Gold and the impact of Beijing on Fed monetary policy

The prospect of higher interest rates is fast approaching, but 10-Year Treasury yields retreated below 2.0%, warning of another test of the December low at 1.40%.

10-Year Treasury Yields

The weight of foreign purchases, for reasons other than yield (dollar peg/currency manipulation), may be overwhelming the market response. This has happened before, in 2004/2005, when the Fed was alarmed to find that long-term yields failed to respond to monetary tightening. The graphs below are from a 2012 report by DO Beltran (and others) at the Fed. The Fed Funds Rate was steadily increased between mid-2004 and the end of 2005, but 10-year yields declined slightly over the same period.

Fed Funds Rate and 10-Year Treasury Yields

The reason was fairly obvious: a massive surge in foreign purchases (mainly from China) had left the long-term market awash with liquidity. US monetary policy was effectively being controlled from Beijing.

Foreign Treasury Purchases

I cannot understand why this abuse has been tolerated.

The Dollar

The Dollar Index has been consolidating for the last 5 weeks, but the narrow range is a bullish sign and the Dollar is likely to strengthen further. Breakout would offer a medium-term target of 100*.

Dollar Index

* Target calculation: 90 + ( 90 – 80 ) = 100

Gold

Spot Gold is testing support at $1200/ounce. Reversal of 13-week Twiggs Momentum below zero warns of another decline. A trough below the zero line would strengthen the bear signal.

Spot Gold

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

The strong Dollar, low inflation and higher interest rates all point to another decline, but so far support has held firm. Completion of another trough at this level would strengthen the argument that gold is forming a long-term bottom. Possibly with help from Beijing.

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