Australian gold stocks have had a good run since the index (XGD) broke resistance at 2800. At some stage there is bound to be a correction but the up-trend now looks pretty robust, rising 13-week Money Flow confirming buying pressure.
Gold rallies as crude finds support
Crude finds support at $30/barrel, iron ore rallies, the Dollar strengthens, long-term interest rates fall and all seems right with the world. But is it? Deflationary pressures in Europe are rising. China cut bank reserve requirements to stimulate lending. And long-term interest rates would be rising, not falling, if confidence is restored.
Crude
Nymex WTI Light Crude futures (June 2016) found support at $30 per barrel. Expect a test of $40/barrel. But the primary trend is down and respect of the descending trendline is likely, which would warn of another decline.
* Target calculation: 30 – ( 40 – 30 ) = 20
Long-term interest rates remain weak, with 10-year Treasury yields testing primary support at 1.5/1.65 percent. The flight from stocks is driving up Treasuries (and yields lower), overwhelming sales by China (to shore up the Yuan). Declining 13-week Twiggs Momentum warns of further weakness.
The Dollar Index rallied over the past two weeks but further PBOC selling is expected to reinforce resistance at 100. Reversal of 13-week Twiggs Momentum below zero would warn of a primary down-trend.
Gold has benefited from the uncertainty, with consolidation above $1200 suggesting another advance. Breakout above $1250 would offer a target of $1300*.
* Target calculation: 1200 + ( 1200 – 1100 ) = 1300
The monthly chart, however, reflects a more precarious position. Momentum has clearly shifted, with breach of the descending trendline and a sharp rise on the 13-week indicator. But there is no higher trough confirming the trend change. So pick your entry points carefully and maintain tight stops. This could still go either way.
Gold: PBOC makes its move
China’s PBOC made its move against the hedge funds on Monday, while many hedge fund managers were enjoying a long weekend in the Hamptons. With more than $3 Trillion of foreign reserves, this is a fight that the PBOC is likely to win, provided it stands firm. Hedge funds betting on a collapse of the Yuan can leverage their positions, but that makes them vulnerable to margin calls. Driving the Yuan below 6.50 to the Dollar may force some to cover their shorts, which would further strengthen the beleaguered currency.
China’s sell-off of foreign reserves has caused the Dollar to fall, in the midst of a flight to safety. Retracement that respects resistance at 97.50/98.00 would indicate a decline to test primary support at 93.00. Decline of 13-week Twiggs Momentum below zero warns of a primary down-trend.
Flight to safety has spiked demand for Gold. Expect retracement to test support between $1150 and $1200/ounce. But respect of either level would confirm a trend reversal (after recovery above $1200 completes a higher trough).
Batten down the hatches
Batten down the hatches, the storm is here.
Nymex WTI Light Crude futures (March 2016) are testing support at $30 per barrel. There is no indication that this is the bottom and breach of $30 would be likely to test $20 per barrel.
* Target calculation: 30 – ( 40 – 30 ) = 20
Long-term interest rates are falling, with 10-year Treasury yields headed for another test of primary support at 1.5 percent. Breach of 1.7 percent would confirm. The flight from stocks is driving up Treasuries (and yields lower).
Flight to safety is (normally) synonymous with a strong Dollar, so the weakening Dollar Index is a surprise.
China must be selling off Dollar reserves to support the Yuan and restore confidence.
Too late, I’m afraid. That horse has bolted. Loss of confidence in the Yuan is driving demand for gold, with the spot metal rallying to $1200 per ounce. Resistance at the former support level makes retracement likely, but a trough that respects $1100 or narrow consolidation below $1200 would suggest reversal (to an up-trend). Breach of $1200 would offer a target of $1300*.
* Target calculation: 1200 + ( 1200 – 1100 ) = 1300
After forming a lower peak at 18000, Dow Jones Industrial Average is testing primary support at 16000. 13-Week Twiggs Momentum peak at zero warns of a primary down-trend. Breach of support would offer a target of 14000*.
* Target calculation: 16000 – ( 18000 – 16000 ) = 14000
The S&P 500 displays a similar pattern, testing primary support at 1850, with a 13-week Twiggs Momentum peak at zero. Breach of support would offer a target of 1500*.
* Target calculation: 1850 – ( 2150 – 1850 ) = 1550
A monthly chart shows VIX rising for another test of 30. Oscillation between 20 and 30 flags elevated market risk.
Australia’s ASX 200 retreated below primary support at 5000, signaling a primary down-trend. A 13-week Twiggs peak below zero already warns of a decline. Today’s close at 4832 confirms, offering a short-term target of 4600* and a long-term target of 4000*.
* Target calculation: 4850 – ( 5050 – 4850 ) = 4650; 5000 – ( 6000 – 5000 ) = 4000
Investors who plan to hold stocks through a possible down-turn should stop watching daily prices and listening to news reports. It will only weaken your resolve. I am comfortable with holding stocks with strong dividend streams, but wary of holding growth stocks as they normally suffer the biggest losses.
For traders this is a time of dangerous opportunity. Either shorting sectors likely to be worst hit or waiting for opportunities to buy gold stocks.
Only when the tide goes out do you discover who’s been swimming naked.
~ Warren Buffett
Gold rallies but how long?
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
Dow breaks support
My newsletters on December 10th and January 14th warned of the approaching storm across global markets. The Dow Jones Industrial Average has now broken primary support at 16000, signaling a primary down-trend. Reversal of 13-week Twiggs Money Flow below zero, indicating selling pressure, strengthens the warning. Target for the decline is 14000*.
