Gold Breaking Out – Ready to Reach for New Highs?

Action in Gold

There was some noticeable action in gold today. Some say it is just another irrelevant noise, others are calling for new highs.

I have been saying for quite a while that I think gold will do well as soon as people return to the world of reality, and deflation, deleveraging, and credit contraction show their impacts on the markets once again. Whether we are headed that way now or later is still open, but I happen to believe that we are approaching a turnaround.

The action in GLD today makes a breakout a possibility:

gld
Click on image to enlarge.

The HUI index continues to hold the line, the upward move I expected in July did occur, and it also happens to have initiated a breakout out of a triangle now:

hui
Click on image to enlarge.

If the stock market rally is over, and stocks and other commodities are headed for new lows, I expect gold and gold mining to do well. If it is not that time yet, then today’s action may indeed just have been irrelevant noise.

Treasurys

… and what is a well thought out deflation trade without considering Treasury Notes/Bonds. I have been following the trading range in Treasurys for quite a while now and everything has played out as expected so far.

Back in November 08 I called for significantly lower Treasury Yields between 2% amd 2.5%. They then fell from 3.09% to just below 2.5% in January 09. I then expected for technical reasons that they will move higher to the upper end of the range which would be around 3.3%. They actually overshot and went as high as 3.99%. I then said that Treasurys are a good call again. Yields have since then fallen to around 3.30%:

10-year-treasury-2009-july-10

Click on image to enlarge.

I think Treasurys will continue to act well. There maybe some upward pushes here and there so long as inflation expectations pop up once in a while, but the mid-term trend remains unchanged: It is likely that yields are headed for new lows.

Today’s action in gold was beautifully complemented by corresponding action in Treasury yields which dropped by 8 basis points to close at 3.29%, a recent July low. If it breaks, the way down is more or less open:

10-year-treasury-2009-september-02
Click on image to enlarge.

Again, all this ultimately depends on fundamentals. Just as gold, Treasurys will only continue to rally when stocks fall. In addition to that, the dollar rally I am expecting would need to start playing out in order to complete the deflation trade.

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Baltic Dry Shipping Index Drops to 3 Month Low

Today the Baltic Dry Shipping Index dropped to a 3 month low:

baltic-dry-index-200908

This certainly does not bode well for commodity bulls. On a related note, please consider Commodities Poised to Crash Again Soon?.

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Long Term Treasury Securities – Foreign Demand Rises

As deflation continues to run its course, debt destruction goes on, and people seek save haven investments Foreign demand for long-term US securities rises:

Foreign demand for long-term U.S. financial assets rebounded in June even though China and Russia trimmed their holdings.

The Treasury Department said Monday that foreigners purchased $90.7 billion more in long-term U.S. securities than they sold in June. That’s a significant rebound from May when they sold $19.4 billion more than they purchased.

“There is little evidence in recent (Treasury) reports to suggest that foreign investors are growing weary of buying U.S. securities,” Jay Bryson, a global economist at Wells Fargo Securities, wrote in a note to clients. The increased appetite for Treasury securities was partly because their yields rose in early June, he added.

The Treasury is auctioning record amounts of debt to cover what it estimates will be a $1.85 trillion budget deficit this year. If overseas buyers don’t continue purchasing U.S. debt, some economists worry that would mean falling demand at Treasury debt auctions and rising interest rates.

China, the largest foreign holder of U.S. Treasury securities, trimmed its holdings, to $776.4 billion in June from $801.5 billion in May. Russia also reduced its holdings 3.7 percent to $119.9 billion in June.

China’s holdings are a direct result of the huge trade deficits the U.S. runs with the emerging Asian power. The Chinese take the dollars Americans pay for Chinese products and invest them in Treasury securities.

[smartads]American manufacturers argue that gives China unfair trade advantages by keeping the dollar overvalued against the Chinese currency, which makes U.S. goods more expensive for Chinese consumers and Chinese products cheaper here.

Both the Bush and Obama administrations have argued that China should allow its currency to rise faster in value against the dollar, but the yuan has stopped appreciating against the dollar in recent months.

