We are witnessing a flight to safety as money flows out of stocks and into bonds, driving 10-year Treasury yields as low as 1.88 percent. Breach of support at 2.0 percent suggests that another test of primary support at 1.5 percent lies ahead.
What makes this even more significant is that it occurred while China is depleting foreign reserves — quite likely selling Treasuries — to support the Yuan. Heavy intervention in the past few weeks to prevent further CNY depreciation against the Dollar may well show recent estimates of a further $0.5 Trillion outflow in 2016 to be on the light side.
China is caught in a cleft stick: either deplete foreign reserves to support the Yuan, or allow the Yuan to weaken which would fuel further selling and risk a downward spiral. Regulations to restrict capital outflows may ease pressure but are unlikely to stem the flow.
Chinese sales of Dollar reserves have slowed appreciation of the Dollar Index. Cessation of support for the Yuan would cause breakout above 100 and an advance to at least 107*.
* Target calculation: 100 + ( 100 – 93 ) = 107
Gold
Gold has also benefited from the flight to safety, rallying to $1150/ounce. The rally may well test $1200 but resistance is expected to hold. Respect would suggest a decline to $1000/ounce*; confirmed if support at $1050 is broken. Continued oscillation of 13-Week Twiggs Momentum below zero flags a strong primary down-trend.
* Target calculation: 1100 – ( 1200 – 1100 ) = 1000
thank you.
Well Colin you have got gold wrong so far ( as I am pleased with this ) but I still note your caution so not getting carried away
Question—if you were chinese it was becoming difficult to get your money out ( of china ) and if it kept losing value, would you consider gold ?
Flight to safety increases demand for gold, but so far Chinese seem to prefer Sydney and Vancouver real estate.
Colin my point was that if restrictions are placed on movement of funds to Sydney or Vancouver, then Chinese may look towards gold
Question on chart—-at what POG would you say it has broken through the downtrend ?
There’s no specific price, simply completion of a higher trough (“start of a bull trend” below).
I will be watching retracement from $1200/ounce with interest.
No, I would sit on cash until the correction is over, or short the market in the meantime.
Past history and logic tells us that if every country in the world is either printing money or lowering interest rates then we must eventually have massive inflation. Then governments around the world will fear raising interest rates above the inflation rate for dear of killing their economy, causing even greater inflation. It happened before in the eighties and will happen again. The fox is in charge of the henhouse. Power subsumes truth. But as Keynes would say, the markets can stay irrational longer than we can remain solvent.
Well John , all I can say is that ” past history & logic ” are not fitting the facts of the last number of years.
No, they aren’t. But do you know why?
John, Past history does suggest that, but we are now witnessing the end of a 30-year debt bubble. Central banks are simply trying to soften the blow of debt contraction and head off a 1930s-style deflationary spiral that would damage the global economy. Deflation is the real threat — when asset prices fall and borrowers are forced to sell and repay debt in expectation of further falls. Monetary policy alone cannot solve this. What is needed is a massive upgrade of global infrastructure. But this must be investment in productive assets that generate sufficient income to cover debt servicing costs (or provide competitive returns on equity) else we end up in a debt trap.