Tag: CPI

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Gold headed for $600 or $700?

Gold broke long-term support at $1140/ounce, offering a medium-term target of $1000*. Peaks at zero on 13-week Twiggs Momentum indicate a strong primary down-trend.

Spot Gold

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

What is the long-term target?

Gold fell from a long-term high around $1800 before encountering strong support at $1200. Breakout below this lengthy, mid-point consolidation suggests that the precious metal is likely to experience another decline of similar magnitude to the first. These patterns are normally symmetrical, which would present an end target of $600 per ounce. That is $1200 – ($1800 – $1200) = $600.

$600 may seem outlandish, given the strength of recent support, but not when one adjusts the gold price by the consumer price index (CPI). Then it appears that yellow metal still has some way to fall.

Gold over CPI

Nothing is certain in this world (except death and taxes) and there are many fundamentals (like central banks) that may intervene. Also, there is a strong support level at the 2008 low of $700 per ounce.

Spot Gold

I would attach a 50% probability to gold reaching $700 in the next few years and a bit less, say 30%, to gold reaching $600.

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Gold breaks $1180 support

Core CPI continues to track close to the Fed target of 2.0 percent (CPI All Items is distorted by falling oil prices).

CPI and Core CPI

Long-term interest rates are in a primary up-trend, with 10-year Treasury note yields breakout above resistance at 2.25% offering a target of 3.0 percent. Rising 13-week Twiggs Momentum above zero strengthens the signal.

10-Year Treasury Yields

The Dollar Index continues to test support at 95. Breach would warn of a test of the primary level (and rising trendline) at 93. A sharp decline on 13-Week Twiggs Momentum indicates this is likely.

Dollar Index

Gold

A weakening dollar would boost demand for gold, but rising interest rates counter this. Spot gold broke medium-term support at $1180/ounce, warning of a test of the primary level at $1140. 13-Week Twiggs Momentum peaks below zero suggest continuation of the primary down-trend. Failure of $1140 would offer a long-term target of $1000*.

Spot Gold

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

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Inflation steady while Gold tests support

CPI continues below zero, but core CPI (excluding food and energy) came in at 1.81% for April 2015, indicating long-term inflationary pressures are constant.

CPI and Core CPI

Low inflation relieves upward pressure on bond yields. The yield on 10-year Treasury notes encountered resistance at 2.25%, with tall shadows on the last 3 weekly candles. Expect another retracement to test support at 1.85%. Reversal of 13-week Twiggs Momentum below zero would strengthen the signal.

10-Year Treasury Yields

* Target calculation: 2.25 + ( 2.25 – 1.85 ) = 2.65

The Dollar Index broke resistance at 96 despite falling bond yields, indicating the correction is over and another test of 100 likely. 13-Week Twiggs Momentum is declining, but recovery above the descending trendline would support the (bull) signal. Reversal below 96 is unlikely, but would test support at 93.

Dollar Index

Gold

The inflation-adjusted price of gold (gold/CPI) suggests that gold has further to fall. Unusually high levels of intervention by central banks in financial markets may, however, be fueling support at current prices — suggesting a gradual decline rather than a sharp adjustment.

Gold/CPI

Spot gold is headed for another test of medium-term support at $1180/ounce after respecting resistance at $1220. Breach of support would test the primary level at $1140. 13-Week Twiggs Momentum peaks below zero suggest a primary down-trend. Failure of $1140 would test the long-term target of $1000*.

Spot Gold

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

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Gold and the $1200 ‘support’ level

Barrick Gold failed to break resistance at 13.50 and looks set to continue ranging between 10.00 and 13.50. The consolidation is not an indication of reversal in the primary down-trend.

Barrick Gold

Inflation-adjusted price of gold (USD price divided by US consumer price index) is well above its historic long-term average, indicating that the bear trend is likely to continue.

Spot Gold

On the daily chart spot gold recovered from its March test of primary support at $1140, but has encountered strong resistance around $1200/ounce. 13-Week Twiggs Momentum continues to oscillate below zero, suggesting continuation of the primary down-trend. Reversal below $1180 would warn of another test of $1140, while breach of the primary support level would signal a decline to $1000/ounce*. Breakout above $1220 is unlikely, but would signal a (bear) rally to $1300/ounce.

