Gold bears grow as Fed hints at rate hike

The Fed is expected to hike interest rates next week. 10-year Treasury yields broke resistance at 2.5 percent, signaling an advance to the 2013/2014 high of 3.0 percent. Breakout above 3.0 percent is still a way off but would complete a large double bottom signaling the end of the 30-year secular bull market in bonds. Rising interest rates are bearish for gold.

10-year Treasury Yields

The Dollar Index rally continues to meet resistance, with tall shadows on the last four weekly candles signaling selling pressure. Rising interest rates could strengthen the advance, with bearish consequences for gold, but Chinese sell-off of foreign reserves (to support the Yuan) is working against this.

Dollar Index

Spot Gold is testing support at $1200/ounce. Recovery above $1250 would indicate that the recent down-trend has ended. But breach of support is more likely and would warn of another test of long-term support at $1050/ounce.

Spot Gold

Gold hesitates as Fed hints at rate hike

From WSJ:

Federal Reserve Chairwoman Janet Yellen signaled the central bank is likely to raise short-term interest rates at its March meeting and suggested more increases are likely this year if the economy performs as expected.

“At our meeting later this month, the [Federal Open Market] Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Ms. Yellen said in remarks prepared for delivery at the Executives’ Club of Chicago.

The Dollar Index rally continues to meet resistance, with tall shadows on the last three weekly candles signaling selling pressure. Rising interest rates would strengthen the advance, with bearish consequences for gold.

Dollar Index

Spot Gold hesitated at $1250/ounce. Rising interest rates also increase the opportunity cost of holding precious metals. Reversal below $1200 would warn of another decline but recovery above $1250 remains more likely and would signal an advance to $1300.

Spot Gold

Gold breaks through $1250

10-Year Treasury Yields are testing support at 2.30%. Expect this to hold. Breach of the rising trendline would warn of a correction but this seems unlikely with the Fed intent on normalizing interest rates. Breakout above 2.50% would offer a target of 3.0%.

10-Year Treasury Yields

The Dollar Index rally remains muted since finding support at 100. Rising long-term yields would fuel the advance, with bearish consequences for gold.

Dollar Index

China’s Yuan is consolidating. Resistance on USDCNY at 7 Yuan is likely to be tested soon.

USDCNY

The PBOC has been burning through its foreign reserves to slow the rate of depreciation against the Dollar, to create a soft landing. A sharp fall would destabilize global financial markets and fuel capital flight from China.

China Foreign Reserves

Spot Gold broke through resistance at $1250, signaling an advance to $1300.

Spot Gold

Interest rates bearish for gold

10-Year Treasury Yields are consolidating below resistance at 2.50%. Long tails suggest medium-term buying pressure. Breakout is likely and would offer a target of 3.0%.

10-Year Treasury Yields

The Dollar Index rally has so far been muted since finding support at 100. But rising long-term yields are likely to fuel the advance, with bearish consequences for gold.

Dollar Index

Spot Gold is consolidating below $1250/ounce. Reversal below $1200 would warn of another decline. Breach of primary support at $1130 would confirm. Arguments for a further advance appear weak, but breakout above $1250 would signal an advance to $1300.

Spot Gold

Gold falls as the Fed hikes rates

10-Year Treasury yields jumped above resistance at 2.5 percent after the latest Fed rate hike. Penetration of the long-term descending trendline warns that the secular down-trend is ending. Expect a test of the 2013/2014 high at 3.0 percent. Breakout would confirm the long-term down-trend has ended.

10-Year Treasury Yields

The Dollar Index respected its new support level at 100, signaling an advance to 107*.

US Dollar Index

* Target medium-term: 100 + ( 100 – 93 ) = 107

Gold continued its descent in response to rising interest rates and a stronger Dollar. Steps by the Chinese government to limit private gold purchases, in an attempt to support the Yuan, will also impact on demand. Target for the decline is unchanged at the December 2015 low of $1050/ounce. Retracement that respects the resistance level at $1200 would further strengthen the bear signal.

