Tag: 10-Year Treasury Yields

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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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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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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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Gold: Reasons for the up-trend

Gold is in a medium- to long-term up-trend. Apart from record central bank purchases of bullion and a weakening Chinese Yuan, real long-term interest rates are declining.

The chart below highlights the inverse relationship between gold and real long-term interest rates (10-year Treasury yield minus CPI YoY%). When LT interest rates fall, gold prices surge.

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

Treasury yields are falling because the Fed is cutting short-term interest rates but, more importantly, because QE has resumed. With the ECB driving bond yields into the negative, demand for Treasuries is surging.

The Fed has also reversed course, expanding their balance sheet after the recent liquidity squeeze forced them to resume overnight repos.

Fed Total Assets and Excess Reserves on Deposit

Our target for Gold is the 2012 high of $1800/ounce.

A weak rally strengthens the bearish argument for China’s Yuan, suggesting continuation of the primary down-trend.

CNYUSD

The Yuan is in a long-term down-trend against the Dollar that shows no signs of easing. Resolution of trade tensions is unlikely. Trade is merely the tip of the iceberg in a far wider clash between two global powers with conflicting ideologies which is likely to continue for decades.

Gold is testing support at $1495/ounce. Breach would warn of a correction.

Spot Gold in USD

Silver is similarly testing support. Breach of $17.50/ounce is likely and would warn of a correction, with Gold expected to follow.

Spot Silver in USD

The All Ordinaries Gold Index is trending lower. Breach of 7200 would warn of another decline, with a short-term target of 6500.

All Ordinaries Gold Index

Patience is required. Gold remains in a long-term up-trend and a correction may offer a sound entry point.

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S&P 500: Donald Trump and the next recession

Treasury yields continue to fall, with the 10-Year testing long-term lows at 1.50%. A sign that investors are growing increasingly risk averse.

10-Year Treasury Yields

Crude oil prices remain weak; a bearish signal for the global economy. Breach of support at $50/$51 per barrel would warn of a decline to $40.

Nymex Light Crude

Volatility (21-Day) above 1.0% on the S&P 500 is flashing an amber warning. Breakout above 2940 is likely and would signal another test of 3000. But expect stubborn resistance at our 3000 target level.

S&P 500 Volatility

Bearish divergence (13-Trend Index) on the Nasdaq 100 warns of secondary selling pressure. Breach of 7400 would warn of a test of primary support at 7000.

Nasdaq 100

Robert Shiller maintains that Donald Trump is unlikely to survive a recession:

“So far, with his flashy lifestyle, the US president has been a resounding inspiration to many consumers and investors. But his personal narrative is unlikely to survive an economic downturn….the end of confidence in Trump’s narrative is likely to be associated with a recession.

During a recession, people pull back and reassess their views. Consumers spend less, avoiding purchases that can be postponed: a new car, home renovations, and expensive vacations. Businesses spend less on new factories and equipment, and put off hiring. They don’t have to explain their ultimate reasons for doing this. Their gut feelings and emotions can be enough.”

I would go further and argue that Trump’s management style is likely to cause a recession.

Some of the aims the President is attempting, like addressing China’s unfair trade practices, are vitally important to long-term US interests and he should be given credit for tackling them. But his constant hyperbole, erratic behavior, with a constant mix of bouquets and brickbats, and on-again-off-again tactics, has elevated global uncertainty. Consumers are likely to increase savings and cut back on expenditure, while corporations may cut back on hiring and new investment, which could tip the economy into recession.

GDP growth contracted to 2.3% in the second quarter, while growth in hours worked contracted to 0.92% for the year ended July 2019, pointing to further falls in GDP growth for the third quarter.

Real GDP and Hours Worked

August employment figures are due for release next week and will either confirm or allay our fears.

We maintain our bearish outlook and have reduced equity exposure for international stocks to 40% of portfolio value.

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Recession ahead

There are clear signs of trouble on the horizon.

10-Year Treasury yields plunged to near record lows this month as investors fled stocks for the safety of bonds.

10-Year Treasury Yield

The Federal deficit is widening — unusual for this late in the cycle as Liz Ann Sonders points out. We are being prepared for the impact of a trade war: pressure the Fed to cut rates and raise the deficit to goose stocks.

Federal Deficit

Gold surges as Chinese flee the falling Yuan.

Spot Gold

Commodity prices fall in anticipation of a global recession.

DJ-UBS Commodity Index

Are we there yet? Not quite. The Philadelphia Fed Leading Index is still above 1% (June 2019). A fall below 1% normally precedes a US recession.

Leading Index

Volatility (Twiggs 21-day) for the S&P 500 is rising, as it usually does ahead of a market down-turn, but has not yet formed a trough above 1% — normally a red flag ahead of a market top.