Japan, the second largest holder of U.S. Treasury securities, increased its holdings 5.1 percent to $711.8 billion in June. And the United Kingdom, the third largest holder of Treasuries, increased its holdings nearly 31 percent to $214 billion.

Foreign governments purchased $22.5 billion of Treasury bonds and notes, the department said, after selling $21.8 billion in May. Overseas governments sold $5.9 billion in bonds issued by mortgage giants Fannie Mae, Freddie Mac and other government agencies.

Private foreign investors purchased $78 billion in Treasury bonds and notes in June, the department said, up from sales of $800 million in May.

Today yields on ten year notes are currently at 3.49 percent. I am still as bullish as I have been before on Treasury Notes and Bonds:

Back in November 08 I called for significantly lower Treasury Yields between 2% amd 2.5%. They then fell from 3.09% to just below 2.5% in January 09. I then expected for technical reasons that they will move higher to the upper end of the range which would be around 3.3%. They actually overshot and went as high as 3.99%. I then said that Treasurys are a good call again. Yields have since then fallen to around 3.30%:

10-year-treasury-2009-july-10

Click on image to enlarge.

I think Treasurys will continue to act well. There maybe some upward pushes here and there so long as inflation expectations pop up once in a while, but the mid-term trend remains unchanged: It is likely that yields are headed for new lows.

Just recently someone commented as a response to my post on consumer prices:

Bullish long term treasuries?

If so, I think your arguments should directly go to the trash.

Even though private lending is not increasing, it is currently being replaced by government debt or money. Yes stocks are risky, but the dollar is even riskier.

Maybe I am wrong and there is a flaw in my thinking. If so, then nobody has successfully pointed it out yet. Statements like the above reflect the commonly spread notions of the public who does not like to bother with details and easily falls for simple platitudes. This just reaffirms my beliefs. But we shall let reality be the final arbiter. I believe that Treasury yields are headed lower for the remainder of this year.

As far as my thoughts on the Yuan:

In 2005 the Chinese government ended the peg against the US dollar and switched over to a currency basket. From 2005 though June 2008, the value of one Dollar dropped from RMB 8.28 in 2005 to about RMB 6.83 by June 2008.

Since then, it seems, the fall of the dollar has stopped and the Yuan/Dollar exchange rate remained suspiciously stable. This has gone on through right now. The chart below illustrates this:

The stabilization of the Dollar against the Yuan has almost coincided the reversal of the Dollar’s fall against other major currencies. It thus appears as if, since mid 2008, the Yuan/Dollar peg has been reinstated and continues to be in place as these lines are written. What is also noteworthy is that the US current account deficit has been declining sharply since then.

A first look at the above chart leads one to believe that Chinese and US authorities aimed at putting an end to the fall of the Dollar, and thus intervened accordingly. However, another possibility which I would like to propose is that the Dollar had fundamentally and truly begun to stabilize at the level of RMB 6.83 at that point and was actually in for a major revaluation upwards. Thus the current intervention by Chinese authorities could actually be aiming at a stabilization of its own currency at a higher level than the market would mandate.

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World Stocks Tumble; US Futures Down Over 2 Percent; Brace for a Stormy Week

Tonight, news are coming in from across the world about collapsing stock markets:
– The Nikkei is currently down 3.1%
– The Hang Seng is down 3.6%
– The DAX is down 1.9%

US Futures are pointing down big time:
– The S&P500 Future is down 1.9%
– The Dow Jones Future is down 1.7%

Most of the fantasy news that suggested speedy recovery, stabilizing home prices, and a return to US consumer behavior as we know it have been depleted. There is, on the other hand, lots of terrible news to come. From industry data, to a potential insolvency of the FDIC and an ensuing request for another $100 billion from the taxpayer, this week will certainly be a turbulent and volatile one.

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US Dollar Looks Bullish Fundamentally & Technically

Mish writes Ewave Count on the US Dollar Suggests Move Up is Coming:

US Dollar Weekly Chart

I have been following the above chart for some time and a few weeks ago emailed a friend “There is room for one more wave down”. And so here we are.