Spot Gold

Gold declines as interest rates rise

The Fed is expected to hike interest rates in December. Long-term interest rates are rising in anticipation of further rate hikes in 2017. 10-Year Treasury yields have penetrated their 10-year descending trendline, warning that the secular down-trend is ending. Breakout above 2.50 percent would strengthen the signal, while follow-through above the 2013/2014 high of 3.0 percent would confirm.

10-Year Treasury Yields

The Dollar Index successfully tested its new support level at 100. Target for the advance is 107*.

US Dollar Index

* Target medium-term: 100 + ( 100 – 93 ) = 107

With interest rates rising and the Dollar strengthening, demand for Gold is shrinking. Steps by the Chinese government to limit private gold purchases, part of their program to support the Yuan by slowing capital flight, will also impact on demand. Target for the decline is unchanged at the December 2015 low of $1050/ounce. Retracement that respects the resistance level at $1200 would strengthen the bear signal.

Spot Gold

Gold falls as Dollar climbs

Interest rates are surging as the market anticipates rising inflation under a Trump presidency. 10-Year Treasury yields are testing resistance at 2.50. Breakout is likely and would signal a test of resistance at 3.0 percent. Penetration of 3.0 percent would warn that the 30-year secular down-trend in Treasury and bond yields is coming to an end.

10-Year Treasury Yields

The Dollar strengthened in response to rising interest rates, with the Dollar Index breaking resistance at 100 to signal a primary advance with a target of 107*.

US Dollar Index

* Target medium-term: 100 + ( 100 – 93 ) = 107

Gold breached primary support at $1200 in response, signaling a primary decline with a target of the December 2015 low of $1050/ounce.

Spot Gold

In the long-term, higher inflation and a weakening Yuan could both fuel demand for gold as a store of value. But the medium-term outlook is bearish.

Gold weakens as interest rates rise

Interest rates are climbing steeply as the market anticipates more inflationary policies under a Trump presidency. 10-Year Treasury yields broke through 2.0 percent and are testing resistance at 2.50. Penetration of the descending trendline would warn that the long-term primary down-trend is weakening, signaling a test of 3.0 percent. Breakout above 3.0 is still some way off but would signal the end of the almost 30-year secular down-trend in Treasury and bond yields.

10-Year Treasury Yields

The Chinese Yuan has fallen sharply in response to rising interest rates, with the Dollar headed for a test of resistance at 7.0 Yuan (USDCNY).

USDCNY

Gold responded to rising interest rate expectations with a test of primary support at $1200. Narrow consolidation is a bearish sign, as is reversal of 13-week Momentum below zero. Breach of primary support would signal a primary down-trend with an immediate target of $1050/ounce.

Spot Gold

In the long-term, higher inflation and a weakening Yuan could both fuel demand for gold as a store of value. But the medium-term outlook is bearish.

Gold: Further weakness likely

US Treasury yields are rising, with the 10-year yield breaking through 1.80 percent to signal a test of 2.0 percent. Further rises are likely on the back of stronger GDP figures for the last quarter.

10-year Treasury Yields

The Chinese Yuan continues to depreciate against the Dollar in anticipation of another rate rise from the Fed.

USDCNY

Spot gold displays a weak retracement off support at $1250/ounce, with short candles indicating a lack of conviction. Another primary decline is likely and would test primary support at $1200.

Spot Gold

The ASX All Ordinaries Gold Index respected the descending trendline, suggesting another decline. Reversal below 4300 would confirm, offering a target of 4000.

All Ordinaries Gold Index

Gold: The importance of $1200/ounce

Interest rates are rising, driving gold lower. Long-term Treasury yields are heading for a test of resistance at 2.0 percent but a lot depends on continued stability in financial markets.

10-Year Treasury Yields

The Chinese Yuan continues its devaluation against the Dollar. Any sharp movements would spur global instability and increase demand for gold. But at present Dollar appreciation proceeds at a measured pace.

USDCNY

Selling pressure on gold has increased, reflected by the steep fall of Twiggs Money Flow on the SPDR Gold [GLD] ETF. A larger (TMF) peak near zero would warn of a long-term sell-off.

SPDR Gold

Spot gold has paused in its descent, with a short candle on the weekly chart reflecting short-term support at $1250/ounce, but expect a test of primary support at $1200.

