Gold rallies but how long?

We are witnessing a flight to safety as money flows out of stocks and into bonds, driving 10-year Treasury yields as low as 1.88 percent. Breach of support at 2.0 percent suggests that another test of primary support at 1.5 percent lies ahead.

10-Year Treasury Yields

What makes this even more significant is that it occurred while China is depleting foreign reserves — quite likely selling Treasuries — to support the Yuan. Heavy intervention in the past few weeks to prevent further CNY depreciation against the Dollar may well show recent estimates of a further $0.5 Trillion outflow in 2016 to be on the light side.

USDCNY

China is caught in a cleft stick: either deplete foreign reserves to support the Yuan, or allow the Yuan to weaken which would fuel further selling and risk a downward spiral. Regulations to restrict capital outflows may ease pressure but are unlikely to stem the flow.

Chinese sales of Dollar reserves have slowed appreciation of the Dollar Index. Cessation of support for the Yuan would cause breakout above 100 and an advance to at least 107*.

Dollar Index

* Target calculation: 100 + ( 100 – 93 ) = 107

Gold

Gold has also benefited from the flight to safety, rallying to $1150/ounce. The rally may well test $1200 but resistance is expected to hold. Respect would suggest a decline to $1000/ounce*; confirmed if support at $1050 is broken. Continued oscillation of 13-Week Twiggs Momentum below zero flags a strong primary down-trend.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

10 thoughts on “Gold rallies but how long?

  1. John Murray says:

    Past history and logic tells us that if every country in the world is either printing money or lowering interest rates then we must eventually have massive inflation. Then governments around the world will fear raising interest rates above the inflation rate for dear of killing their economy, causing even greater inflation. It happened before in the eighties and will happen again. The fox is in charge of the henhouse. Power subsumes truth. But as Keynes would say, the markets can stay irrational longer than we can remain solvent.

    • michael beard says:

      Well John , all I can say is that ” past history & logic ” are not fitting the facts of the last number of years.

    • ColinTwiggs says:

      John, Past history does suggest that, but we are now witnessing the end of a 30-year debt bubble. Central banks are simply trying to soften the blow of debt contraction and head off a 1930s-style deflationary spiral that would damage the global economy. Deflation is the real threat — when asset prices fall and borrowers are forced to sell and repay debt in expectation of further falls. Monetary policy alone cannot solve this. What is needed is a massive upgrade of global infrastructure. But this must be investment in productive assets that generate sufficient income to cover debt servicing costs (or provide competitive returns on equity) else we end up in a debt trap.

  2. michael beard says:

    Well Colin you have got gold wrong so far ( as I am pleased with this ) but I still note your caution so not getting carried away
    Question—if you were chinese it was becoming difficult to get your money out ( of china ) and if it kept losing value, would you consider gold ?

  3. Michael says:

    thank you.

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