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The
yellow metal, money for more than three millennia, has a close relationship
to other forms of money. Some argue that it isn’t gold that has risen
in value in the last decade, as much that fiat currencies have lost value
against gold. Ever since gold began its spectacular rise a decade ago, the
U.S. dollar has lost over 80% of its purchasing power. The other currencies
have not fared much better. The euro and the Japanese yen have lost over 70%.
Gold is the only form of money that governments cannot create out of thin air
which is why the supply of fiat currencies is expanding exponentially faster
than gold supplies, which increase by about only 3% per year.
We like to pay close attention to
currencies and to the multi-front currency war because of the effect on gold.
In the “currency war,”
neutrality does not pay as Switzerland discovered when it recently had to set
a floor rate at 1.20 franc per euro by selling francs. The Swiss currency had
gained because it was considered a safe haven. Now that the luster of the
franc has dimmed somewhat, gold is more attractive than ever as a choice for
wealth preservation.
The latest battle in this currency
war is heating up between the U.S. and China and a trade war between the two
most important economies in the world is certainly a cause for worry. For
much of the past two years China has been under pressure from the US to allow
the yuan to appreciate. For its part, China has
accused the U.S. of lowering the value of the dollar by printing so much of
it. Others suggest that both China and the US are “winning” the
currency war by holding down their currencies while pushing up the value of
the Euro, Yen and currencies of some emerging economies.
To see if you
might win in the precious market in the following days, let’s move on
to the technical part of the essay, namely to the analysis of the long-term
US Treasury interest rates chart (charts courtesy by http://stockcharts.com.)
We start with the 30-year US Treasury long-term interest rates chart
since it is instrumental in putting everything which follows into proper
perspective.
We have been including this chart pretty regularly in recent weeks
since it is truly influencing most, if not all of the markets that we cover
on a regular basis.
There was only a minimal change in rates this week but the
rate-of-change (ROC) Indicator did move higher because rates held their
previous gains and makes our current situation more closely resemble what was
seen in 2008.
This was the only time where long-term rates declined as severely and
then bounced sharply. The precious metals markets started a long-term rally
soon thereafter. It is possible that we will see this once again (note that
no market moves in a straight way either up or down).
Having said that, let’s move on to the general stock market.
In the long-term S&P 500 Index
chart, we see that the 50% Fibonacci retracement level recently provided
support and stocks have moved higher since reaching this level. A very strong
resistance line based on 2007 and 2011 tops will be in play very soon
however. This will likely cause at least a pause in the current rally and the
present upside target level for the S&P 500 Index is between 1330 and
1340.
In the short-term SPY ETF, the
recent price action has been very bullish. After declining, prices moved back
up quickly on significant volume suggesting that there is buying power out
there. It appears likely that higher prices will be seen in the near term and
then a strong (combined with the long-term one) resistance line will come into
play. If Thursday's performance is duplicated Friday or Monday, the target
level will likely be reached and a local top will likely be seen. The general
trend however is still to the upside partly influenced by the long-term
interest rate situation.
In the Broker Dealer Index (proxy
for the financial sector) chart, strong price action was seen on Thursday,
but the index is not above its declining resistance line yet. The trend of
the rebound suggests higher index levels are likely but there is an important
resistance line slightly above current levels. A pause in the rally and
period of consolidation are therefore likely to be seen soon. A subsequent
move to the upside would then be possible.
Now, let’s take a look at the
correlations across the PM market.
In this week’s Correlation Matrix , we see
rather mild signals.
The short-term, 30-day column
values are quite weak at this time as no relationship is apparent. The 10-day
column however shows more of a tendency which suggests that the general stock
market is more likely to confirm the bullish scenario for metals in the
immediate term.
This is in line with our recent
essays. For instance, in our latest essay (21st October, 2011) on
the possible rally in gold we wrote:
We are
inclined to think that we’re relatively close to an upswing in gold.
The point here is if a decline is seen before the upswing, it could simply be
the formation of a double bottom with the rally yet to come. So a short move
down did not invalidate any rally this week since the rally had not yet
begun. We have simply seen a rebound after an initial bottom with a second
bottom now being formed. As long as the two support levels in the $1,600
range hold, the outlook remains bullish.
What happened with gold afterwards
largely confirmed what we had written. As of now, we are still inclined to
think that in the very-short term a move up in gold is more possible than
not. This obviously doesn’t alter our long-term bullish outlook in any
way.
Summing
up, the analysis
of long-term interest rates and of the general stock market suggests possible
higher prices across the PM sector in the immediate (!) term.
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Thank you for reading. Have a great and profitable week!
Przemyslaw
Radomski
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