Category: Gold & Commodities

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Falling crude prices are good news

Crude oil prices are falling sharply. Nymex Light Crude broke support at $98/barrel and Brent Crude is testing support at $104. Breach of that support level would confirm a primary down-trend.

Nymex WTI Crude

The theory has been bandied about that lower crude prices are a Barack Obama strategy to deter Vladimir Putin in East Ukraine. But there are signs of an economic slow-down in Europe, especially Italy, that would hurt demand for Brent Crude. And the Baltic Dry Index, which reflects bulk commodity shipping rates, indicates global trade is at a low ebb. Whichever is correct, low crude prices are welcome — good for the medium-term outlook of the global economy.

Baltic Dry Index

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Gold finds support as Euro falls

  • Treasury yields warn of a decline
  • Euro trending lower
  • Dollar halts at resistance
  • Gold finds short-term support

Interest Rates and the Dollar

The yield on ten-year Treasury Notes retreated below 2.50 percent, warning of a decline to 2.00 percent*. Follow-through below 2.40 would confirm. 13-Week Twiggs Momentum below zero strengthens the signal. Reversal above 2.65 is unlikely, but indicate an advance to 3.00 percent.

10-Year Treasury Yields

* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00

The euro is in a primary down-trend, having broken primary support at $1.35. Target for the initial decline is $1.30*. Declining 13-week Twiggs Momentum below zero confirms the down-trend. Recovery above $1.35 is unlikely, but would warn of a bear trap.

EURUSD

* Target calculation: 1.35 – ( 1.40 – 1.35 ) = 1.30

The Dollar Index has run into resistance at 81.50, evidenced by tall wicks (“shadows”) on the last two weekly candles. Weakness in Europe is likely to drive the Dollar higher, while lower treasury yields would retard the advance. Recovery of 13-week Twiggs Momentum above zero suggests a primary up-trend. Breakout above 81.50 would signal a primary advance to 84*. Reversal below 81.00 is unlikely, but would warn of another test of primary support at 79.00.

Dollar Index

* Target calculation: 81.50 – ( 81.50 – 79.00 ) = 84.00

Gold

Gold found short-term support at $1280/$1300. Oscillation of 13-week Twiggs Momentum around zero continues to indicate hesitancy. Breach of support at $1240/$1250 would warn of a primary down-trend. Recovery above $1350 remains unlikely at present, but would indicate another test of $1400/$1420.

Spot Gold

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

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What caused the Dow sell-off?

Dow Jones Industrial Average fell 1.88% to close at 16563, breach of 16750 warning of a secondary correction. Decline of 21-day Twiggs Money Flow below zero would strengthen the signal. Breach of primary support at 15500 is unlikely and the trend remains upward.

Dow Jones Industrial Average

* Target calculation: 16500 + ( 16500 – 15500 ) = 17500

The S&P 500 also fell sharply. Reversal below 1950 warns of a test of medium-term support at 1900. Breach of primary support at 1750 again appears unlikely.

S&P 500

* Target calculation: 1500 + ( 1500 – 750 ) = 2250

The CBOE Volatility Index (VIX) spiked up, but remains below 20 — values normally associated with a bull market.

VIX Index

What caused the sell-off? Commentators seem puzzled. Theories advanced vary from Argentinian default to developments in Eastern Europe. Neither of these seem to hold much water: the market has been aware of the risks for some time and they should be largely discounted in current prices. My own preferred theory is the expectation of a rate rise from the Fed. With good GDP numbers and falling unemployment the Fed may be tempted to tighten a lot sooner than originally expected. Even oil prices are falling. High crude prices is one of the reasons for the cautious Fed taper so far.

Nymex Light and Brent Crude

Which makes me suspect that this correction is going to end like the last “taper tantrum” — with a strong rally when the market realizes that economic recovery will lift earnings.

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Commodities weaken on soft demand

Crude oil prices fell sharply in July, especially Brent Crude [pink] which is testing support at $104/$106 per barrel. Breach of that support level, or $98/$100 for Nymex Light Crude, would signal a primary down-trend.

Nymex WTI Crude

Commodity prices have weakened in sympathy, with Dow Jones-UBS Commodity Index falling sharply since breaking support at 133. Expect another test of long-term support at 122/124. Reversal of 13-week Twiggs Momentum below zero strengthens the bear signal.

Dow Jones UBS Commodities Index

Retreat of the Baltic Dry Index — which reflects bulk commodity shipping rates — to its 2008 low, shows similar weakness for iron ore and coal.

