Posted on by ColinTwiggs

Gold tumbles as Treasury yields fall

Overview:

  • Treasury yields fall
  • The Dollar strengthens slightly
  • Stocks are rising
  • Gold breaks support

Interest Rates and the Dollar

The yield on ten-year Treasury Notes broke primary support at 2.50 percent, warning of a decline to 2.00 percent*. Reversal of 13-week Twiggs Momentum below zero confirms weakness. Recovery above 2.80 is most unlikely at present, but would indicate another advance.

10-Year Treasury Yields

* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00

The Dollar Index is testing resistance at 80.50. Recovery of 13-week Twiggs Momentum above zero would increase the chances of a double-bottom reversal (to a primary up-trend), but respect of resistance remains as likely and would test primary support at 79.00. Another 13-week Twiggs Momentum peak below the zero line would signal continuation of the primary down-trend.

Dollar Index

* Target calculation: 79.0 – ( 81.5 – 79.0 ) = 76.5

Stocks and Housing

Falling long-term interest rates are likely to boost the housing sector and the broader stock market. The Dow Jones Industrial Average is heading for a test of the recent high at 16750. Rising 21-day Twiggs Money Flow signals medium-term buying pressure. Retracement that respects support at 16500 would confirm an advance to 17000*.

Dow Jones Industrial Average

* Target calculation: 16.5 – ( 16.5 – 16 ) = 17

Gold and Silver

Gold faces conflicting forces: low inflation reduces demand for precious metals, but low interest rates and a weaker Dollar increase demand. At present low inflation seems to have the upper hand, driving gold through support at $1300/$1280 per ounce. Expect a test of primary support at $1200. Reversal of 13-week Twiggs Momentum below zero reinforces the bear signal. Recovery above $1300 is most unlikely, but would warn of a bear trap and rally to $1400.

Spot Gold

3 Replies to “Gold tumbles as Treasury yields fall”

  1. Is it true that the 10 or so “major” banks in the US can pay 0.25% on QE money and then buy Treasuries with a 2.0% (or so) yield ? I’m not qualified in these matters and would like to know if these banks can make money for doing nothing. Maybe it’s just a Conspiracy Theory !

    1. The Fed pays 0.25% on bank reserves deposited at the Fed, whether required reserves or excess reserves. Most QE money ends up as excess reserve deposits. So the Fed buys treasury notes and bonds yielding > 2.0% and pays 0.25% on excess reserves in exchange. The Fed profits — not the banks.

    2. …It becomes far clearer if you consider the Fed as merely a “front” for Treasury (or SPV as Enron would have called it).
      There are now three tiers of public debt:

      1. Treasury bonds, notes and bills with varying yields depending on their maturity;
      2. Bank deposits at the Fed which currently yield 0.25% pa;
      3. Bank notes and coins which yield no interest (“Zero-coupon bonds with no fixed date of repayment” as one economist called them).

      QE largely consists of swapping #1 for #2. Profits made by the Fed are passed on to government through the Congressional budget.

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