Gold as a safe haven

The performance of gold can be volatile but at times it acts as a safe haven when geo-political tensions are high and confidence in fiat currencies is low.

Chris Puplava highlighted the recent strong correlation between gold and the Japanese Yen. That is no surprise as the Japanese yen also acts as a safe haven in times of political turmoil. Breakout above 114 to the yen (below 0.00875 on the chart below) would warn of a stronger Dollar and weaker gold prices. Breach of support at 108 (above 0.0092 on the chart below), on the other hand, would be bearish for the Dollar and bullish for gold.

Japanese Yen and Gold

The greenback continues its primary down-trend. Expect another test of primary support at the September low of 91. Breach is not yet likely but would be a strong bull signal for gold.

Dollar Index

Gold continues its test of medium-term resistance at $1300/ounce. Upward breakout is more likely (Twiggs Trend Index holding above zero indicates buying pressure) and would target the September high of $1350. Breach of primary support at $1260 is less likely but would warn of a test of primary support at $1200.

Spot Gold

Gold: Tall shadows suggest weakness

Tall shadows for the last three days on the spot gold chart suggest selling pressure. Penetration of the rising trendline indicates that the up-trend is slowing. Breach of short-term support at $1330/ounce would signal a test of medium-term support at $1300. Respect of support would confirm a healthy primary up-trend, while breach would indicate weakness.

Spot Gold

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

At present I don’t see much threat to support between $1300 and $1310. Safe-haven demand for gold is boosted by uncertainty in Europe, the US election dilemma (a choice between two equally undesirable alternatives), and the declining Yuan.

USDCNY

USDCNY retraced to test support at 6.60. Sell-off of USD currency reserves by the PBOC — to support the Yuan or at least slow its decline — helps to suppress US Dollar appreciation. This is a win-win for gold bulls. A weak dollar enhances the price of gold while a falling Yuan encourages capital flight and — you guessed it — demand for gold.

Aussie Dollar threatens breakout, Euro tests support

The Aussie Dollar continues to test resistance at $0.94. Recovery of 13-week Twiggs Momentum above zero suggests continuation of the up-trend, testing resistance at $0.97. Reversal below $0.92 is unlikely at present, but would warn of a decline to the band of support between $0.87 and $0.89.

Aussie Dollar

The Euro respected primary support at $1.35 and the rising long-term trendline. Recovery above $1.37 would suggest a rally to $1.39/$1.40, but descending 13-week Twiggs Momentum crossed below zero, warning of weakness. Breach of $1.35 would signal a decline to $1.31*.

Euro/USD

* Target calculation: 1.35 – ( 1.39 – 1.35 ) = 1.31

Japan: Dollar supports Nikkei

The US Dollar found support at ¥101 against the Yen. Recovery above the May high at ¥104 would suggest a healthy up-trend, while breakout above ¥106 would offer a target of ¥110*. Divergence on 13-week Twiggs Momentum remains bearish, but another trough above zero would reverse this. Breach of support at ¥101 now seems unlikely, but would warn of trend weakness.

Nikkei 225

* Target calculation: 106 + ( 106 – 102 ) = 110

A rising Dollar/Yen exchange rate would assist Japanese stocks. The Nikkei 225 found support at 14000 on the monthly chart. Recovery above 15000 would suggest another advance, while breakout above 16000 would confirm. Reversal of 13-week Twiggs Money Flow below zero, however, would warn of a primary down-trend.

Nikkei 225

Japan: Nikkei falls as Dollar weakens

The US Dollar is testing support at ¥102 to ¥103 against the Yen. Breach of the rising trendline would strengthen the warning from a bearish divergence on 13-week Twiggs Momentum. Reversal of Momentum below zero would suggest a primary down-trend. Recovery above ¥104 is less likely, but would offer a target of ¥110*.

Nikkei 225

* Target calculation: 106 + ( 106 – 102 ) = 110

A rising Dollar/Yen exchange rate would assist Japanese stocks. The Nikkei 225 is testing support at 15000 after penetrating its rising trendline. Bearish divergence on 13-week Twiggs Money Flow warns of selling pressure. Reversal below 15000 would indicate a strong correction, while a Twiggs Money Flow cross below zero would warn of a primary down-trend.

Nikkei 225

Forex: Dollar and Sterling strengthen

The Euro is rallying for another test of resistance at $1.37 after finding support at $1.3350 against the greenback. Troughs above zero on 13-week Twiggs Momentum suggest a healthy up-trend. Breakout above $1.37 would signal an advance to $1.40*. Respect of resistance, indicated by reversal below the secondary rising trendline, would, however, warn of a correction to the primary trendline at $1.31.

