Tag: Gold

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Weak Dollar Boosts Gold & Copper

Key Points

  • Gold is testing resistance at $4,250 per ounce.
  • Copper (COMEX September futures) jumped to $6.72/lb.
  • US Treasury intervention in the Japanese Yen has rattled bond market investors.
  • The ISM Services PMI signals expansion, but signals weak job growth and strong inflationary pressures.

Gold rallied to test resistance at $4,250 per ounce. A breakout would signal another test of $5,000.

Spot Gold

Copper jumped to $6.72/lb on the COMEX futures exchange (Sep’26), continuing its long-term uptrend.

CNBC: Copper

The Dollar softened after last week’s joint intervention by Japan’s Ministry of Finance (MoF) and the US Treasury to support the Yen. Bond market traders are questioning why the US Treasury was involved and not the G7. Coordinated action by G7 central banks has supported past interventions. This time, the G7 were not involved, and the conclusion is that the US Treasury was acting to protect its Treasury market. The US Treasury repo operations circumvented the MoF being forced to sell US Treasuries to support the Yen, a move that would have driven up yields. (Reuters)

Dollar Index

Stocks & Financial Markets

Bitcoin1 continues to consolidate in a narrow range above 60000, a bearish sign in a downtrend. A breakout above 65000 would signal that financial market risk aversion is easing, while a break below 60000 would warn of a major liquidity contraction.

Bitcoin (BTC)

Dow Jones Industrial Average broke out above 53000, and is headed for a test of 55000. Trend Index troughs above the zero line confirm buying pressure.

Dow Jones Industrial Average

ISM Services

The ISM Services PMI increased to 54.1% for July, signaling a broad economic expansion.

ISM Services PMI

However, the Employment index fell to 47.4%, warning of weak job growth ahead.

ISM Services Employment

Services Prices also increased to 70.3%, a level similar to Manufacturing, signaling strong inflationary pressures.

ISM Services Prices

Conclusion

US Treasury operations to assist Japan’s intervention in support of the Yen underscore the fragility of US Treasury markets. The move fueled a rally in Gold and Copper, as well as the Dow, as confidence in US Treasury markets was shaken.

The ISM Services PMI signals continued expansion, but warns of weak job growth and strong inflationary pressures.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
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4 Key Takeaways for the Week

Key Points

  • Long-term Treasury yields climbed after the Fed kept rates unchanged.
  • The Japanese Yen is weakening as the Bank of Japan slow walks rate hikes.
  • Gold absorbs selling pressure as long-term rates rise.
  • China’s economy is slowing.

Treasury Market

The bond market has been anticipating a rate hike. This has been signaled since the 2-year Treasury yield broke above the Fed funds target range in March 2026.

2-Year Treasury Yield & Fed Funds Target (Upper Limit)

The FOMC voted to keep the Fed funds rate unchanged, with a target range of 3.5% to 3.75%. There were 3 dissenting votes, calling for a rate hike. The new Fed Chair, Kevin Warsh, is encouraging opposing views, and we can expect more dissent in the future. Warsh has also avoided forward guidance, which is likely to increase volatility in the bond market and consequently the term premium.

10-year Treasury yields climbed to 4.745% on Friday, reflecting market concern that the FOMC is not taking a more hawkish stance on inflation.

10-Year Treasury Yield

GDP grew at 6.5% over the 12 months to June, suggesting that the 10-year yield needs to rise by at least 175 basis points if the Fed is serious about containing inflation. Long-term interest rates below nominal GDP growth (the rate of return on new capital investment) encourage rapid credit growth, with demand expanding faster than output.

10-Year Treasury Yield & Nominal GDP Growth

Japan & the Sovereign Bond Market

Japan’s GDP grew by 3.6% over the 12 months to March 2026. The 10-year JGB yield is 2.8%, indicating that monetary policy remains stimulative, but less so than the US.

10-Year Treasury Yield & Nominal GDP Growth

The Bank of Japan kept its policy rate at 1.0% at last week’s meeting despite an upturn in CPI to 1.7%. The weakening Yen drives higher inflation.

