Category: Gold & Commodities

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Gold, Treasuries and China’s Yuan

China’s Yuan retreated against the Dollar, encountering resistance at 14.35 US cents as the seemingly endless trade talks hit another rough patch. Breach of recent support 14.15 would warn of another test of primary support at 14 cents.

Chinese Yuan CNY/USD

Chinese purchases have weakened 10-Year Treasury yields in the last two weeks. A Yuan at 14 cents is likely to result in 10-year yields testing support at 1.50%. The disconnect between long-term and short-term rates in the US is growing, with long-term rates increasingly dictated by actions at the PBOC.

10-Year Treasury Yields

Declining yields strengthen demand for Gold as it lowers the opportunity cost. Expect continued support at $1450/ounce and a possible test of the descending trendline at $1500. Breach of support is unlikely unless Treasury yields again test resistance at 2.0%.

Gold (USD/ounce)

Silver is similarly testing support at $17.00/ounce but we are unlikely to see a follow-through unless Treasury yields strengthen.

Silver (USD/ounce)

Australia’s All Ordinaries Gold Index continues in a downward trend channel, headed for secondary support at 6000. Declining Trend Index peaks warn of strong selling pressure. Respect of 6000 would signal that the primary up-trend is intact, while breach and a test of primary support at 5400 would warn of trend weakness.

All Ordinaries Gold Index

Patience

Gold remains in a long-term up-trend. A correction may offer an attractive entry point but we first need to confirm that the up-trend is intact before increasing exposure to gold stocks.

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ASX 200: Banks break support

ASX 300 Banks index broke support at 7600, signaling a correction to test primary support at 6750. Declining peaks on the Trend Index confirm selling pressure.

ASX 300 Banks

The ASX 200 REITs index has formed a bearish descending triangle. Breach of support at 1600 would warn of a correction. It seems unlikely that would reach primary support at 1350 because financial markets are searching for yield.

ASX 200 REITs

The ASX 300 Metals & Mining index is also faltering. Expect another test of support at 4100 (neckline of a large head-and-shoulders reversal pattern). Breach would offer a target of 3400. The Trend Index penetrated its descending trendline but a peak near zero would warn of continued selling pressure.

ASX 300 Metals & Mining

Iron ore found short-term support at 80 but continues its primary down-trend. Our long-term target is 65.

Iron Ore

The ASX 200 retreated from resistance at 6800. Declining Trend Index peaks only indicate secondary selling pressure at present. Expect another test of support at 6400. Breach is still unlikely but would offer a target of 5400.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

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Gold, Silver and Treasury yields

10-Year Treasury yields retraced from resistance at 2.0% this week but rising Trend Index troughs indicate upward pressure on yields. Breakout above 2.0% would strengthen the signal. Higher long-term rates would increase the opportunity cost of holding Gold, reducing demand.

10-Year Treasury Yields

China’s Yuan penetrated its descending trendline against the Dollar. Similarities between the two patterns (above and below) suggest that China is reducing purchases of Treasuries, increasing upward pressure on yields.

Chinese Yuan CNY/USD

Rising yields would normally strengthen demand for the Dollar. Instead, declining Trend Index peaks warn of long-term selling pressure.

Dollar Index

Gold found short-term support at $1450/ounce but further rises in Treasury yields would increase the selling pressure highlighted by declining peaks on the Trend Index.

Gold (USD/ounce)

Silver broke support at $17.00/ounce, with an even steeper fall on the Trend Index warning of a further decline on Silver and Gold.

Silver (USD/ounce)

Australia’s All Ordinaries Gold Index continues its downward trend channel, headed for secondary support at 6000. Declining Trend Index peaks again warn of strong selling pressure. Respect of 6000 would signal that the primary up-trend is intact, while breach and a test of primary support at 5400 would again warn of trend weakness.

All Ordinaries Gold Index

Patience

Gold is in a long-term up-trend. A correction may offer an attractive entry point but we first need to confirm that the up-trend is intact before increasing exposure to gold stocks.

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ASX 200 diverges from fundamentals

Seasonally adjusted labour force estimates show a decline in October 2019:

  • Employment decreased by 19,000 to 12,919,200 people
    (full-time -10,300 and part-time -8,700).
  • Unemployment rate increased by 0.1 pts to 5.3%.
  • Monthly hours worked in all jobs decreased by 2.8 million hours to 1,783.9 million hours.

The leading indicator of employment has been predicting a down-turn in employment for some time, recording its sixteenth consecutive monthly fall in November.

Australia: Leading Employment Indicator

Job advertisements have also declined since late 2018.

Australia: Job Ads & Vacancies

Falling employment has a knock-on effect in other areas of the economy:

According to Tony Weber, chief executive of the FCAI, new vehicles have now seen the nineteenth consecutive month of decreasing sales in the Australian market, with October 2019 sales down 9.1% compared to October 2018.