Euro/USD

* Target calculation: 1.37 + ( 1.37 – 1.34 ) = 1.40

Sterling breakout above resistance at €1.20 signals a primary up-trend. Recovery of 13-week Twiggs Momentum above zero strengthens the signal. Target for the advance is €1.23*. Reversal below €1.19 is unlikely, but would warn of another test of €1.1650.

Sterling/Euro

* Target calculation: 1.20 + ( 1.20 – 1.17 ) = 1.23

The Greenback is likely to retrace to test the new support level at ¥101 Japanese Yen. Respect would confirm an advance with a target of ¥108*. The trough above zero on 13-week Twiggs Momentum strengthens the signal. Reversal below ¥101 is unlikely, penetration of the rising trendline warning of trend weakness.

USD/JPY

* Target calculation: 1.01 + ( 1.01 – 0.94 ) = 1.08

Canada’s Loonie broke primary support at $0.94, signaling another decline with a target of $0.915*. A peak below zero on 13-week Twiggs Momentum strengthens the signal. Recovery above $0.945 is unlikely, but would warn of a bear trap.

Canadian Loonie

* Target calculation: 0.945 – ( 0.975 – 0.945 ) = 0.915

The Aussie Dollar is heading for a test of primary support at $0.89. The peak below zero on 13-week Twiggs Momentum signals continuation of the down-trend. Breakout below $0.89 would offer a long-term target of $0.81*, while respect of support would suggest a rally to $0.93. The RBA needs a weaker Aussie Dollar, without lowering interest rates, and will do all it can to assist the decline.

Aussie Dollar

* Target calculation: 0.89 – ( 0.97 – 0.89 ) = 0.81

Aussie down-trend

The Aussie Dollar found short-term support at $0.91 against the greenback. Expect a rally to test the descending trendline and resistance at $0.93. Respect of the trendline is likely and would warn of a down-swing to primary support at $0.89. The peak below zero on 63-day Twiggs Momentum signals continuation of the down-trend. Breakout above $0.93 is unlikely, but would suggest that the down-trend is ending. The RBA needs a weaker Aussie Dollar, without lowering interest rates, and will do all it can to assist the decline.

Aussie Dollar

* Target calculation: 0.91 – ( 0.93 – 0.91 ) = 0.89

Aussie breach of support at $1.12 against its Kiwi neighbor, warns of a primary down-trend. Retracement is likely to respect the new resistance level and would confirm the down-trend. Follow-through above $1.13 is unlikely but would warn of a bear trap. The peak below zero on 63-day Twiggs Momentum signals continuation of the down-trend. Target for the decline is $1.08*.

Kiwi Dollar

* Target calculations: 1.12 – ( 1.16 – 1.12 ) = 1.08

Weaker Dollar Outlook

Recovery of the Dollar has been overrated. With restrictions on fiscal deficits, it will be difficult to contain deflationary pressures from the Great Credit Contraction which is likely to endure for at least a decade — following the Great Credit Bubble over the last 40 years. Fed quantitative easing is likely to endure for longer than many observers, myself included, initially expected. And inflation will remain low despite QE, which is offset by deflationary pressures from the Great Credit Contraction.

The lower inflation outlook is reflected by falling gold and rising bond prices.

The Great Credit Bubble

There were two distinct credit bubbles in the last 50 years: the first in the 1980s, the second in the early 2000s. The chart comparing growth in Domestic Nonfinancial Credit (both Private and Government) to nominal GDP shows two clear episodes where credit growth outstripped GDP. Both resulted in significant falls in GDP from which the economy struggled to recover. The latter episode fed into the housing market, leading to the global financial crisis.

Dollar Index

The Great Credit Contraction

If we look at total Domestic Nonfinancial Credit, the rate of growth remained positive. So why call this a contraction? But the aggregate conceals a hidden danger: private household credit contracted, threatening a deflationary spiral similar to the 1930s — when GDP fell almost 50 percent.
Domestic Nonfinancial Credit - Households
Which is why the Federal Government frantically borrowed money for stimulus spending — to offset the effect of private credit contraction.
Domestic Nonfinancial Credit - Federal Govt
Government deficits have not solved the problem — they are merely kicking the can down the road. Household credit growth continues to lag GDP.
Dollar Index

Outlook for the Dollar

The Dollar has not benefited from the lower inflation outlook as interest rates are also likely to remain low. Primary advance of the Dollar Index ($DXY) seems to be losing steam, with a lower peak than mid-2012. Expect a test of primary support at 79. Penetration of the rising trendline would indicate trend weakness, while failure of support at 79 would signal a reversal. Twiggs Momentum is approaching the apex of a long-term triangle; reversal below zero and the rising trendline would also warn of a reversal.

