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Gold Surprises as Dollar Gets Monkey-Hammered LowerIn " Gold Leaps Higher as Worries Mount ," I briefly pointed out how those very same institutions that championed quantitative easing policies implemented by the Federal Reserve are now coming out to proclaim quantitative easing added no substantial benefit to the real economy . Gold was pushed lower on the assumption that central banking policy would all pan out and that the U.S. would finally achieve escape velocity; but the exact opposite is occurring. Despite the near 12 to 16 months of absolutely horrendous, even recessionary data, market participants believed that if the Fed began to tighten monetary policy then the economy must be alright. Central bankers,misguided by classroom academics and abhorrent to real world economic dynamics, believe that if you tinker with interest rates that somehow inflation will magically begin to rise. Not so because it is real, meaningful growth that produces inflation; and it is more evident now that the these policies do not produce meaningful growth. I mapped out the dollar's downward trajectory, which was largely based on the floundering economy and the inability for the Fed to take action that will pop asset inflation. I still believe this is based on the above factors and that the dollar will likely gather strength as the US slips into deflation. Traders and CNBC pundits think that if deflation takes hold then gold will surely decline into the abyss. And just like their "lower gas prices equal booming consumer spending" myth, gold falling off a cliff during deflation is just as preposterous. Gold is unique in that if can act like an insurance policy against both sides of tail risk (inflation and deflation). It is well-known that gold had a massive bull run when stagflation took hold of the US during the 1970s. Inflation ran amok. However, nobody mentions that gold tripled, in inflation-adjusted dollar terms, during the early 1930s (the Great Depression) prior to President Roosevelt outlawing the private ownership of gold. As I wrote last April: " There is an assumption that the dollar and gold’s performance is strictly inverse of one another, but that is not so. The WGC (World Gold Council) indicates that between early 2014 and March 20, 2015, the dollar has gained over 20 percent while gold only fell 1.2 percent. Historically, gold prices more than double on a weak dollar than it falls on a stronger dollar. Thus, a stronger dollar is not indicative of massive gold depreciation. When the dollar declines, gold has appreciated 14.9 percent. Yet, when the dollar strengthens, gold has only fallen by 6.5 percent, according to the WGC. " If you look at this chart, you will notice one thing: gold sure looks to trend with the SPX. There is an argument that this due to simple asset inflation. Notice the massive divergence began when gold began to top in 2011. The divergence is what I call the "perception" gap. I expect that divergence to close. It's no secret that I was right about the volatility of 2015, along with other key macro trends. I believe by the end of 2016 and 2017 is when the real fireworks begin. Gold's recent move has been huge, and, of course, there will be profit taking. But those who follow me know that the underlying fundamentals for gold has been strengthening for some time. (Note: the gold chart is the same I used in the above mentioned gold idea, but the minor uptrend (along with new resistance) were added). Please follow me @lemieux_26 and check out my other ideas, which have links to previous writings.
COMEX:GC1!
by CommoditiesTrader
11
U.S. Dollar Awaits FOMC DecisionSome say this week's FOMC decision will be of historical proportions and be the first time the Federal Reserve will increase the Fed funds rate in almost a decade. The U.S. dollar index is in a descending trend. Price action is floating above the minor trend created by the top on April 13. The dollar has not been able to see any significant support higher, likely due to the uncertainty about the Fed's policy. The economy is clearly slowing down, and the Fed has never hiked rates into a slowing economy. Furthermore, financial conditions are already tightening in the wake of a potential boost - if we can call it that -in interested rates. According to Goldman Sachs' financial conditions index, which incorporates equity prices, exchange rates, credit spreads and a slew of other factors, hit the highest level in five years. In regards to what is already occurring with a stronger dollar, increase in borrowing costs and declining asset prices, the market is already undergoing what feels like a 75 bps increase; a 25 bps hike from the Fed would only add insult to injury. Technically, rallies in the dollar have been sold. Price action did see significant pressure in late August and broke key technical support. There was support near 92.50, but the mere close below signals the potential for further weakness. If the Fed remains dovish this weak, and the FOMC minutes continue to be vague and confusing, the dollar could very well retest this year's lows. Momentum on the longer-dated charts are suggesting that upward movement is challenged, and the trend could be changing. Of course, if the Fed did come out and increased rates, the dollar would significantly strengthen. The idea that the Fed would allow that is flaw because they are begging for any sign of inflation in a deflationary world. Multinational corporations have been greatly hurt with the dollar rising against nearly all currencies, and emerging market currencies collapsing. A $3 trillion debt crisis could also occur if the Fed embarks on a path towards monetary tightening. The idea that the Fed can just tighten once and be done with it is foolish. That's not monetary normalcy, and the Fed would only prolong the inevitable. Please follow me on Twitter @Lemieux_26 Check my posts out at: bullion.directory www.investing.com www.teachingcurrencytrading.com oilpro.com