Japanese CPI Inflation

The low BOJ policy rate and ongoing bond purchases aimed at suppressing long-term JGB yields undermine the currency. The Yen has steadily weakened, breaking above 160 against the Dollar in June 2026 to reach its highest level in 39 years. Japan’s Ministry of Finance intervened on Thursday to support the Yen, driving the exchange rate to 157 against the Dollar. However, the effect of these MoF interventions is short-lived because of BoJ policy.

Japanese Yen

Rising long-term yields in sovereign bond markets reflect growing concern over sovereign debt levels and the risk of fiscal dominance. When central bank policy is dominated by government bond markets’ need for support, with lower interest rates prioritized above containing inflation, the currency’s purchasing power is eroded, as in Japan.

The US 30-year Treasury yield has climbed to 5.275%, reflecting concerns over currency debasement.

30-Year Treasury Yield

The Japanese JGB yield is lower at 3.98%, but this reflects sizable ongoing QE by the Bank of Japan aimed at suppressing long-term rates.

30-Year JGB Yield

The Bank of Japan has higher debt levels relative to GDP than the UK and should theoretically trade at a higher yield. The difference in the 30-year Gilt yield lies in central bank monetary policy: the Bank of England is steadily shrinking its balance sheet, while the BoJ is actively buying JGBs in the secondary market to suppress yields.

30-Year UK Gilts Yield

Dollar & Gold

Rising short-term yields are strengthening the Dollar, with the 1-Year Treasury yield gaining more than 50 basis points in the last 6 months.

1-Year Treasury Yield (CNBC)

Gold has softened considerably from its peak of $5,500 per ounce and has been testing primary support at $4,000 over the past 8 weeks.

Spot Gold

Gold ETF inflows slowed in the first half of 2026 but remained positive, driven by continued inflows into Asian funds. North America experienced an outflow of $7.7 billion, European inflows slowed to $3.2 billion, while Asia recorded a strong inflow of $12 billion.

Gold ETF Flows

Average daily trading volumes surged to a record $488 billion in the first half of 2026.

Gold Average Daily Trading Volumes

OTC trading, led by the LBMA, averaged US$249bn/day, substantially above 2025 levels and underscoring the depth of institutional participation. Exchange-traded volumes also jumped, reaching US$227bn/day – 22% higher than the 2025 average – supported by elevated investor activity. Meanwhile, global Gold ETF trading averaged US$12bn/day – up 73% from 2025 – fueled primarily by robust trading in US funds as investors increasingly turned to Gold amid heightened macroeconomic and geopolitical uncertainty.

Comex futures net longs increased to 538 tonnes, up 16% since May, and the highest month-end level since January despite a weakening gold price. A closer look shows retail participation (non-reportable net longs declined in June, while other reportables, which capture large trades outside the managed money category, were up 16% from May. Managed money net longs remained broadly stable, declining by just 43 tonnes year-to-date. Again, H1 investor behavior differed: retail positioning largely tracked short-term price movements while larger traders’ positions have, in general, stayed stable since mid-March. (WGC)

Comex contracts standing for delivery jumped to 13,123 in July from 8,838 in May, and a 9.0% increase over July last year.

Spot Gold

China

The Chinese NBS Manufacturing PMI fell to 49.2 in July, down sharply from 50.3 in June. Values below 50 indicate a contraction in the manufacturing sector.

China: NBS Manufacturing PMI

The OECD Composite Leading Indicator for China fell to 98.6 in June, below its long-term average of 100, signaling a contraction.

OECD: China Composite Leading Indicator

The RBA’s activity indicators for China show industrial production is holding up, boosted by record exports. However, real retail sales growth has stalled, while fixed asset investment has contracted sharply following Trump’s tariff blitz last year.

OECD: China Activity Indicators

Household credit growth (purple below) has also stalled. Business credit has taken up the slack, but government credit growth is also contracting.

OECD: China Total Social Financing

Conclusion

10-year US Treasury yields jumped to 4.745% after the Fed kept its funds target range at 3.5%-3.75%, reflecting bond market concerns over inflation.

