Rising Rates
Friday’s first round of QE2 (quantitative easing) was not well received by the markets. The Fed bought $7.22 billion of bonds, as the first installment of its $600 billion target over the next 6 months. Stocks reacted by falling 2% for the week, bonds lost 2.2%, commodities fell 3%, and gold was down 2%, while silver dropped 2.6%.
There was other news out that contributed to the declines, as the U.S. is not alone in a world drowning in an ocean of paper money. As I have mentioned repeatedly, the EU debt problems would resurface. This time Ireland is in the spotlight, as its bond yields jumped to 9%. Portugal is not far behind with 7% yields.
All this money printing is starting to add up. Inflationary pressures are starting to surface around the world. China reported a 4.4% rise in consumer prices, while its money supply is up 19%. Its real estate market has responded in bubble-like fashion, reminiscent of what the U.S. and Japan have already been through.
China has a big impact on commodity markets worldwide. If an overheated economy forces a stronger monetary policy (tightening) from The Peoples Bank of China (PBOC), it could have a big affect on worldwide commodity prices. It is undeniable that commodities have been heating up: industrial metals and oil are at 2 year highs; silver is at a 30 yr. high, rising over 60% since August; while gold rose over 20% to all-time highs.
Perhaps the most disturbing development is the rise in long term rates here in the U.S., as evidenced by the chart below. 30 year rates have jumped from 3.46% in Sept. to 4.26% in Nov. The long end of the bond market is not enamored with QE2 so far. Bond investors are concerned about the excessive debt supply the Treasury is pushing.
Currencies
The Federal Reserve is doing more harm than good. It should be abolished. A first step towards this goal would be the passage of Congressman Ron Paul’s call for an audit of the Fed. If their books were fully disclosed, it would be game over.
The excessive amount of debt being issued by the Treasury Dept. and the Fed, coupled with deficit spending and zero bound interest rates, is a monetary policy from hell that will end in tears.
Such unsound monetary policy is debasing our currency; and all world currencies. There is no currency on earth that is not being destroyed. Purchasing power is being lost by all – some are just rotting faster than others. This has not been lost on gold.
The euro and the dollar keep taking turns falling off a cliff. The charts below show the unbelievable volatility the two currencies have exhibited. The charts show an unsound dynamic at work – knee-jerk reactions from central bank intervention.
The weekly chart shows the dollar has taken four (4) huge swings in the last two years: up +26%, down -18%, up +20%, and down -15%. These are huge moves for a currency to take in such short time spans. This type of market dynamic in currencies is rare – unless the currency in question is in a bad state of affairs – as in near collapse.
It would be bad enough if just the dollar was acting this way, but the second chart shows the euro has been just as volatile. As a matter of fact: the euro and the dollar are mirror images of one another. They trade in opposite directions. Notice at the bottom of each chart that gold is well aware of what is going on, as it keeps forging higher.
Euro
The euro has been as volatile as the dollar. In 2008 the euro fell –22%; followed by a +20% rally in 2009; then fell –21% at the start of 2010; and has recently rallied +20% in five months time.
Notice at the bottom of the chart that gold has steadily forged ahead, regardless of the direction of the euro or the dollar. Gold is acting like the ultimate currency that it is, fully aware that all paper fiat currencies are rapidly deteriorating (losing purchasing power) in a dangerous game of global currency debasement.
The daily chart below shows the dollar has been trying to forge a short term bottom since Oct. It has rallied up to resistance (78.28) three times now; and has yet been able to penetrate through.
The dollar is at an important point – it will either break above resistance, keeping the rally alive; or it will bounce off resistance and start heading down to test the lows (76). The direction of the dollar will affect the other markets, especially commodities, as the second chart below shows the close inverse correlation between the CRB index and the dollar.
Commodities
The weekly CRB chart shows that when the dollar is in a well defined downtrend that commodity prices rise. This inverse relationship will likely continue.
A continued rally by the dollar will put a head wind to commodities. Conversely, if the dollar reverses down, commodities will have a strong bid put under them, especially if the dollar’s recent low is violated.
Gold
Gold may be decoupling from the dollar, depending on what the euro does. If the euro goes into free-fall, due to another sovereign debt crisis, gold will likely continue higher.
It is interesting to note that on Tues. the dollar was up significantly, yet gold rallied as well. Then on Friday, gold took a big hit of almost 3%, yet the dollar was down on the day. This bears watching.
The daily chart shows gold about to test its rising trendline. RSI bounced hard off of the 70 overbought level, and MACD looks about ready to make a negative crossover, which would indicate further downside.
As of now this is a short term pull-back in an on-going uptrend. Such a correction/consolidation is actually positive for gold, as it allows it to build more support from which to launch the next leg up.
Overlaid on the chart is a set of Fibonacci retracement levels. The first 38.2% level is at 12.06. This is very close to gold’s last reactionary low at 15.90. This support area needs to hold or an intermediate term correction could unfold.
I think support will hold, at least on the initial test. Then a rally should ensue as buyers that missed the boat jump in. This would propel the market higher, which in turn could lead to the intermediate term correction that is out there waiting. Once that occurs, gold strongest leg of the bull market will begin.
Of course there are many other possible scenarios; however, there is an intermediate term correction due at some point in the not too distant future; just as there is the third stage of a secular bull market to come. Both events will occur; it’s a question of when not if.
In trying to discern the “when” of the next intermediate term correction, it is not necessary to call a top. Gold is in a secular bull market. Hence, long term core positions remain on hold. The portfolio remains 60% in the precious metal sector.
For those inclined to trade, the 15 level is important to watch. If support holds, then another short term move up will begin. Conversely, if 15 does not hold, then an intermediate term correction will unfold.
IF (?) such a correction occurs, it will be near the end of it that the next big buying opportunity will present itself, as the chart below shows. Note gold still remains overbought on the weekly chart. A break below CCI 100 would be an early warning signal.
Gold’s point & figure chart is flashing a high pole warning, which alerts one that a possible reversal could be at hand. It warrants watching.
The above excerpt is from this week’s full market wrap report. I am bullish on gold long term, but I also know that all bull markets have intermediate term corrections. One is due. It is best to step aside when these corrections begin; and to add new positions when they are over. These corrections can be sudden and violent, throwing many off the bulls back.
If you would like to read a comprehensive report that covers all these subjects and more, we invite you to try a three month trial subscription. I am so confident in gold that I am offering a money back guarantee to all new subscriptions taken out this week.
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