“Year to date sales of new motor vehicles in 2019 are almost 78,000 units (eight per cent) lower than the same period in 2018…”

Retail sales are also soft:

In volume terms, the seasonally adjusted estimate for the September quarter 2019 fell 0.1%. This follows a 0.1% rise in the June quarter 2019, and a 0.1% fall in the March quarter 2019.

But the ASX 200, seemingly unperturbed, is testing resistance at 6800. Breakout would signal a primary advance with a target of 7200. Breach of support at 6400 seems unlikely but would warn of a decline with a target of 5400.

ASX 200

There are, however, signs of weakness in the largest two sectors.

ASX 300 Banks index penetrated its rising trendline, warning of a correction. Declining peaks on the Trend Index indicate secondary selling pressure. Follow-through of the index below 7600 would strengthen the bear signal.

ASX 300 Banks

A hanging man candlestick warns the ASX 300 Metals & Mining index is likely to again test support at 4100 ( the neckline of a large head-and-shoulders reversal pattern ). A Trend Index peak near zero would indicate continued selling pressure.

ASX 300 Metals & Mining

Iron ore continues its primary decline, since breaking support at 90. Our long-term target is 65.

Iron Ore

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook. But ASX 200 breakout above 6800 would force us to re-examine our outlook.

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Gold plunges

Gold broke support at $1490/ounce, the base of a bearish descending triangle. A sharp drop on the Trend Index warns of strong selling pressure. Respect of secondary support at $1350 would signal that the primary up-trend is intact, while a test of primary support at $1270 would warn of trend weakness.

Gold (USD/ounce)

Silver similarly broke support at $17.50/ounce, with an even steeper fall on the Trend Index warning of a strong decline, confirming the Gold signal.

Silver (USD/ounce)

The cause of the sharp fall is clear: long-term Treasury yields are rising, increasing the opportunity cost of holding Gold. 10-Year Treasury yield breakout above 2.0% would warn of an up-trend, with an initial target of 2.50%.

10-Year Treasury Yields

The All Ordinaries Gold Index continues its downward trend channel, towards secondary support at 6000. Declining Trend Index peaks again warn of selling pressure. Respect of 6000 would signal that the primary up-trend is intact, while a test of primary support at 5400 would again warn of trend weakness.

All Ordinaries Gold Index

Patience is required

Gold is in a long-term up-trend and a correction may offer an attractive entry point. But we first need to confirm that the up-trend is intact before increasing exposure to gold stocks.

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ASX banks profit squeeze but miners bullish

Iron ore continues its primary decline, having broken support at 90. Expect a test of the long-term target at 65.

Iron Ore

ASX 300 Metals & Mining index rallied during the week. I was expecting another test of support at 4100 ( the neckline of a large head-and-shoulders reversal pattern ) but a higher Money Flow trough near zero indicates buying pressure. A large divergence between iron ore and the Metals & Mining index warns that something is afoot.

ASX 300 Metals & Mining

The CEOs of ANZ, Westpac and NAB this week all mentioned pressure on net interest margins in their earnings announcements.

Net Interest Margins

But as this chart of fee and other income to March 2019 shows, it is not just interest margins that are under pressure. Transaction fees are steadily declining, while low book growth in recent years has resulted in declining lending fees. The recent sharp fall in other fee-based activity is also unlikely to recover as banks shed their troublesome wealth management business units.

Majors: Fees
Source APRA: Major Banks

ASX 300 Banks index retreated below its rising trendline, warning of a correction. Declining peaks on the Trend Index indicate secondary selling pressure. Follow-through below 7600 would strengthen the signal.

ASX 300 Banks

REITs have been experiencing selling pressure in the last few months despite the scramble for yield, with descending peaks on Twiggs Money Flow and a bearish descending triangle. Breach of support at 1600 would offer a short-term target of 1500.

ASX 200 REITs

ASX 200

Financials are mildly bearish but miners are surprisingly bullish. An ascending triangle on the ASX 200 signals buying pressure, while the declining peaks on Money Flow are modest in relation to the overall up-trend. Breakout above 6800 would signal another advance with a target of 7200. Breach of support at 6400 is now less likely but would warn of a decline with a target of 5400. As always, the two biggest sectors, Financials and Mining, are likely to point the way.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook. But ASX 200 breakout above 6800 would force us to review our outlook.

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ASX: Iron ore breaks support

Iron ore broke support at 90, falling sharply to $83.55/ton. Expect a decline to test the long-term target at 65.

Iron Ore

ASX 300 Metals & Mining index rallied slightly but another test of support at 4100 is likely — the neckline of a large head-and-shoulders reversal pattern. Declining peaks on the Trend Index warn of selling pressure. Completion of the head-and-shoulders reversal would offer a target of 3400.

ASX 300 Metals & Mining

Residential mortgage activity is recovering in response to recent rate cuts but banks are under pressure, with lower interest margins, lower fee income and high remediation costs from malpractices exposed by the Royal Commission.