* Target calculation: 16000 – ( 18000 – 16000 ) = 14000
S&P 500 breach of primary support at 1870 confirms the Dow signal. The long tail on the latest candle indicates the continued presence of buyers (highlighted by rising 21-day Twiggs Money Flow). Expect retracement to test the new resistance level but respect is likely and follow-through below 1850 would be the final nail in the coffin. The medium-term target is 1700* but long-term, expect a test of 1500.
* Target calculation: 1900 – ( 2100 – 1900 ) = 1700
CBOE Volatility Index (VIX) testing 30 suggests elevated risk.
Gold and Treasury Yields
Bonds have benefited from the flight to safety, with 10-year Treasury Yields closing below 2.0%. Follow-through below 1.90% would suggest a test of the 2015 low at 1.65%.
Gold likewise rallied to $1100 per ounce. But falling oil prices and low inflation are likely to undermine any long-term demand for gold as a store of value.
Gold-Oil ratio says “Sell”
Spot Gold recently recovered above $1100, suggesting a short rally fueled by concern over China. The gold-oil ratio, however, soared to 33, signaling that gold is highly overbought relative to Brent Crude. Last time the gold-oil ratio reached 30 was 1988 — when the Iraq-Iran ceasefire eased global crude shortages — and before that when the Saudis substantially hiked crude oil production in 1985. Any gold rally is likely to be short-lived — with stubborn resistance at $1200/ounce — and followed by a test of support at $1000/ounce*.
* Target calculation: 1100 – ( 1200 – 1100 ) = 1000
The last time (2008) that Brent Crude reached these lows, gold fell to $700/ounce.
Gold unlikely to benefit as China loosens Dollar peg
Long-term interest rates remain soft despite the anticipated Fed rate hike. 10-Year Treasury yields respected support at 2.0 percent and breakout above 2.50 percent would indicate a test of primary resistance at 3.00 percent.
Two factors have been driving US interest rates lower over the last decade: Fed monetary policy and PBOC purchases of US Treasuries. China built up $4 trillion of foreign reserves, a substantial amount in US Treasuries, to suppress appreciation of the Yuan against the Dollar and maintain a trade advantage.
China’s foreign reserves declined over the last year as the country struggled to maintain its peg against the strengthening Dollar, with large capital outflows. The shift from a strict peg to the Dollar to a basket of currencies may take immediate pressure off the PBOC. But a weakening Yuan is likely to encourage further capital outflows. And borrowers with USD-denominated loans are likely to suffer losses, increasing capital outflows through hedging or early repayment. So relief may be temporary.
Retreat of the greenback is unlikely to continue now that the PBOC has announced it will loosen its peg against the Dollar. Dollar Index breakout above 100 and recovery of 13-week Twiggs Momentum above its descending trendline would both signal a fresh advance. Target for the advance is 107*.
* Target calculation: 100 + ( 100 – 93 ) = 107
Gold
Gold’s down-trend continues. Breach of (short-term) support at $1050 per ounce would confirm a test of (long-term) support at $1000/ounce*. 13-Week Twiggs Momentum peaks below zero indicate a strong primary down-trend. A stronger Dollar is likely to further weaken demand for gold.
* Target calculation: 1100 – ( 1200 – 1100 ) = 1000
Gold muted as Dollar slides
I would have expected a gold rally in response to the falling Dollar but the response is so far muted.
The Euro leapt 3.08% last Thursday, December 3rd, in response to a weaker-than-expected stimulus package from the European Central Bank.
The Dollar Index, with a 57.6% weighting against the Euro, fell 2.26%.
Other factors also weaken the Dollar. The Peoples Bank of China is selling off reserves to support the falling Yuan. This is likely to continue as capital outflows from China maintain pressure on the currency.
A weaker Dollar would boost US exports and accelerate domestic growth. Strong bearish divergence between 13-week Twiggs Momentum and the Dollar Index warns of a reversal. Breach of support at 98 would indicate a test of primary support at 93. Failure of primary support remains unlikely, but reversal of 13-week Twiggs Momentum below zero would strengthen the warning.
Interest Rates
Long-term interest rates remain soft despite the anticipated Fed rate hike. 10-Year Treasury yields respected support at 2.0 percent. Breakout above 2.50 percent would indicate a test of 3.00 percent.
Gold
Gold is headed for a test of support at $1000/ounce* after breaching $1100. 13-Week Twiggs Momentum peaks below zero confirm a strong primary down-trend. A weaker Dollar would increase support for gold but there is no sign of this yet.
* Target calculation: 1100 – ( 1200 – 1100 ) = 1000
Gold: The final nail
Gold respected its new resistance level after a brief retracement and is again testing short-term support at $1065/ounce. 13-Week Twiggs Momentum peaks below zero indicate a strong primary down-trend. Breach of support is likely and would provide further confirmation of a decline to $1000/ounce*.
* Target calculation: 1100 – ( 1200 – 1100 ) = 1000
Spot silver has also broken long-term support, reinforcing the gold signal.
The Gold Bugs Index, representing un-hedged gold stocks, is testing primary support at 105. Failure of support is likely and would be the final nail in the coffin (for gold).
The stronger Dollar is weakening demand for gold, with the Dollar Index testing resistance its 12-year high at 100. Rising 13-week Twiggs Momentum indicates a healthy (primary) up-trend. Breakout above 100 is very likely and would signal an advance to 107*.
* Target calculation: 100 + ( 100 – 93 ) = 107