Spot Gold

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

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Inflation and Dollar stable

March CPI readings were much as expected, with the annual rate at zero but core CPI (excluding food and energy) close to the Fed target of 2 percent.

Core CPI

Ten-year Treasury Note yields continue to consolidate in a narrow band between 1.85% and 2.00%. Breakout above resistance is more likely and would offer a target of 2.25%. 13-Week Twiggs Momentum below zero continues to indicate a primary down-trend. Recovery of long-term yields is likely to be gradual for two reasons:

  1. The Fed is adopting a cautious stance towards lifting short-term rates; and
  2. Downward pressure exerted on long-term yields by offshore (Chinese & Japanese) purchases of Treasury securities (with the intent of suppressing appreciation of their exchange rates).

10-Year Treasury Yields

A stable inflation rate and low interest rate outlook have kept the Dollar Index range-bound between 96 and 100. Rising 13-week Twiggs Momentum continues to indicate a strong primary up-trend. Breakout above 100 would signal an advance to 110*. Failure of support at 96 is unlikely.

Dollar Index

* Target calculation: 100 + ( 100 – 90 ) = 110

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Inflation outlook

March consumer price index (CPI) is due for release on Friday. Producer prices, released Tuesday, ticked upwards after a sharp December/January fall on the back of plunging crude oil prices.

PPI Finished Goods

Average hourly earnings growth (non-supervisory manufacturing jobs), however, retreated below 1.0%.

Average Hourly Earnings

CPI is likely to remain heavily affected by oil prices, but core CPI (excluding food and energy) is expected to remain close to the Fed’s target of 2.0%.

CPI and Core CPI

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Deflation in Australia?

The Eurozone experienced negative CPI growth over December/January.

CPI EU

Australia shows consumer price growth declining at the end of 2014. The next CPI update (Q1 2015), at end of April, is likely to reflect further slowing.

CPI Australia

Declining inflation expectations reported by Westpac (in the 0 to 5% range) tend to support this.

CPI expectations Australia (0 - 5% range)

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CPI unwinds as the Fed runs out of “patience”

From Seeking Alpha:

The euro fell to a fresh 12-year low on Wednesday, extending a broad decline just days after the ECB launched its €1T bond-buying program, while the dollar index soared to its highest in more than 11 years at 98.95, buoyed by expectations that the Fed could soon lift U.S. interest rates. Nearly all now believe the FOMC will remove the word “patient” from its policy statement after its March 17-18 meeting, opening the door for a rate increase in June.

Not so fast. US consumer price growth (annual % change) to end of January 2015 fell below zero.

US CPI

Core CPI is slowing at a far gentler rate because it excludes energy prices (as well as food).

CPI Core

Wage pressures in the manufacturing sector are declining, despite solid job numbers, indicating there is still plenty of slack.

Manufacturing Hourly Earnings

With inflationary pressures easing, why the haste to raise interest rates? I believe that Janet Yellen will move when the time is right. And not before.

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Crude still has further to fall

West Texas Crude has been falling since breaking support at $75/barrel, following through below $50/barrel. A test of 2009 lows at $30/barrel is likely unless there is major disruption to supply.

WTI Crude Monthly

When we adjust crude prices for inflation, they remain high by historical standards. Prior to the China boom of the early 2000s, the ratio of WTI Crude to CPI had seldom ventured above $20/barrel when measured in 1982-1984 dollars (shown as 0.2 on the chart below). After the dramatic fall of the last 3 months, the adjusted price at the end of December 2014 (in 1982-1984 dollars) is still $25.20/barrel (0.252 on the chart) — well above the former high.

WTI Crude adjusted for inflation

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Gold – further falls likely

Low interest rates increase demand for gold by lowering the carrying cost. A rising dollar, however, has the opposite effect.

Gold respected resistance at $1250/ounce, confirming the primary down-trend. Another 13-week Twiggs Momentum peak below zero strengthens the signal. Breach of primary support at $1180 would offer a long-term target of $1000*. Recovery above 1250 is unlikely, but would test the descending trendline around $1300.

Spot Gold

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

Gold Bugs Index, representing un-hedged gold stocks, fell sharply since breaching long-term support at 190. Declining 13-week Twiggs Momentum (below zero) signals a strong primary decline. Bearish for gold.

Gold Bugs Index

The price of gold adjusted for inflation (gold/CPI) remains relatively high and further falls are likely.

Gold adjusted for CPI

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