The new Fed Chair’s strategy is to keep short-term rates low and allow long-term rates to rise, to slow the rate of demand growth in the economy and curb inflation. However, nominal GDP is growing at an annual rate of 6.5%, which means that 10-year Treasury yields would need to rise by 175 basis points to keep inflation in check. An increase to 6.5% would likely cause a sharp contraction in stocks.

Japan’s Ministry of Finance has intervened to support the Yen. However, the effects will likely be short-lived, as the Bank of Japan continues to maintain stimulative monetary policy, which fuels inflation and undermines the currency.

Rising long-term sovereign debt yields reflect bond market concerns over rising sovereign debt and the risk of fiscal dominance, as in Japan, where the central bank has prioritized maintaining an orderly bond market above price stability. Erosion of the currency purchasing power is the inevitable outcome.

Gold has found strong support at $4,000 per ounce, with long-term investors prepared to wait out the turmoil in the Middle East. Demand from Asian investors has been particularly strong, but could be undermined if China goes into recession.

China’s economy shows increasing signs of contraction, precipitated by a decline in business investment following President Trump’s 2025 tariff attack. Household credit and real retail sales have stalled, and the NBS Manufacturing PMI fell to 49.2, signaling a contraction. Higher fuel prices would be an added headwind that could tip the economy into recession.

Acknowledgments

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Bitcoin Flags Shift to Risk-Off

Key Points

  • Brent Crude falls below $75 per barrel as the Strait of Hormuz gradually reopens.
  • However, crude oil reserves continue to decline.
  • Bitcoin is testing primary support, and stocks are weakening.
  • The Dollar is stronger, while Gold is testing primary support at $4,000 per ounce.

Brent Crude futures (Aug’26) fell below $75 per barrel on reports of increased traffic through the Strait of Hormuz.

Brent Crude Futures (ICE August'26)

From HFI Research:

The market is pricing a clean reopening, right on schedule. I am not convinced…

A reopening is neither as close nor as clean as the market would have us believe. Tankers have to start entering the Gulf for shut-in wells to be brought back on production. Minesweeping alone takes weeks after any ceasefire, redirected tankers need 30 to 40 days to reposition, and Tehran can keep the mere threat of attack alive to throttle passage at will.

US Strategic Petroleum Reserves continue to decline at the rate of 9 million barrels a week, falling to 331 million barrels on June 19.

Strategic Petroleum Reserve (SPR)

The ceasefire remains tenuous, with hostilities between Israel and Hezbollah in Lebanon a potential flashpoint. From Reuters:

In Washington, Lebanon and Israel discussed a U.S.-backed proposal for Israel’s forces to pull out of ⁠some territory it ​invaded to be handed back to Lebanese army control. But Israeli Prime Minister Benjamin Netanyahu said Israel would not pull troops out.

…At home, the reckoning is equally stark, said former U.S. official Dennis Ross. Netanyahu is increasingly boxed in between a U.S. president intent on ending the conflict and a domestic base resistant to ​concessions, particularly in Lebanon, he said. Withdrawal risks political backlash while escalation risks confrontation with Washington.

Bitcoin1 continues to test primary support at 60,000. A breach would warn of another decline, signaling a hard swing in financial markets away from risk assets.

Bitcoin (BTC)

The S&P 500 is in its fourth week of a mild sell-off, with declining Trend Index peaks indicating secondary selling pressure. A retracement to test support at 7000 is likely.

S&P 500

10-year Treasury yields are retracing for another test of support at 4.25% as lower oil prices ease inflation fears.

10-Year Treasury Yield

Dollar & Gold

The Dollar is strengthening in expectation of higher short-term interest rates, but new Fed Chair Kevin Warsh has yet to reveal his hand.

Dollar Index

Gold is testing primary support at $4,000 per ounce as the Dollar strengthens.

Spot Gold

Copper & Lithium

Energy metals are also experiencing a sell-off, with Copper and Lithium most prominent.

Copper

Sprott Copper Miners ETF2 (COPP) is headed for a test of primary support at 32, while Trend Index peaks below zero warn of long-term selling pressure.

Sprott Copper Miners ETF (COPP)

Sprott Lithium Miners ETF2 (LITP) is testing secondary support at 13. Declining Trend Index peaks warn of growing selling pressure, and a breach of support will likely test the primary level at 11.

