is definitely not rising in real terms.

So my long-term view of gold remains bullish, but that does not rule out a 30% correction like 2008 below. Retail investors are definitely sellers, with substantial outflows from gold ETFs, but central banks according to Agustino Fontevecchia at Forbes are buying:

As prices have dropped and investors lost faith, central banks have been on the opposite side of the trade, gobbling up bullion at a rate of 27-metric tons a month, according to UBS’ gold expert Edel Tully. Russia and South Korea are among the biggest buyers….

This could still go either way. On the monthly chart we can see gold testing support at $1550. The third dip below zero on 13-week Twiggs Momentum gives strong warning of a down-trend. Breakout below $1500 would offer a target of $1200*, but respect of support — indicated by recovery above the February 26 high at $1620 — would signal a rally to $1800.

* Target calculation: 1500 – ( 1800 – 1500 ) = 1200

Dollar Index

The Dollar Index is testing resistance at 84.00. Breakout is likely and would signal an advance to 89.00/90.00. Rising momentum supports this view.

Crude Oil

The ascending triangle and rising 13-week Twiggs Momentum both signal a primary advance for Nymex Crude, supported by an improving economic outlook. Brent Crude breaking support at $106/barrel, reflects the opposite view in Europe and we could see the crude prices in North America and Europe converge — if not cross — for the first time in more than two years.

Commodities

Dow Jones-UBS Commodity Index continues in a primary down-trend.

China — the major driver of global commodity prices — is significantly lagging the recovery in the US.

Spot gold is testing primary support at $1500 to $1550. Declining 13-week Twiggs Momentum below zero warns of a primary trend reversal. Failure of support at $1500 would confirm.

The daily chart shows penetration of support at $1550. Recovery above the support level would warn of a bear trap — confirmed if there is a breakout above the February high at $1620 — but follow-through below $1500 would signal the start of a bear market.

I don’t like the look of this:

Probability of gold entering a primary down-trend is rising. Watch out for bear traps, but failure of primary support at $1500 would confirm a primary down-trend.

Dollar Index

The stronger dollar contributes to weaker gold prices. Breakout of the Dollar Index above 84.00 would signal an advance to 89.00/90.00. Rising momentum suggests continuation of the primary up-trend.

Crude Oil

Brent Crude respected support at $106/barrel, while Nymex Crude breakout above $98/$99 would confirm a primary up-trend. Rising crude prices would inhibit the global recovery.

Commodities

Commodity prices continue to diverge from stocks, with the Dow Jones-UBS Commodity Index headed for a test of support at 126. Weaker commodities suggest that the S&P 500 advance is unsustainable.

The Gold Bugs Index ($HUI) representing un-hedged gold stocks has under-performed spot gold since the GFC in 2008, with a safe-haven premium priced into the metal. But $HUI diverged strongly in mid-2012, commencing a strong primary down-trend while spot gold continues to range above support (at $1500/ounce).

On the weekly chart spot gold continues to test resistance at 1620 — and the upper trend channel. Failure to break out would threaten primary support at $1500 to $1550. Reversal of 13-week Twiggs Momentum below zero already warns of a primary down-trend and failure of support at $1500 would confirm; a TMO peak below zero would strengthen the signal.

Conclusion:

I am not yet convinced that gold is headed for a primary down-trend, but substantial outflows from gold  ETFs in recent months highlight investors returning to the stock market. Inflation is muted, with central bank expansionary policies merely counteracting deflationary pressures from credit contraction. Opportunities for another bull run on gold appear distant — unless a major catastrophe sparks more QE — but respect of primary support would signal further ranging between $1500 and $1800.

Dollar Index

A stronger dollar contributes to weaker gold prices. Breakout of the Dollar Index above 84.00 would signal an advance to 89.00/90.00. Rising momentum suggests continuation of the up-trend.

Crude Oil

Brent Crude is falling in response to the contraction in Europe, while Nymex Crude breakout above $98/barrel would signal a primary up-trend in response to a reviving US economy. Reversal of  Brent Crude below $106/barrel would signal a primary down-trend, narrowing the price gap between the two continents.

Commodities

Dow Jones-UBS Commodity Index is in a primary down-trend, headed for another test of the 2012 low at 126. Divergence between the index and S&P 500 suggests that the rise in equities does not reflect a recovery in the US manufacturing base — and may be prone to failure if manufacturing does not respond.

Spot gold is testing primary support at $1500 to $1550. Reversal of 13-week Twiggs Momentum warns of a reversal and failure of support at $1500 would confirm. A Twiggs Momentum peak below zero would strengthen the signal.

On the weekly chart we can see respect of support at $1550 is likely to be followed by a rally to test the February 26 high at $1620. That is likely to be followed by a re-test of support at $1550 but breakout above $1620 and the trend channel would indicate an advance to $1800.

My conclusion is similar to last week:

I am not yet convinced that gold is headed for a primary down-trend. We may be in a low-inflation/deflationary environment right now but central bank expansionary policies will counteract this. Watch out for bear traps. Respect of primary support around $1500 could present a buying opportunity.

Dollar Index

A stronger dollar contributes to weaker gold prices. Breakout of the Dollar Index above 84.00 would signal an advance to 89.00/90.00. Rising momentum suggests continuation of the up-trend.

Crude Oil

A long-term view shows Brent and Nymex Crude ranging at far higher prices than in the lead up to the GFC. High crude prices continue to inhibit the global recovery. Breakout of Nymex above $100/barrel and Brent Crude above $120 would signal a primary up-trend — and more bad news for the recovery — while failure of primary support at $84 and $106/barrel, respectively, would signal a primary down-trend.

Commodities

Dow Jones-UBS Commodity Index found support at 126, but……

The Continuous Commodity Index has already broken its equivalent support level.  Respect of resistance at 29 would confirm another down-swing to test the June 2012 lows. The Dow Jones-UBS Index would most likely follow.