INDEX:DXY
by CommoditiesTrader
Gold Leaps Higher As Worries MountFollowing the FOMC minutes on Wednesday, gold has seen a massive two day move that brought the precious metal to five-week highs. Worries mount as market participants are beginning to realize that the Federal Reserve is stuck within a liquidity trap. The minutes statement indicated that the Fed saw risks to near-term inflation (as the five-year breakeven rate hit five-year lows) and growth. The once “sure bet” on a September rate hike quickly dwindled, and the possibility of another round of quantitative easing is growing. There has been a lack of attention to two key revelations within mainstream media: The Bank of International Settlements (the central bank of central banks) and the St. Louis Fed have come out publicly to express that quantitative easing has been the epitome of failure. Both institutions have stated that the massive balance sheet expansion and zero interest rate policy (ZIRP) has not added any growth to the real economy. The BIS has even gone as far as to say that the world is defenseless against the next crisis, which many “Main Street” analysts believe is around the corner. In regards to a efficacy of ZIRP, the white paper publish by the St. Louis Fed said: “A Taylor-rule central banker may be convinced that lowering the central bank’s nominal interest rate target will increase inflation. This can lead to a situation in which the central banker becomes permanently trapped in ZIRP. With the nominal interest rate at zero for a long period of time, inflation is low, and the central banker reasons that maintaining ZIRP will eventually increase the inflation rate. But this never happens and, as long as the central banker adheres to a sufficiently aggressive Taylor rule, ZIRP will continue forever, and the central bank will fall short of its inflation target indefinitely. This idea seems to fit nicely with the recent observed behavior of the world ís central banks.” But, this is not just the Fed’s problem. Quantitative easing has been a failure in Japan and Europe. In a “defenseless” world and crisis looming, gold stands to greatly benefit. Price action for gold is fueled by short-covering (near-term) because the dollar just base-jumped of the hopes and expectations of a Wall Street recovery. However, as Pandora’s box is opened, gold’s upside potential becomes great. Resistance can be found at $1,162, which is slightly below the descending trend created in late January. If price action can close above these key levels, gold will attempt to challenge the 200-day EMA near $1,182. The 50 percent Fib. retracement of January’s downtrend is at $1,189. As long as the dollar remains soft, gold will be relatively supported at these levels. Although, price taking can take place and healthy. The daily RSI is approaching 69, but the weekly and monthly RSI is below 45. Moreover, the weekly chart is showing a bullish +/- DMI crossover, suggesting a potential inflection point in the most hated asset on Wall Street. Please follow me on Twitter @Lemieux_26 Check my posts out at: bullion.directory www.investing.com www.teachingcurrencytrading.com oilpro.com Low cost trading solutions: www.fiverr.com
COMEX:GC1!
by CommoditiesTrader
9
USDJPY To Grind Higher on Interest Rate HopesThe dollar-yen has been rather range bound, floating between 123 and 125. The U.S. dollar is likely to remain firm heading into September, as many market participants believe the Federal Reserve will finally raise the Fed funds rate for the first time since 2006. Many traders are looking at the fact that funds rate future traders are pricing in a 54 percent chance a rate hike will occur, which has dropped four percent since the non-farm payrolls were released. Here is something that suggests that does not mean anything. In 2009, Fed funds traders forecasted a 58 percent chance the Fed would hike rates in Q1 of 2010. That’s how long this Game of Bankers have been playing out. Like Monopoly, the game transcends time until players begin to loose all their money. The hope that the Fed begins to tighten policy will override the fact that Bank of Japan (BoJ) Governor Haruhiko Kuroda said that there is no need for additional monetary easing because he believes inflation will reach the central bank’s two percent target in 2016 – a target that has remained elusive for all easing central banks. Although it is not doubted that Kuroda actually believes a steady two-percent can be achieved, the BoJ has underwritten Japan’s massive deficit spending program and has induced severe financial repression. Despite the QE program that trumps the Fed’s, Japan’s economy remains weak and fragile. The USDJPY is approaching 125, a mark that has not been overtaken since June 5. A close about these key level should