Spot Gold

A long-term monthly chart of gold reflects the importance of support at $1200. The high of 2009, the lows of 2013, and the recent lows in April and June, all reinforce strength at $1200. Breach of this level would signal a long-term down-trend.

Spot Gold

The ASX All Ordinaries Gold Index retraced to test resistance at 4500 after the recent breakout. Respect is likely and would signal decline to 4000.

All Ordinaries Gold Index

Why would the Fed raise interest rates when the economy is slowing?

10-Year Treasury yields have rebounded off their all-time low, shown here on a monthly chart, but remain in a secular down-trend. Only recovery above 3.0 percent (a long way off) would signal that the long-term down-trend has reversed.

10-Year Treasury Yields

The 5-year breakeven inflation rate (5-year Treasury Yield – 5-year TIPS yield) suggests that the long-term outlook for inflation is low. But growth in Hourly Non-Farm Earnings and Core CPI (excluding Food and Energy) has started to rise.

5-year Breakeven rate & Hourly Non-Farm Earnings Growth

One would expect the Fed to be preparing for another rate increase to tame inflationary pressures. But there are still concerns about the strength of the recovery.

Growth in estimated total weekly Non-Farm Earnings has been declining since early 2015; calculated by multiplying Average Hourly Earnings by Average Weekly Hours and the Total Non-Farm Payroll.

Estimated Weekly Non-Farm Earnings

If we examine the breakdown, growth in the Total Non-Farm Payroll is slowing and Average Weekly Hours Worked are declining.

Non-Farm Payrolls & Average Weekly Hours

Not what one would expect from a robust recovery.

Gold respects support

10-Year Treasury yields are retracing to test the recent support level at 1.60 percent but the trend remains upward.

10-Year Treasury Yields

The Chinese Yuan is easing against the US Dollar, with USDCNY in a gradual up-trend as the PBOC manages the decline in order to conserve foreign reserves. This is likely to alleviate immediate selling pressure on the Yuan, both from capital flight and borrowers covering on Dollar-denominated loans.

USDCNY

Spot gold respected support at $1300/ounce. Breakout above the falling wedge (and resistance at $1350) would signal another advance.

Spot Gold

* Target calculation: 1375 + ( 1375 – 1300 ) = 1450

Rising interest rates and low inflation are bearish for gold but uncertainty over US elections, Europe/Brexit, and the path of the Chinese economy contribute to bullish sentiment.

Gold stocks serve as a useful counter-balance to growth stocks in a portfolio. If there are positive outcomes and a return to economic stability, growth stocks will do well and gold is likely to underperform. If there is instability and growth stocks do poorly, gold stocks are likely to outperform.

Gold approaches a watershed

Expectations of interest rate rises are growing, with 10-year Treasury yields advancing towards 2.0 percent after breaking out above 1.60.

10-Year Treasury Yields

The Chinese Yuan is easing against the US Dollar, in a managed process from the PBOC which will use up foreign reserves more slowly than a direct peg. It is also likely to minimize selling pressure on the Yuan, both from capital flight and from Chinese borrowers covering on Dollar-denominated loans.

USDCNY

Spot gold is easing, in a falling wedge formation, towards a test of medium-term support at $1300/ounce. This is a watershed moment. Breach of $1300 would warn of a test of primary support at $1200. But respect of support would suggest another test of the July high at $1375.

Spot Gold

* Target calculation: 1375 + ( 1375 – 1300 ) = 1450

Rising interest rates and low inflation increase downward pressure on gold but uncertainty over US elections, Europe/Brexit, and the path of the Chinese economy contribute to buying support. Gold stocks serve as a useful counter-balance to growth stocks in a portfolio. If there are positive outcomes and a return to economic stability, then growth stocks will do well and gold is likely to underperform. If things goes wrong and growth stocks do poorly, gold stocks are likely to outperform.

In Australia the All Ordinaries Gold Index ($XGD) continues to test support at 4500. Respect (recovery above 5000) would signal another test of the recent highs at 5600. A weakening Australian Dollar/US Dollar would tend to mitigate the impact of a fed rate hike. Breach of 4500 is less likely but would confirm a primary down-trend.