ANZ reported a flat full-year profit at $6.4 billion but revealed margin and retail fee pressure:

“The halving of the Reserve Bank’s cash rate during the year was the major factor in a 12 basis point compression of ANZ’s net interest margin to about 1.72 per cent. The net interest margin is the difference between the bank’s funding costs and what it charges for loans, and it’s as low as it has ever been – in the mid-1990s the margin was about 4 per cent – with no reason to believe the pressure on margins will abate.” [Stephen Bartholomeusz]

ASX 200 Financials index met resistance at 6500. Declining peaks on the Trend Index now indicate selling pressure. Expect a test of primary support at 6000; breach would offer a target of 5300.

ASX 200 Financials

REITs recovered slightly from their recent sell-off but the descending triangle is bearish. A lower Trend Index peak would strengthen the bear signal. Breach of support at 1600 would offer a short-term target of 1500.

ASX 200 REITs

ASX 200

The ASX 200 continues to give mixed signals. An ascending triangle on the index chart is bullish, but declining peaks on the Trend Index warn of selling pressure. Breakout above 6800 would signal another advance, while breach of support at 6400 would warn of a decline with a target of 5400. The two biggest sectors, Financials and Mining, are likely to lead the way.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

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Australian Gold: Patience required

Gold, measured in Australian Dollars, is in a bearish descending triangle, testing support at $2150/ounce. A sharp fall on the Trend Index, with a peak below zero, warns of strong selling pressure.

Gold (AUD/ounce)

The All Ordinaries Gold Index recently broke support at 7200, warning of a decline to 6000. Again, a declining Trend Index warns of selling pressure.

All Ordinaries Gold Index

Patience is required. Gold is in a long-term up-trend, with a target of the 2012 high at $1800/ounce. A correction may offer an attractive entry point but further falls are expected before the advance resumes.

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ASX mixed signals

Residential mortgage activity is recovering in response to recent rate cuts. Buyers are unable to resist the ultra-low finance costs, while APRA is sitting on its hands regarding macro-prudential measures (e.g. reducing maximum LVRs) to prevent another credit/housing bubble. Again, we see a two-speed economy, with mortgage stress in newer suburbs and inner-city units, where homeowners are unable to take advantage of lower rates, and rising prices in older, more established suburbs with lower mortgage exposure.

ASX 200 Financials index is testing resistance at 6500. Higher troughs on the Trend Index indicate buying pressure. There is no sign of a reversal at present but keep a weather eye on primary support at 6000; breach would warn of a primary decline with a target of 5200.

ASX 200 Financials

Banks face headwinds from pressure on interest margins, increased competition from disruptors in the form of neobanks (digital banking service providers), and demands to increase capital buffers which could lead to dividend cuts.

Iron ore is testing support at 90. Breach of support would warn of a decline with a long-term target of 65.

Iron Ore

ASX 300 Metals & Mining index is testing support at 4100, the neckline of a large head-and-shoulders reversal pattern. Declining peaks on the Trend Index signal selling pressure. Breach of support would warn of a decline with a target of 3400.

ASX 300 Metals & Mining

REITs recovered slightly from their recent sell-off but downside risk remains. Breach of support at 1600 would warn of a decline to 1500.

ASX 200 REITs

ASX 200

The ASX 200 continues to give mixed signals. An ascending triangle on the index chart is bullish, but the Trend Index also shows declining peaks, warning of selling pressure. Breakout above 6800 would signal another advance, while breach of support at 6400 would warn of a decline with a target of 5400.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

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Gold’s hidden correction

There is a lot going on in global financial markets, with a Dollar/Eurodollar shortage forcing the Fed to intervene in the repo market. The Fed will not, on pain of death, call this QE. But it is. The only difference is that the Fed is purchasing short-term Treasury bills rather than long-term notes and mortgage-backed securities (MBS). The effect on the Fed’s balance sheet (and on Dollar reserves held by primary dealers) is the same.

Fed Assets

The effect on the Dollar has been dramatic, with a sharp dip in the Dollar Index. Interesting that this was forewarned by a bearish divergence on the Trend Index since June this year. Financial markets knew this was coming; they just didn’t shout it from the rooftops.

Dollar Index

Gold and precious metals normally surge in price when the Dollar weakens, to be expected as they are priced in USD, but Gold was already weakening, testing support at $1500/ounce.

Spot Gold in USD compared to Real 10-Year Treasury Yields

Silver was similarly testing support at $17.50/ounce.

Spot Silver

The falling Dollar has supported Gold and Silver despite downward pressure from other sources. In effect we have a “hidden” correction, with falling precious metal values obscured by falling unit values. Just as surely as if we had reduced the number of grams in an ounce….

Support for the Dollar would likely result in Gold and Silver breaking support, signaling a correction.

Australia’s All Ordinaries Gold Index, where the effect of the weakening greenback is secondary, has already broken support at 7200 after a similar bearish triangle (to Gold and Silver). Breach warns of another decline. Expect support at 6000.

All Ordinaries Gold Index

Patience is required. Gold is in a long-term up-trend, with a target of the 2012 high at $1800/ounce. A correction would offer an attractive entry point.

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