get momentum traders to flood the pair, as it did last time to push it just shy of 126. Resistance could be found at 125.38. The pair does have to close over both 125.05 price resistance and the intraday descending trend created at 125.85. If the pair is unable to do so near-term, USDJPY could trend lower to support at 124.40 and 124.15. If traders begin to think the Fed will not tighten in September, the dollar should pullback slightly. The the hope would then be pushed back to December. If dollar will remain supported in terms of the rate hike potential by the Federal Reserve, as well as the disinflationary pressure the dollar is causing by strengthening. Mark Carney, the Bank of England (BoE) Governor who had been recently hawkish, shied away from previous rhetoric on hiking rates citing the strong FX pressures and low inflation. Please follow me on Twitter @Lemieux_26 Check my posts out at: bullion.directory www.investing.com www.teachingcurrencytrading.com oilpro.com Low cost trading solutions: www.fiverr.com
by CommoditiesTrader
1
10 Yr Treasury Rates vs. S&P 500 The rally in long dated US treasuries over the past 35 years could easily be called the greatest bull market we've seen in modern times. 10 yr rates have been trending down in a near perfect channel for almost 30 years. Calling for the end of this rally has become a popular pastime. Due to the nature being zero bound on rates, the upper trend line will with 100% certain fail at some point. However, will the greatest bull market we've seen end without at least one more touch of the long term trend? Some recent forecasts were just released by Barron's magazine for "top wall street strategists." Link -> online.barrons.com In summary, out of 10 strategist all 10 expect higher equity prices (avg prediction 2210, ~10% from current levels). For 10 yr rates, 10 out of 10 expect higher rates for 2015 (avg predicition 3.05, almost a full percent above the current 2.1). The primary sentiment seems to be that rates are so low that they cannot possibly go lower. However, 10 yr rates of other developed countries are showing that is just not the case. Canada - 1.75%, Japan - .39%, Germany - .62%, France - .89%, Netherlands - .76%, Switzerland - .23%, Hong Kong - 1.7%. Its unclear currently to me what the primary driver will be for rates going to the 3% level referenced above. Inflation has been well in check by recent reports. Commodities prices have been trending significantly lower in aggregate. And the US dollar is looking as though it is currently breaking out of a 30 year downtrend, an event that is more likely to import deflation from abroad than to cause inflation. From a technical standpoint, as mentioned above the 10 yr rates have been trending lower in a well defined channel for over 30 years. The current question I think is whether we will get one more touch of that lower trend line before any meaningful reverse higher. Marked on the chart is a measure of the time elapsed between troughs in the 10 yr rates that occurred on this trend line. The average from 1993 has been right around 245 bars, with the shortest period being 187. If we use this as a guideline then we could expect the next trough in the 10 yr rate to occur as early as the end of next year to as late as April 2017. Depending on the timing, those periods would line up with a rate of .75% and .50% respectively. Will rates get that low? I'm not sure and there's not much value in trying to answer that right now. A move like this would clearly surprise the most people and given the right circumstances I think it is at least a possibility. More importantly though is that the current trend has been for lower rates and the current sentiment on bonds is overwhelmingly bearish. Also shown as a backdrop to the rates on the chart above is the S&P 500. It worth noting that each time the 10 yr rate has touched the bottom trend line, it has also marked an excellent entry point into stocks. But the opposite has also been true. As the 10 yr rate peaks and heads towards the bottom trend line, it has not been a great time to be long stocks. So will it be higher stock prices and higher rates for 2015 as 10 out of 10 top strategist suggest? Or might we be in store for something different. A market that chops sideways to down while rates grind lower towards that bottom trend line. One piece of evidence that has me thinking the latter is the stocks to bond ratio that I recently looked at. We could be nearing a breakout in that ratio and would support a move like this (linked below)
FRED:DGS10
by SMP99
Long Bond to SPY RatioAbove is a look at the 10 yr Bond prices relative to S&P 500. The purpose isn't to look for an exact top where prices or the ratio trend may reverse but instead to see where we've been in the past and where we are at currently. Breaks in the long term down trend of this ratio have lead to large moves in the SPY, however, determining those breaks in the trend are likely easier to do in hindsight. Its possible we are at or near breaking the current trend but again maybe the ratio continues to goes lower. In fact just recently the ratio made new lows during the month of November (lower than both 2000 and 2007). For now its worth watching the current trend that has developed from 2011. During the pull back in Oct, the ratio moved up to touch this trend and reversed lower after that touch.
AMEX:SPY
by SMP99
10