Gold Dollar pause

Long-term Treasury yields remain in a bear trend, with 10-year yields holding below resistance at 2.00%. Breach of support at 1.85% would signal another test of the primary level at 1.65%. A lower inflation outlook is translating into lower interest rate expectations.

10-Year Treasury Yields

The Dollar Index is likewise encountering resistance at 100. Breakout would signal an advance to 104*. Reversal below 96, however, would test primary support at 94.

Dollar Index

* Target calculation: 100 + ( 100 – 96 ) = 104

Gold is also consolidating, ranging between $1180 and $1220/ounce. Reversal below $1180 would signal a decline to $1000/ounce*, while breakout above $1220 would indicate a rally to $1300/ounce.

Spot Gold

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

Crude breakout: exercise caution

Nymex Light Crude broke resistance at $55/barrel, signaling the end of the narrow consolidation of the past few months. Some have heralded this as the end of the bear trend and start of a bull market.

Brent Crude and Nymex WTI Light Crude

If we examine the recent consolidation — shown here on June 2015 Light Crude futures — it is clear that it is broadening, with the second trough below the first, rather than rectangular. Peaks are likely to follow a similar pattern; so a higher peak does not necessarily mean a breakout. Broadening wedges tend to be unreliable reversal signals and I would wait for retracement that respects the new support level at $55 to confirm the breakout.

Nymex WTI Light Crude June 2015 Futures

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

Light vehicle sales

US light vehicles sales are back in the range of 16 to 18 million vehicles a year experienced during the (halcyon?) days of 1998 to 2007. An important indicator of consumer confidence.

US Light Vehicle Sales

Upsurge in global trade?

While commodity prices are tanking, with iron ore now trading below $50 per tonne, there are signs that international shipping of manufactured goods is on the increase. Shipbrokers Harper Petersen publish the Harpex, a weekly index of charter rates for container vessels. The recent up-turn reflects increased demand for container shipping — an important barometer of international trade.

Harpex Index

Dollar double bottom — gold tests support

Apologies for my recent absence. I seem to take longer to recover from a ‘flu virus than I used to. The Dollar Index, however, has made a robust recovery, breaking resistance at 98.50. Completion of a double-bottom suggests a new advance with a target of 104*.

Dollar Index

* Target calculation: 100 + ( 100 – 96 ) = 104

Gold retreated below its former primary support level of $1200/ounce as the dollar strengthened. Breach of the rising trendline suggests the bear rally is over; follow-through below $1180 would confirm, strengthening the long-term target of $1000/ounce*.

Spot Gold

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

Gold tests resistance as the dollar falls

Ten-year Treasury Note yields are testing support at 1.85% after consolidating below 2.00% for 2 weeks. 13-Week Twiggs Momentum below zero continues to indicate a primary down-trend. Failure of support at 1.85% would test primary support at 1.65%.

10-Year Treasury Yields

Correction on the Dollar Index has lasted 3 weeks but continues to respect the first line of support at 95.50. Rising 13-week Twiggs Momentum also continues to indicate a strong (primary) up-trend. Recovery above 100 is likely and would offer a target of 110*.

Dollar Index

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

Gold is testing resistance at $1200/ounce on the back of softer interest rates and a weak dollar. Breakout above $1220/ounce would indicate a rally to $1300. But 13-week Twiggs Momentum below zero continues to indicate a primary down-trend. Respect of $1300, or reversal below $1180 would suggest another test of primary support at $1140/$1150.

Spot Gold

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

Jobs growth slows (slightly)

The Wall Street Journal reports:

U.S. employers sharply slowed their hiring in March…….. Nonfarm payrolls rose by a seasonally adjusted 126,000 jobs in March, the Labor Department said Friday. That was the smallest gain since December 2013.

If we take a step back and look at US non-farm payrolls over the last 12 months, growth remains surprisingly strong. The economy added 2.9 million jobs in the year ending 31st March; down from 3.2 at the end of February, but still a robust recovery.

US non-farm payrolls

We haven’t seen this level of job growth since the Dotcom era.

US non-farm payrolls

The state of crude

Crude is consolidating in a narrow band between $44 and $55/barrel. Supply continues to exceed demand and storage facilities are approaching capacity. The bear trend is expected to continue. Failure of support at $44/barrel would confirm.