But hold your horses. Wave 5’s can truncate or extend. That is why I have two “?” on the chart. Either way, the count appears corrective and there should be another relatively strong wave (of some sort) back up once wave 5 down has finished.

Right now, should the weekly candle continue up and solidly break the trendline, it would be suggestive that wave 5 is over.

This is very significant given the fact that the US$ is typically inversely correlated with the S&P 500 as well as commodities. So rather than focusing on the S&P 500 “jello” counts directly, one is likely better off following the US$.

Bear in mind, the primary focus of technical analysis in general is not predictive capability, but rather to find spots where one can initiate a trade with a stop loss relatively close by. In that regard, the solid trendline above is the place to watch.

Daneric’s Elliott Waves

I am not the only one to come up with that US dollar count. Dan at Daneric’s Elliott Waves sent me the same, but far more detailed, count a few days ago (click on above link to see).

Since then I have been following his site and I can easily say he knows far more about Ewave than I do. What I really like are his “no nonsense” comments such as:

PS – I don’t really pay attention to what EWI has as a $ count. This chart I just made up tonight completely on my own. It seemed easy enough to count and the chart generally took less than 30 minutes to complete.

PSS – There is a great positive divergence on the RSI. So indeed it may turn back up hard soon enough. Its hard to say exactly how the micro waves will trace over the next month. But make no mistake, I think this chart portends the dollar will make great advances upward contrary to what most people assume.The trouble most people get into with Ewave is coming up with a thesis, then struggling to find a count that will fit it. Given Ewave is rather subjective, that is an easy trap to fall into.

Daneric said “the chart generally took less than 30 minutes to complete”.

That is the way it should be. I do not want to spend 4 hours plotting alternatives when all they do is say where we have been, not where we are going, only to be subjected to a barrage of 200 emails all telling me why my count is wrong.

By the way, it only took me 5 minutes to do my chart but then again I only labeled a portion of the chart, a practice I do not recommend because it can cause problems.

Please note Daneric’s comment “But make no mistake, I think this chart portends the dollar will make great advances upward contrary to what most people assume.”

That is quite consistent with my long-term belief the US dollar is in a wide trading range and is not about to collapse (because it already has and every county is embarking on beggar-thy-neighbor competitive currency debasement policies).

The key is neither one of us is forcing a count to appease that belief.

I wrote about the fundamentals recently in China Pegging Yuan to US Dollar Again:

From June 1995 through the beginning of 2005, the Chinese government was pegging its Currency to the US Dollar. It was producing money (Yuans) to purchase Dollars, fostering a US current account deficit.

In 2005 the Chinese government ended the peg against the US dollar and switched over to a currency basket. From 2005 though June 2008, the value of one Dollar dropped from RMB 8.28 in 2005 to about RMB 6.83 by June 2008.

Since then, it seems, the fall of the dollar has stopped and the Yuan/Dollar exchange rate remained suspiciously stable. This has gone on through right now. The chart below illustrates this:

The stabilization of the Dollar against the Yuan has almost coincided the reversal of the Dollar’s fall against other major currencies. It thus appears as if, since mid 2008, the Yuan/Dollar peg has been reinstated and continues to be in place as these lines are written. What is also noteworthy is that the US current account deficit has been declining sharply since then.

A first look at the above chart leads one to believe that Chinese and US authorities aimed at putting an end to the fall of the Dollar, and thus intervened accordingly. However, another possibility which I would like to propose is that the Dollar had fundamentally and truly begun to stabilize at the level of RMB 6.83 at that point and was actually in for a major revaluation upwards. Thus the current intervention by Chinese authorities could actually be aiming at a stabilization of its own currency at a higher level than the market would mandate.

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

– Global deleveraging is driving investors from other currencies back to the Dollar
Deflation hitting the US first, and other countries only later
– Imports into the US are falling rapidly
– Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar. Such an event could possibly be the ignition for a significant Dollar rally in the years to come.

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