Sprott Lithium Miners ETF (LITP)

Conclusion

The Dollar is strengthening amid expectations of higher short-term interest rates under the new Fed Chair, Kevin Warsh. But Warsh has yet to reveal his hand, and long-term Treasury yields are softening as fears of high inflation from spiking energy prices fade.

The ceasefire in the Persian Gulf is tenuous and could easily be disrupted by a flare-up of hostilities between Israel and Hezbollah in Lebanon. Stability in the region is even further out of reach than it was before 28 February and will likely remain so. States will likely build up larger strategic reserves and develop strategies to reduce their exposure to another closure of the Strait of Hormuz. This includes encouraging the use of electric vehicles and nuclear energy, two industries that we expect to be long-term beneficiaries from the conflict.

The biggest losers will likely be the Gulf States and Israel. The Gulf States have suffered an enormous setback in their ability to project themselves as a stable financial and industrial hub for future development. They will fall under Iran’s shadow, which will be able to exert far greater political sway in the region. Israel is also likely to suffer under whatever peace deal President Trump negotiates, with a financially stronger Iran able to extend its influence in the region and unlikely to be deterred from its long-term aims of regional hegemony.

Gold and commodities are falling as the Dollar strengthens, but we are convinced that this runs counter to the secular trend, which will likely last for decades. Increased fiscal spending and growing deficits will accelerate the debasement of the Dollar and other fiat currencies, with central banks continuing their shift to Gold bullion as the primary reserve asset.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
  2. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.
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No Happy Ending

Key Points

  • US forces carried out what the Pentagon called “defensive” strikes on missile launch sites and minelaying boats in southern Iran on Monday.
  • Iran’s Revolutionary Guard retaliated with a drone attack on a US airbase on Thursday.
  • Brent crude rallies to $96.60 per barrel.
  • President Trump insists a deal is within reach.
  • Trump allies have voiced opposition to the proposed deal, which they say favors Iran.
  • Trump says he can outwait Iran and that Iranian leaders had miscalculated if they thought ‌the November midterm elections would force him into a deal.
  • Gold and silver fall as prospects for a peace deal fade.

DUBAI/WASHINGTON, May 28 (Reuters) – Iran’s Revolutionary Guard targeted a U.S. airbase on Thursday after the U.S. military carried out what a Washington official said were strikes on an Iranian drone operation near ‌the Strait of Hormuz….

The U.S. official, who requested anonymity to speak candidly about military operations, told Reuters the military shot down four Iranian attack drones and struck a ground control station ​in the port city of Bandar Abbas that was about to launch a fifth drone.

“These actions were measured, purely defensive and intended to maintain the ceasefire,” the official said.

The Islamic ​Revolutionary Guard Corps said it targeted a U.S. base in response to what it described as an early morning U.S. attack near Bandar Abbas airport, ⁠Tasnim news agency reported. The IRGC said it targeted the U.S. airbase from which the attack on the control station near Bandar Abbas was launched, without identifying the base.

Brent crude (July’26 futures) rallied to $96.60 on news of the air strikes.

Brent Crude Futures (ICE July'26)

Crude oil flows through the Strait of Hormuz remain at a trickle.

Oil Tanker Transits Through the Strait of Hormuz

For those hoping the end of the price surge is near, Sultan Al Jaber, the head of the Abu Dhabi National Oil Company (ADNOC), has disappointing news.

“Even if this conflict [with Iran] ends tomorrow,” he said today at an Atlantic Council event, “full flows will not return before the first or even second quarter of 2027.”

US Strategic Petroleum Reserves (SPR) are shrinking, falling from 415 million barrels to 374 million over the past 6 weeks.

Strategic Petroleum Reserves (SPR)

The emerging deal puts off many critical issues to be resolved later and has already exposed the Republican president to fierce criticism — even from some of his own supporters — that Iran’s hardline leaders will emerge from the conflict battered but emboldened. It all comes to a head just as the midterm elections to determine control of Congress come into focus and as Republicans worry that rising costs and fuel prices are darkening the American electorate’s mood.