All Ordinaries Gold Index $XGD

* Target calculation: 4500 – ( 5000 – 4500 ) = 4000

Gold steady as rates fall

Interest rates retreated this week, with 10-year Treasury yields falling below support at 1.60 percent.

10-year Treasury Yield

Falling interest rates reduce downward pressure on gold. Spot Gold steadied above support at $1300/ounce. Momentum above zero continues to indicate a primary up-trend. Respect of support at $1300 would confirm. Breach of support is unlikely but would signal trend weakness and a test of primary support at $1200/ounce.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

Gold shudders on strong jobs numbers

Long-term interest rates surged on strong jobs numbers, well above the estimate of 180,000. From the WSJ:

Nonfarm payrolls rose by a seasonally adjusted 255,000 last month, the Labor Department said Friday. Revisions showed U.S. employers added 18,000 more jobs in May and June than previously estimated.

10-Year Treasury yields strengthened to 1.58 percent in response, from a record low of 1.33 percent four weeks ago. Expect a test of the descending trendline at 1.66 percent.

10-Year Treasury Yields

Gold fell to $1335/ounce on expectations of higher interest rates. Penetration of the rising trendline would suggest a correction to test primary support at $1200/ounce. Follow-through below $1300 would confirm.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

At present I don’t see much threat to support between $1300 and $1310. Especially with safe-haven demand for gold enhanced by European uncertainty over Brexit, the dilemma of US November elections (a choice between two equally undesirable alternatives), and a declining Yuan encouraging capital flight from China.

USDCNY

Gold surges as the Pound and Yuan fall

The Yuan is sliding against the Dollar, with USDCNY breaking through resistance at 6.60. Expect further capital flight, both from residents and offshore investors. Borrowers will also seek to repay Dollar-denominated loans and replace them with facilities in the local currency, adding further pressure on the Yuan.

USDCNY

The PBOC has been encouraged by fading prospects of further rate rises from the Fed, with 10-year Treasury Yields falling to a new all-time low of 1.37 percent, compared to 1.40 percent in 2012.

10-Year Treasury Yields

….And the Pound falling to a 30-year low.

GBPUSD

Falling currencies and lower long-term interest rates are both good news for gold bugs, with spot gold surging to $1370/ounce. Expect retracement to test the new support level at $1300/ounce. Respect of the band of support at $1280/$1300 is likely and would signal another advance, with a target of $1400/ounce*.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1200 ) = 1400

Gold rises as the Yuan and interest rates fall

China seems to have given up on its policy of supporting the Yuan against the Dollar, with USDCNY breaking through resistance at 6.60. Depleting foreign reserves to support the Dollar-peg was always going to be a tough call for the PBOC. But the alternative of increased capital flight and rising counter-measures from trading partners may exact an even higher price.

USDCNY

Perhaps the PBOC was encouraged by fading prospects of further rate rises from the Fed this year, after BREXIT. 10-Year Treasury Yields are headed for a test of support at the all-time low of 1.40 percent in 2012.

10-Year Treasury Yields

Gold broke resistance at $1300/ounce and is now retracing to test the new support level. BREXIT, a weakening Yuan, and lower interest rates are all likely to fuel demand for gold. Respect of the band of support at $1280/$1300 is likely and would signal another advance, with a target of $1400/ounce*.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1200 ) = 1400

Gold surges on BREXIT fears

Long-term interest rates continue their decline, with 10-year Treasury yields breaking support at 1.65 percent. Breach signals a test of the all-time (July 2012) low of 1.40 percent.

10-year Treasury yields

Gold broke resistance at $1300/ounce on fears of a BREXIT vote on June 23rd and expectations that the Fed will need to soft-pedal on interest rates. Breakout offers a long-term target of $1550*.

Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

Chinese buying of gold has been relegated to secondary status, at least for the next week. Sale of foreign reserves appear to have resumed, with the USDCNY running into resistance at 6.60. PBOC sale of foreign reserves weakens the Dollar, boosting demand for Gold.

USDCNY

Disclosure: Our Australian managed portfolios are invested in gold stocks.