Brent Crude and Nymex WTI Light Crude

Gold hesitant response to weak Dollar

Ten-year Treasury Note yields are re-testing resistance at 2.00%. Recovery above 2.25% would indicate the correction is over and a rally to test the key resistance level of 3.00%. 13-Week Twiggs Momentum below zero, however, continues to indicate a primary down-trend. Failure of support at 1.85% would signal a test of 1.65%.

10-Year Treasury Yields

The Dollar retreated from long-term resistance at 100 as expectations of higher interest rates eased. Rising 13-week Twiggs Momentum signals a strong (primary) up-trend. Respect of support at 95.5 would confirm.

Dollar Index

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

Gold rallied on the back of a soft dollar and weak interest rate outlook, but failed to hold above $1200/ounce. 13-Week Twiggs Momentum below zero continues to indicate a primary down-trend. Follow-through below $1180 would warn of another test of support at $1140/$1150, while a rise above $1220 would test $1300.

Spot Gold

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

Crude consolidates

Saudi Arabia bombs its neighbor Yemen. Another war in the Middle East and crude prices rally. Nymex Light Crude retreated above support at $45/barrel, testing $50, while Brent Crude found support at $54. The Saudis are obviously concerned about the success of Iranian-backed rebels in their close neighbor and are prepared to intervene militarily (Putin will probably send a telegram of support, attempting to draw a parallel although the situation in Ukraine is vastly different). Expect further consolidation between $45 and $55 for Nymex Light Crude. Supply continues to exceed demand and storage facilities are approaching capacity. The bear trend is likely to continue despite the current interruption.

Brent Crude and Nymex WTI Light Crude

Footsie breaks 15-year high

The FTSE 100 overcame resistance at its December 1999 high of 6950, closing the week above 7000 for the first time. Expect retracement to test the new support level, but breakout signals a primary advance with a long-term target of 8000*. A 21-day Twiggs Money Flow trough above zero confirms long-term buying pressure.

FTSE 100

* Target calculation: 7000 + ( 7000 – 6000 ) = 8000

Germany’s DAX recovered above 12000, suggesting continuation of the advance. Expect resistance at the Deutsche Bank target of 12500 (from late 2014). Rising 21-day Twiggs Money Flow indicates strong buying pressure. Reversal below 11800 is unlikely at this stage, but would warn of a correction.

DAX

* Target calculation: 12200 + ( 12200 – 11900 ) = 12500

Strong advances on these two indices suggest a broader European recovery.

Gold rallies on Fed “dovish” statement

The Fed Open Market Committee (FOMC) dropped the word “patient”, but market bulls responded positively to its “dovish” post-meeting statement. Jeff Cox at CNBC writes:

… the mostly dovish statement made little fanfare over eliminating the word, and in fact stated specifically that “an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting,” a phrase missing from previous communiques……

“The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” the statement said.

Like I said: “…. Janet Yellen will move when the time is right. And not before.”

Ten-year Treasury Note yields broke through 2.00%, warning of another test of primary support at 1.65%. 13-Week Twiggs Momentum below zero continues to signal a down-trend. Recovery above 2.00% is unlikely, but would signal a rally to 2.50%.

10-Year Treasury Yields

The Dollar retreated from long-term resistance at 100. Rising 13-week Twiggs Momentum signals a strong (primary) up-trend. Respect of support at 95.5 would indicate continuation of the trend.

Dollar Index

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

Gold rallied on the back of a softer dollar and weaker interest rate outlook. Expect a rally to test $1200/ounce, but respect of this level would reinforce the primary down-trend. Breach of support at $1140/$1150 would confirm. 13-Week Twiggs Momentum below zero strengthens the bear signal.

Spot Gold

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

China hot money heads for the exit

Huw McKay at Westpac writes:

“The Jan-Feb FX positions of China’s banks imply that FX reserves fell in the early part of the year, despite back to back monster trade surpluses of $US60 billion. The logical conclusion is that money flowed out in a big way on the financial account.”

There are two reasons why capital would flow out on the financial account. The usual explanation is the PBOC buying US Treasuries, exporting capital to prevent the yuan appreciating against the Dollar. But Huw points out that the PBOC balance sheet shows a slight decline in foreign assets held. This could be a smokescreen, with investments channeled through an intermediary. Otherwise, it could be a sign that private capital is leaving for safer shores. This from the Business Times:

More than 76,000 Chinese millionaires emigrated or acquired citizenship of another country in the decade through 2013 amid global expansion by the nation’s companies.