But Trump on Wednesday dismissed the idea that the upcoming elections would shape his Iran strategy.

“They thought they were gonna outwait me. You know, ‘We’ll outwait him. He’s got the midterms,'” Trump said. “I don’t care about the midterms.”

….The president is also facing scrutiny from Republican allies, including Sens. Roger Wicker of Mississippi, Lindsey Graham of South Carolina and Ted Cruz of Texas, who have said the terms seem too favorable to Tehran.

They’re balking at aspects of the deal that have emerged publicly that they say too closely resemble the nuclear agreement reached with Iran by Democratic President Barack Obama, which Trump scrapped during his first term.(NPR)

Trump faces the risk that higher crude prices cause a similar inflation spike to the 2022 Russian invasion of Ukraine, resulting in a wipeout at the November midterms.

Brent Crude & CPI

Gold & Silver

Gold and silver face increased selling pressure as the sudden drop in oil export revenues forces Gulf States to liquidate reserves, including bullion. High oil prices have also forced Turkiye to enter into an $80 billion gold swap to cover higher import costs without crashing the already-weak Turkish Lira. Russia, for different reasons, is also liquidating gold reserves to help fund its war with Ukraine.

Gold broke support at $4,500 per ounce, signaling a likely test of support at $4,000.

Spot Gold

Silver has retraced similarly, and a break below $70 per barrel would signal another test of primary support at $60. Declining Trend Index peaks warn of continued selling pressure.

Spot Silver

Conclusion

The US war with Iran — and negotiations — will likely continue for months, if not years. Crude oil shortages and high prices are expected to cause an inflation spike ahead of the US midterm elections, resulting in a Republican wipeout in November.

We remain bullish on the long-term outlook for gold and silver, but their current weakness will likely persist until the Strait of Hormuz reopens and oil prices fall.

Acknowledgments

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Bipolar Disorder

Key Points

  • The University of Michigan Consumer Sentiment Index fell to a new record low since the series started in 1960.
  • The Dow Jones Industrial Average broke through resistance at 50,000, confirming a fresh bull market advance.

The University of Michigan Consumer Sentiment Index fell to a new low of 44.8.

University of Michigan: Consumer Sentiment

A plot of the 3-month moving average since 1960, when the Consumer Sentiment series started, shows that consumer sentiment is at a record low.

University of Michigan: Consumer Sentiment

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CPI Jump to 3.8% Spooks Bond Market

Key Points

  • Headline CPI jumped to 3.8% in April in response to rising energy prices.
  • We expect Food CPI to jump sharply as rising costs pass through the supply chain over the next few months.
  • 10-year Treasury yields jumped to 4.46%, a bearish sign for stocks, but the Dow continues to test resistance at 50,000.
  • The silver breakout above $80 per ounce continues.
  • Surplus Gold and silver inventories in the US have been depleted, which will likely increase upward pressure on prices when the Persian Gulf crisis is resolved.

The headline Consumer Price Index (CPI) jumped to 3.8% for the 12 months to April 2026, up from 3.3% in March. Core CPI (excluding food and energy) increased more gradually to 2.7% in April, up from 2.6% in the previous month.

CPI & Core CPI - Annual

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Blockade

Key Points

  • President Donald Trump announced a US blockade on Iranian shipments through the Strait of Hormuz.
  • Closure of the Strait will restrict 20% of the global oil supply.
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Ceasefire But No Long-term Peace in Sight

Key Points

  • President Trump announced he had agreed to a two-week ceasefire with Iran.
  • Iranian Foreign Minister Seyed Abbas Araghchi confirmed that Iran will allow safe passage through the Strait of Hormuz for two weeks.
  • Brent crude futures (Jun’26) plunged to $93.86 per barrel.
  • Gold climbed to $4,800 per ounce as the Dollar weakened.

President Trump has agreed to a two-week ceasefire with Iran.

Truth Social Post

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How the SRF could blow up the Treasury market

Key Points

  • The Fed’s Standing Repo Facility (SRF) is designed to provide backup funding to the repo market during periods of liquidity stress.
  • The $12 trillion repo market is secured by government securities, normally USTs, and has largely replaced unsecured interbank lending.
  • However, hedge funds are taking advantage of the SRF to finance highly leveraged basis trades.