Dollar Index

Here Comes the Dollar Wave Again | WSJ.com

Wall Street Journal opinion on the impact of QE3 on Asia:

If Asia stays true to form, the world is in for a bout of foreign-exchange interventions — some coordinated, some not — in a quest for stability. Yet these interventions will only encourage greater speculative flows, as some investors start betting on the next policy move. This would be America’s problem, too, given the growing number of American businesses trading with Asia that will grapple with a chaotic exchange-rate system…….

via Review & Outlook: Here Comes the Dollar Wave Again – WSJ.com.

Chinese Yuan hits highest level against USD, but PBOC wants it weaker

by Zarathustra

After a long period since late last year as Chinese Yuan was expected to depreciate, it appears that the expectation of Chinese Yuan appreciation is back on people’s mind. Chinese Yuan hits the highest level since the revaluation started in 2005, completely reversing the depreciation since earlier this year…..

via Chinese Yuan hits highest level against USD, but PBOC wants it weaker.

New Jolt Looms for Investors: Earnings – WSJ.com

Jonathan Cheng: Companies begin reporting second-quarter earnings this week, starting with Alcoa Inc. (AA -2.19%) on Monday. Already, 42 companies—including Ford Motor Co. (F -0.73%) and Texas Instruments Inc. (TXN -2.43%) —have warned investors that profits will be lower than initially expected…….

Companies now are being hit on several fronts. Economies in China, Europe and the U.S. are slowing. That is hurting companies dependent on demand from those countries. As well, the U.S. dollar has jumped against the euro and other currencies, reducing profits made from international sales for U.S. companies.

via New Jolt Looms for Investors: Earnings – WSJ.com.

Peter Schiff Speaks to James Rickards, Author of Currency Wars | Peter Schiff | Safehaven.com

James Rickards: The dollar is not necessarily on the road to ruin, but that outcome does seem highly likely at the moment. There is still time to pull back from the brink, but it requires a specific set of policies: breaking up big banks, banning derivatives, raising interest rates to make the US a magnet for capital, cutting government spending, eliminating capital gains and corporate income taxes, going to a personal flat tax, and reducing regulation on job-creating businesses. However, the likelihood of these policies being put in place seems remote – so the dollar collapse scenario must be considered.

via Peter Schiff Speaks to James Rickards, Author of Currency Wars | Peter Schiff | Safehaven.com.

Safe haven demand for dollar and gold eases

The Dollar Index is testing support at 78.00. Narrow consolidation above the support level indicates weakness. Recovery above 79.00 would relieve this, while failure of support would warn of another test of primary support at 75.00.  Rising 63-day Twiggs Momentum, well above zero, however, suggests continuation of the up-trend.

Dollar Index

* Target calculation: 80 + ( 80 – 75 ) = 85

Spot gold is also weak as safe haven demand for both the yellow metal and the dollar has eased. Reversal below $1670 would signal another test of primary support at $1600. Declining 63-day Twiggs Momentum suggests further weakness but the long-term outlook remains bullish with the indicator comfortably above the zero line.

Spot Gold

* Target calculation: 1800 + ( 1800 – 1700 ) = 1900

Increased tensions with Iran are supporting the price of Brent Crude above $105/barrel. Narrow oscillation of 63-day Twiggs Momentum around the zero line indicates uncertainty. Failure of support (and respect of the descending trendline) would indicate another primary decline with a target of $85*. Breach of primary support at $99 would confirm.

ICE Brent Crude Afternoon Markers

* Target calculation: 100 – ( 115 – 100 ) = 85

The CRB Commodities Index respected its descending trendline, suggesting a primary decline to $265*. Follow-through below short-term support at $305 would strengthen the signal, while breach of primary support at $295 would confirm. The Aussie Dollar and Canada’s Loonie both closely follow commodity prices and can be expected to follow the CRB index lower.

CRB Commodities Index

* Target calculation: 295 – ( 325 – 295 ) = 265

Brazilian Real and South African Rand

The Brazilian Real has fallen sharply against the greenback since the government took measures to stem the inflow of funds on capital account. Breach of medium-term support at $0.56 would indicate respect of the descending trendline and another test of primary support at $0.52. In the long-term, failure of primary support would warn of a fall to $0.40.

Brazilian Real

* Target calculation: 0.52 – ( 0.64 – 0.52 ) = 0.40

The South African Rand is weakening against both the US and Aussie dollar. The Aussie (another resources currency) shows an accelerating up-trend against the Rand. Breakout above R8.30 would signal an advance to R9.00*. Accelerating up-trends, however, inevitably lead to blow-offs — as in 2008.

South African Rand

* Target calculation: 7.50 + ( 7.50 – 6.00 ) = 9.00