Category: Gold & Precious Metals

The prospect of higher interest rates is fast approaching, but 10-Year Treasury yields retreated below 2.0%, warning of another test of the December low at 1.40%.

The weight of foreign purchases, for reasons other than yield (dollar peg/currency manipulation), may be overwhelming the market response. This has happened before, in 2004/2005, when the Fed was alarmed to find that long-term yields failed to respond to monetary tightening. The graphs below are from a 2012 report by DO Beltran (and others) at the Fed. The Fed Funds Rate was steadily increased between mid-2004 and the end of 2005, but 10-year yields declined slightly over the same period.

The reason was fairly obvious: a massive surge in foreign purchases (mainly from China) had left the long-term market awash with liquidity. US monetary policy was effectively being controlled from Beijing.

I cannot understand why this abuse has been tolerated.

The Dollar

The Dollar Index has been consolidating for the last 5 weeks, but the narrow range is a bullish sign and the Dollar is likely to strengthen further. Breakout would offer a medium-term target of 100*.

* Target calculation: 90 + ( 90 – 80 ) = 100

Gold

Spot Gold is testing support at $1200/ounce. Reversal of 13-week Twiggs Momentum below zero warns of another decline. A trough below the zero line would strengthen the bear signal.

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

The strong Dollar, low inflation and higher interest rates all point to another decline, but so far support has held firm. Completion of another trough at this level would strengthen the argument that gold is forming a long-term bottom. Possibly with help from Beijing.

10-Year Treasury Yields found support above the December low of 1.40%, recovering above medium-term resistance at 2.00%. The outlook is hardening around a Fed increase in short-term rates by mid-year. A higher trough would suggest that the long-term down-trend in yields, shown below on an annual chart, is coming to a close. But only breakout above resistance at 3.00% would confirm that the secular bull-trend in bonds has ended.

The Dollar is strengthening on the back of low inflation and expectations of higher rates — bearish signs for gold.

Spot Gold remains in a bear trend, testing support at $1200/ounce.

Reversal of 13-week Twiggs Momentum below zero warns of another decline. A weekly close below $1180 would strengthen the bear signal.

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

Ten-year Treasury Note yields retreated below 2.30%, signaling another test of primary support at 2.00%. Declining 13-week Twiggs Momentum below zero suggests a continuing down-trend. Recovery above 2.40% is unlikely, but would warn of a rally to 2.65%.

* Target calculation: 2.30 – ( 2.60 – 2.30 ) = 2.00

The Dollar Index is testing resistance at its 2008/2010 highs between 88 and 90. Rising 13-week Twiggs Momentum indicates a healthy (primary) up-trend. Expect retracement or consolidation below resistance, but failure of support at 84 is unlikely.

* Target calculation: 84 + ( 84 – 79 ) = 89.00

Gold

Low inflation and a strong dollar reduce demand for gold. Low interest rates reduce the carrying cost of gold, but the appeal is muted when inflation expectations remain low. Gold is testing its new resistance level at $1200/ounce. Respect is likely and would confirm a long-term target of $1000*. Declining 13-week Twiggs Momentum below zero indicates a strong down-trend.

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000