S&P 500 Volatility

And annual payroll growth is still at 1.5%. This is the canary in the coal mine. A fall below 1% (from its 2015 peak) would warn that the US is close to recession.

Payroll Growth and FFR

What to watch out for:

  • Falling commodity prices below primary support (DJ-UBS at 75) will warn that the trade war is starting to bite;
  • Falling employment growth, below 1%, would signal that the US economy is affected; and
  • September is a particularly volatile time of the year, when fund managers clean up their balance sheets for the quarter-end, with a history of heavy market falls in October as cash holdings rise.

I tell my clients to sell into the rallies. Don’t wait for the market to fall. Rather get out too early than too late.

Of course I cannot guarantee that there will be a recession this year, but there are plenty of warning signs that we are in for a big one soon.

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S&P 500: Flight to safety

10-Year Treasury yields are near record lows after Donald Trump’s announcement of further tariffs on China. The fall reflects the flight to safety, with rising demand for Treasuries as a safe haven.

10-Year Treasury Yield

Crude found support at $50/barrel. Breach would warn of a new down-trend, with a target of $40/barrel. Declining crude prices reflect a pessimistic outlook for the global economy.

10-Year 3-Month Treasury Spread

The S&P 500 found support at 2850. Rising volatility warns of increased market risk. A test of support at 2750 remains likely.

S&P 500

Declining Money Flow on the Nasdaq 100 reflects rising selling pressure. Expect a test of 7000.

Nasdaq 100

The Shanghai Composite Index broke support at 2850. A Trend Index peak at zero warns of strong selling pressure. Expect a test of support at 2500.

Shanghai Composite Index

India’s Nifty is testing support at 11,000. Breach would offer a target of 10,000.

Nifty Index

Dow Jones Euro Stoxx 600, reflecting large cap stocks in the European Union, is testing primary support at 368. Strong bearish divergence on the Trend Index warns of a double-top reversal, with a target of 330.

DJ Euro Stoxx 600

The Footsie is similarly testing support at 7150. Breach would offer a target of 6600.

FTSE 100

I have warned clients to cut exposure to the market. It’s a good time to be cautious.

“There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time.”

~ Jesse Livermore

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Gold: Every cloud has a Silver lining

Long-term interest rates are declining after more dovish speeches from the Fed, with 10-year Treasury yields re-testing support at 2.0%. The opportunity cost of holding gold is low.

10-Year Treasury Yields

The Dollar Index is likely to weaken, testing primary support at 95. A weakening Dollar boosts demand for Gold.

Dollar Index

A big gain in Silver this week is likely to be followed by a similar move in Gold. The two precious metals tend to move in unison. Breakout above $16.00/ounce signals an advance to $17.50.

Spot Silver in USD

Gold is consolidating above short-term support at $1400 after a strong advance, indicating buying pressure. Another advance is likely, with a medium-term target of $1500/ounce.

Spot Gold in USD

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Gold buying pressure

Long-term interest rates close to zero after inflation, with 10-year Treasury yields testing support at 2.0%, means that the opportunity cost of holding gold is minimal.

10-Year Treasury Yields

A weakening Dollar Index is expected to test primary support at 95, further boosting demand for Gold.

Dollar Index

Gold found short-term support at $1400 after a strong advance, indicating buying pressure. Respect of support at $1350/$1400 would offer a medium-term target of $1500/ounce.

Spot Gold in USD

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S&P 500: Plan B

The S&P 500 is testing its all-time high at 2950. Bearish divergence on Twiggs Money Flow warns of secondary selling pressure. Respect of resistance is likely and would signal retracement to test support at 2750.

S&P 500

The 10-Year Treasury yield has fallen to 2.0%, indicating that the Fed is expected to cut interest rates in the second half of 2019.

10-Year Treasury yield

Stocks are still running on hope of a deal in the US-China trade dispute. Xi Jinping and Donald Trump will meet this weekend to discuss the way forward. Chinese preconditions for a trade agreement are likely to include the US lifting its ban on the sale of technology to telecommunications giant Huawei and removal of US tariffs on Chinese imports, according to The Wall St Journal. The US is unlikely to accede and chances of a deal are slim to nonexistent.

Trump doesn’t seem concerned: “My Plan B with China is to take in billions and billions of dollars a month and we’ll do less and less business with them……My plan B’s maybe my plan A.” (Bloomberg)

Plan B is the likely outcome, with a moderate impact on US corporate earnings and Fed rate cuts to keep the market on track. Risks rise while the potential upside declines. It’s a good time to be cautious.

We must recognize that as the dominant power in the world we have a special responsibility. In addition to protecting our national interests, we must take the leadership in protecting the common interests of humanity……There is no other country that can take the place of the United States in the foreseeable future. If the United States fails to provide the right kind of leadership our civilization may destroy itself. That is the unpleasant reality that confronts us.

~ George Soros: The Age of Fallibility

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