Australia was among the most favored destinations, broker Knight Frank LLP said on Thursday, citing data compiled by law firm Fragomen LLP. The Chinese accounted for more than 90 percent of applications for the country’s significant investor visa in the two years to the end of January, representing 1,384 people. They also make the most applications for high-net-worth visas in the UK and the US.

Consumer confidence is below 2008/2009 levels and declining.

Crude breaks support

Nymex light crude (April 2015 contract) broke support at $45/barrel, warning of a decline to $35/barrel*.

Nymex WTI Crude

* Target calculation: 45 – ( 55 – 45 ) = 35

The Catch-22 of energy storage | On Line Opinion

John Morgan questions whether wind and solar are viable energy sources when one considers energy returned on energy invested (EROEI).

There is a minimum EROEI, greater than 1, that is required for an energy source to be able to run society. An energy system must produce a surplus large enough to sustain things like food production, hospitals, and universities to train the engineers to build the plant, transport, construction, and all the elements of the civilization in which it is embedded. For countries like the US and Germany, Weißbach et al. estimate this minimum viable EROEI to be about 7……

The fossil fuel power sources we’re most accustomed to have a high EROEI of about 30, well above the minimum requirement. Wind power at 16, and concentrating solar power (CSP, or solar thermal power) at 19, are lower, but the energy surplus is still sufficient, in principle, to sustain a developed industrial society. Biomass, and solar photovoltaic (at least in Germany), however, cannot. With an EROEI of only 3.9 and 3.5 respectively, these power sources cannot support with their energy alone both their own fabrication and the societal services we use energy for in a first world country.

EROEI with and without storage

Energy Returned on Invested, from Weißbach et al.,1 with and without energy storage (buffering). CCGT is closed-cycle gas turbine. PWR is a Pressurized Water (conventional nuclear) Reactor. Energy sources must exceed the “economic threshold”, of about 7, to yield the surplus energy required to support an OECD level society.

These EROEI values are for energy directly delivered (the “unbuffered” values in the figure). But things change if we need to store energy. If we were to store energy in, say, batteries, we must invest energy in mining the materials and manufacturing those batteries. So a larger energy investment is required, and the EROEI consequently drops…[to the buffered level].

Read more at The Catch-22 of energy storage – On Line Opinion – 10/3/2015.

Why our prep-school diplomats fail against Putin and ISIS | New York Post

Kerry and Putin

“Why do our “best and brightest” fail when faced with a man like Putin?” Ralph Peters asks. “Or with charismatic fanatics? Or Iranian negotiators? Why do they misread our enemies so consistently, from Hitler and Stalin to Abu Bakr al-Baghdadi, the Islamic State’s self-proclaimed caliph?”

The answer is straightforward:

Social insularity: Our leaders know fellow insiders around the world; our enemies know everyone else.

The mandarin’s distaste for physicality: We are led through blood-smeared times by those who’ve never suffered a bloody nose.

And last but not least, bad educations in our very best schools: Our leadership has been educated in chaste political theory, while our enemies know, firsthand, the stuff of life.

Above all, there is arrogance based upon privilege. For revolving-door leaders in the U.S. and Europe, if you didn’t go to the right prep school and elite university, you couldn’t possibly be capable of comprehending, let alone changing, the world…….

That educational insularity is corrosive and potentially catastrophic: Our “best” universities prepare students to sustain the current system, instilling vague hopes of managing petty reforms.

But dramatic, revolutionary change in geopolitics never comes from insiders. It’s the outsiders who change the world.

An Athenian general once wrote:

The state that separates its scholars from its warriors will have its laws made by cowards, and its fighting done by fools.

~ Thucydides (c. 460 BC – c. 400 BC)

Read more at Why our prep-school diplomats fail against Putin and ISIS | New York Post.

Another downward leg for crude?

Nymex Light Crude is headed for another test of support at $45/barrel. Breach would signal a decline, with a medium-term target of $35/barrel*.

Nymex WTI Light Crude and Brent Sweet Crude

* Target calculation: 45 – ( 55 – 45 ) = 35

Saturation of available storage capacity (see Crude in Contango) is expected to force sellers into the market and drive prices lower.