Gold breaks to a new high

Key Points

• Gold broke through resistance at $3,500 per ounce, reaching a new high of $3,546.
• Silver is testing resistance at $41 per ounce.
• Sovereign debt is losing favor, with the UK 30-year gilt yield above 5.7% for the first time in 27 years.

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After its recent breakout, the Dow Jones Industrial Average has retraced to test support at 45K. Respect is likely, but a breach would raise questions about the validity of the Dow’s recent bull market signal.

September is also the worst month of the year for stock performance, most likely due to investment managers cleaning up their portfolios before the financial year-end.

While September has the worst average return, we are always wary of October, which in the past has delivered some of the most severe crashes in memory, including 1929 and 1987.

Financial Markets

Bitcoin is testing support at 110K, warning that investors’ risk appetite is shrinking. A follow-through below the recent low would be a strong bear signal for stocks.

Treasury Markets

10-year Treasury yields are consolidating in a narrow band above support at 4.2%, anticipating a Fed rate cut in September, causing a decline in long-term yields.

However, long-term yields are in a secular uptrend, with the US 30-year testing resistance at 5.0%.

Global financial markets are increasingly shunning long-term sovereign debt. The UK 30-year Gilt rose above 5.70% for the first time since April 1998.

Japanese 30-year JGB yields are climbing steeply due to the Bank of Japan tightening monetary policy.

The 30-year German Bund is on a similar path.

A secular bear market in bonds will also likely be bearish for stocks.

Dollar & Gold

The US Dollar Index continues in a bearish narrow consolidation above support at 97. Trend Index peaks below zero warn of long-term selling pressure, and a breach of support at 97 would strengthen our long-term target of 90.

Gold broke through resistance at $3,500 per ounce, reaching a new high of $3,546. A higher Trend Index trough signals buying pressure. Expect retracement to test the band of support between $3,400 and $3,500, but respect will likely confirm another advance, further strengthening our target of $4,000 by the end of the year.

Silver made a similar breakout above $40 per ounce. Again, we expect retracement to test the new band of support between $39 and $40, but respect will likely confirm another advance. Our year-end target is $44.

ISM Manufacturing

The manufacturing sector continues to signal a contraction, but the rate of decline slowed, with the ISM Manufacturing PMI rising to 48.7%.

The outlook improved, with forward orders rising to 51.4%.

However, employment prospects remain low, with the employment sub-index at 43.8%.

Input prices are still rising, but the prices sub-index surprisingly improved to 63.7%. A similar improvement in Services next week would indicate that inflationary pressures are easing, increasing the likelihood of a Fed rate cut.

Conclusion

Long-term government bonds are in a secular bear market, which will likely be bearish for stocks.

Gold reached a new high above resistance at $3,500 per ounce, reflecting investor caution towards sovereign debt. A retracement that respects the latest support level would confirm our year-end target of $4,000.

Acknowledgments

• CoinDesk: Bitcoin
• Federal Reserve of St Louis: FRED Data
• CNBC: Bond Yields
• Institute for Supply Management: ISM Report on Business