Baltic Dry Index

Waning demand from China is driving down prices.

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Gold weakens on Dollar strength

  • Treasury yields find support
  • Euro signals a primary down-trend
  • Dollar continues to strengthen
  • Gold weakens

Interest Rates and the Dollar

The yield on ten-year Treasury Notes recovered above 2.50 percent, suggesting that a bottom is forming. Follow-through above 2.65 would strengthen the signal. Reversal below 2.40, however, would confirm a decline to 2.0 percent*.

10-Year Treasury Yields

* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00

The Euro broke primary support at $1.35, signaling a primary decline with a target of $1.30*. Reversal of 13-week Twiggs Momentum below zero confirms the down-trend. Recovery above $1.35 is unlikely, but would warn of a bear trap.

EURUSD

* Target calculation: 1.35 – ( 1.40 – 1.35 ) = 1.30

The Dollar Index rallied on strong GDP figures, testing resistance at 81.50. Breakout is likely and would signal a primary advance with a target of 84*. Recovery of 13-week Twiggs Momentum above zero indicates a primary up-trend. Reversal below 80.50 is unlikely, but would warn of another test of primary support at 79.00.

Dollar Index

* Target calculation: 81.50 – ( 81.50 – 79.00 ) = 84.00

Gold

Gold is testing support at $1295/$1300. Failure of support would warn of a primary down-trend. Breach of $1240/$1250 would confirm. Recovery above $1350 is unlikely at present, but would indicate another test of $1400/$1420. Reversal of 13-week Twiggs Momentum below zero would strengthen the bear signal, but oscillation close to the zero line presently signals hesitancy.

Spot Gold

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

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Gold retreats as Dollar strengthens

  • Treasury yields weaken further
  • The Dollar continues to strengthen
  • Inflation target remains at 2% p.a.
  • Gold retreats

Interest Rates and the Dollar

The yield on ten-year Treasury Notes broke support at 2.50 percent, indicating a test of 2.00 percent*. 13-Week Twiggs Momentum below zero warns of a primary down-trend. Follow-through below 2.40 would confirm. Recovery above 2.65 is unlikely, but would indicate the correction is over, with a medium-term target of 2.80 and long-term of 3.00 percent.

10-Year Treasury Yields

* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00

The Dollar Index followed-through above 80.50 and is headed for another test of 81.00. Recovery of 13-week Twiggs Momentum above zero suggests a primary up-trend. Breakout above 81.00 would strengthen the signal; and 81.50 would confirm. Breach of 80.00 is unlikely at present, but would warn of another test of primary support at 79.00.

Dollar Index

Low interest rates and a stronger dollar suggest inflation expectations are falling, but this is not yet evident on the TIPS spread. The 5-year Breakeven rate (5-Year Treasury Yield minus 5-Year Inflation-Indexed Yield) remains at 2.0 percent.

5-Year Treasury Yield minus 5-Year Inflation Indexed (TIPS) Yield

Gold

Gold is nonetheless falling, in line with weaker inflation expectations. Breach of short-term support at $1295/$1300 would test $1240/$1250. And breach of $1240 would signal another primary decline, with an intermediate target of $1100*. Oscillation of 13-week Twiggs Momentum around zero, however, suggests hesitancy, with no strong trend. Recovery above $1350 is unlikely at present, but would indicate another test of $1400/$1420.

Spot Gold

* Target calculation: 1250 – ( 1400 – 1250 ) = 1100

When we compare long-term crude prices (Brent Crude) to gold, it is evident that crude prices tend to lead and gold to follow. The main reason is the impact that higher crude prices have on inflation, increasing demand for gold as an inflation hedge. Crude prices currently remain high, but it remains to be seen whether gold will follow as usual.

Gold and Crude

Gold prices adjusted for inflation suggest the opposite. There are two enormous spikes on the chart, both flagging times of great financial uncertainty. The first is spiraling inflation of the early 1980s and the second is the all-in balance sheet expansion (also known as quantitative easing) by central banks after the global financial crisis. Gold prices remain elevated and are likely to fall further as central banks curtail expansion.

Gold and CPI

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Gold retreats as Dollar strengthens

  • Treasury yields remain weak
  • The Dollar strengthens
  • Inflation looks weak despite rising TIPS spread
  • Gold retreats

Interest Rates and the Dollar

The yield on ten-year Treasury Notes continues to test support at 2.50 percent. Failure would indicate a decline to 2.00 percent; follow-through below 2.40 would confirm. 13-Week Twiggs Momentum below zero continues to warn of a primary down-trend. Recovery above 2.65 is less likely, but would suggest the correction is over, with a medium-term target of 2.80 and long-term of 3.00 percent.