Unsecured interbank lending has largely been replaced by repo financing after the breakdown of trust in the global financial crisis of 2008.

A repo is short for repurchase agreement, where the borrower sells government securities, typically US Treasuries, with an agreement to repurchase them at a slight discount the following day. The repo (discount) rate, formally known as the Secured Overnight Financing Rate (SOFR), has increased in importance as the repo market has grown to almost $12 trillion, overshadowing the widely known Fed Funds Rate (FFR). Both the SOFR and FFR are managed by the Fed through its open market operations.

A sharp spike in the repo rate in 2008 threatened to collapse the entire financial system. The Achilles heel of the banking system, and the reason for the Fed’s existence, is maturity mismatch. Borrowers take advantage of low interest rates in the short-term market and invest in long-term assets, capturing the wide spread. That works well until the yield curve inverts. Short-term rates spike upward as available credit contracts, causing a fire sale of long-term assets as borrowers scramble to raise cash to repay loans. A spike in the repo rate effectively serves as a margin call on long-term assets.

The first instance occurred during the 2008 subprime crisis, when the repo market ceased functioning, leading to a panicked sale of assets. Then, in 2019, repo rates spiked after the Fed’s QT had lowered bank reserves, reducing the supply of bank credit available to fund repos. The spike led to the famous Powell pivot, where the Fed abruptly ended QT and expanded its balance sheet (QE) to inject liquidity into financial markets.

Again in March 2020, repo rates spiked during the COVID pandemic, causing a sell-off of US Treasuries financed through highly leveraged basis trades.

The chart below shows the spread between the repo rate (SOFR) and the fed funds rate (FFR) in 2019 and 2020.

SOFR-FFR

The Fed responded by establishing the Standing Repo Facility (SRF), through which borrowers can obtain repo finance directly from the Fed when there is a shortage in the repo markets. The SRF acts as a market stabilizer, limiting increases in the SOFR and preventing a repeat of earlier repo market collapses. The underlying purpose is to avoid a fire sale of US Treasuries if the repo market ceases to function.

Hedge funds have increasingly tapped the repo market to finance highly-leveraged basis trades, which take advantage of the spread between repo rates and the implied discount on Treasury futures. The SRF has encouraged these trades by limiting the downside risk. Hedge funds pocket the spread when repo rates are low, and rely on the SRF to save them if rates rise.

We suspect that the size of leverage investment in US Treasuries is greater than commonly believed. Over the past decade, offshore investment in US Treasuries has swung from foreign central banks to private sector investment, primarily through offshore financial centers favored by hedge funds.

Basis trades are likely to continue growing as long as the Fed maintains a standing repo facility to stabilize the repo market. The SRF enables hedge funds to enter profitable leveraged trades on US Treasuries with limited downside risk.

As Charlie Munger said, “Show me the incentive and I’ll tell you the outcome.”

Stocks

The S&P 500 remains tentative after last week’s contraction in financial market liquidity.

S&P 500

A contraction in the ADP’s four-week moving average of private sector job creation to -11,250 has not helped.

ADP Private Sector Jobs - NER Pulse

Financial Markets

The secured overnight financing rate (SOFR) remains above the rate paid to banks on reserve balances (IORB), indicating financial market stress.

Secured Overnight Financing Rate (SOFR) & Interest on Reserve Balance (IORB)

Bitcoin is re-testing support at 100K, warning that liquidity remains tight.

Bitcoin (BTC)

Dollar & Gold

The dollar is weakening as prospects for a December rate cut improve.

Dollar Index

Silver rallied to test its previous high at $54 per ounce.

Spot Silver

Gold followed, with a rise to $4,230 per ounce. A breakout above the resistance level at $4,400 would offer a target of $5,000.

Spot Gold

Conclusion

Basis trades funded through repo markets are expanding as the Fed’s standing repo facility (SRF) enables hedge funds to profit with limited downside risk while the Fed acts as a backstop.