10-Year Treasury Yields

* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00

The Dollar Index found short-term support at 80.00. Follow-through above 80.50 indicates another test of 81.00. Recovery of 13-week Twiggs Momentum suggests a primary up-trend. Breakout above 81.00 would strengthen the signal; above 81.50 would confirm. Breach of 80.00 is unlikely at present, but would warn of another test of primary support at 79.00.

Dollar Index

Low interest rates and a stronger dollar suggest inflation expectations are falling, but this is not yet evident on the TIPS spread (10-Year Treasury Yields minus 10-Year Inflation-Indexed Yields).

10-Year Treasury Yields minus 10-Year Inflation Indexed (TIPS) Yields

Gold

Gold is nonetheless falling, in line with weaker inflation expectations. Follow-through below $1300 would test support at $1240. And breach of $1240 would threaten another primary decline, with a target of $1000*. Oscillation of 13-week Twiggs Momentum around zero, however, suggests hesitancy, with no strong trend. Recovery above $1350 is unlikely at present, but would indicate another test of $1400/$1420.

Spot Gold

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

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Commodities weak except for crude

  • Chinese stocks test long-term support
  • Commodities weaken
  • Crude oil remains high

China’s Shanghai Composite Index continues to test long-term support. 13-Week Twiggs Momentum holding below zero suggests continuation of the primary down-trend.

Shanghai Composite Index

Commodity prices are weakening, with Dow Jones-UBS Commodity Index breaking support at 133 to warn of another test of long-term support at 122/124. Reversal of 13-week Twiggs Momentum below zero would strengthen the signal.

Dow Jones UBS Commodities Index

Crude oil remains strong. The chart below plots WTI Light Crude over the consumer price index. The ratio is well above the historical average and is acting as a significant hand-brake on the post-GFC recovery.

Nymex WTI Crude

Considering the holes made in GDP (the green line) by crude oil spikes over the last 40 years, you can understand why Janet Yellen is reluctant to raise interest rates despite falling unemployment.

Nymex WTI Crude

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Gold strengthens on Dollar weakness

  • Treasury yields weaken
  • The Dollar continues to test long-term support
  • Gold is strengthening

Interest Rates and the Dollar

The yield on ten-year Treasury Notes is again testing support at 2.50 percent. Failure would indicate a decline to 2.00 percent. Follow-through below 2.40 would confirm. Market expectations favor low interest rates and 13-Week Twiggs Momentum below zero continues to warn of a primary down-trend. Recovery above 2.65 is less likely, but would suggest the correction is over, offering a medium-term target of 2.80 and long-term of 3.00 percent.

10-Year Treasury Yields

* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00

The Dollar Index tests short-term support at 80.00. Respect of zero by 13-week Twiggs Momentum warns of continuation of the primary down-trend. Breach of 80.00 would indicate a test of primary support at 79.00. Recovery above 80.50 is unlikely at present, but would suggest an advance to 81.50.

Dollar Index

Gold

Low interest rates and higher inflation expectations favor a stronger gold price and a weaker Dollar. Gold is consolidating in a narrow band below medium-term resistance at $1325/$1330, suggesting continuation of the rally. Breakout would signal a test of $1400. Recovery of 13-week Twiggs Momentum above zero hints at a primary up-trend; breakout above $1400 would confirm. Retreat below $1300 is unlikely, but would test support at $1240.

Spot Gold

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Enough to make Gazputin grin

  • Chinese stocks drift lower
  • Crude oil rising
  • Other commodities weak

China’s Shanghai Composite Index continues to drift lower on the long-term, monthly chart.

Shanghai Composite Index

Apart from crude oil, commodity prices have fared little better. But crude plays such a dominant role in most commodity indices that they appear more buoyant. Dow Jones-UBS Commodity Index rallied to 140 before retracing for another test of primary support. Oscillation of 13-week Twiggs Momentum around zero, however, does not suggest a significant trend.

Dow Jones UBS Commodities Index

Crude oil is doing a lot better, heading for another test of $110/barrel on the back of supply threats from geo-political tensions. The ascending triangle is very large, but breakout would suggest a long-term target of the 2008 high at $145*.

Brent Crude and Nymex Crude

* Target calculation: 110 + ( 110 – 75 ) = 145

…Enough to make even Gazputin grin.

Vladimir Putin

Read more at Bloomberg, June 2013: Gazprom’s Demise Could Topple Putin

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