Basis trades increase the vulnerability of US Treasury markets as hedge funds are highly leveraged short-term holders of USTs. In the past, unwinding basis trades have caused a sharp rise in Treasury yields when repo rates spike. The SRF may prevent a repeat of past spikes but provides an incentive for hedge funds to take on greater risk, expanding the size of their basis trades and increasing Treasury market vulnerability.

Financial markets remain unsettled, with Bitcoin testing long-term support at 100K. Gold and silver rallied, and breakout to new highs would offer targets of $5,000 and $62 per ounce, respectively.

Acknowledgments

Posted on

Gold, the Dollar and a big hole in the desert

Summary

  • Stocks rallied on news of a ceasefire between Iran and Israel
  • But celebrations may be premature
  • The dollar weakened, which is likely to boost demand for gold

The S&P 500 rallied to test resistance at 6100. Breakout would signal a fresh advance, but declining Trend Index peaks warn of selling pressure.

S&P 500

Uncertainty remains high.

The White House was quick to claim victory after the US airstrike on Iranian nuclear enrichment facilities. But claims that the subsequent ceasefire is the start of a new era of peace in the Middle East will likely prove premature.

A ceasefire is not a peace settlement. It’s a pause in hostilities that allows both parties to rearm and re-strategize.

A precision strike is nothing more than a big hole in the desert, the effectiveness of which can only be determined by subsequent Iranian actions.

The damage assessment reported by CNN is premature, but it does raise some interesting questions.

The assessment, which has not been previously reported, was produced by the Defense Intelligence Agency, the Pentagon’s intelligence arm. It is based on a battle damage assessment conducted by US Central Command in the aftermath of the US strikes, one of the sources said.

The analysis of the damage to the sites and the impact of the strikes on Iran’s nuclear ambitions is ongoing, and could change as more intelligence becomes available.

….Two of the people familiar with the assessment said Iran’s stockpile of enriched uranium was not destroyed. One of the people said the centrifuges are largely “intact.” Another source said that the intelligence assessed enriched uranium was moved out of the sites prior to the US strikes. (CNN)

If the stockpile of enriched uranium were moved or otherwise not destroyed, how would this affect Israel’s security?

The only way to finish this is with boots on the ground. Neither Israel nor President Trump is likely to commit to that.

In the Treasury market, 10-year yields declined to 4.3%, easing the pressure on stocks.

10-Year Treasury Yield

However, the dollar continues to weaken, with the US Dollar Index testing support at 98. A breach would confirm our target of 90.

Dollar Index

The chart below shows how Brent crude and the dollar moved contra-cyclically, with the dollar weakening when crude oil prices rose, and vice versa.

However, that changed shortly before Russia’s full-scale invasion of Ukraine in 2022, the dollar strengthened despite a spike in energy prices, diverging from past behavior as investors sought safety. The divergence continues, with the dollar weakening while crude oil prices are falling. The dollar’s role is under threat.

Brent Crude & USD Index for Advanced Economies

Investors globally appear to be gradually reducing their exposure to dollar-denominated assets, driving the greenback down to its lowest level against a basket of major currencies in three and a half years….

According to Bank of America’s FX strategy team, European “real money” investors – institutions like pension funds and insurance companies – are the main drivers of the dollar’s selloff in the second quarter, slashing their dollar positioning to the lowest since 2022 in a matter of weeks.

But the story might not be so straightforward…. research shows that most of the dollar’s average daily declines in the last few months have come in Asian trading hours, suggesting Asian holders of U.S. bonds may also be increasing their dollar hedges. (Reuters)

Demand for gold remains strong as the dollar weakens, with the metal finding support at $3,300 per ounce. Respect of this level would signal another test of resistance at $3,400.

Spot Gold

Conclusion

Stocks have rallied, but uncertainty in the Middle East remains high.

Long-term Treasury yields have softened, but the dollar continues to weaken, reflecting uncertainty over the US role in the global monetary system.

Private investors have replaced central banks as major investors in US Treasuries. They are far more price sensitive, and both European and Asian investors are increasingly hedging their dollar positions, expecting dollar weakness.

A weakening dollar is expected to boost demand for gold.

Acknowledgments

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