Gold Bugs Better Not Look At These Charts

Last week the Fed has lifted its benchmark interest rate aggressively by 0.75 percentage points and that was the biggest increase since 1994. This decision came with the yearly inflation of 8.6% in May running at its fastest pace since December 1981.

Moreover, new hikes are to come this year as the Fed’s benchmark rate is targeted at 3.4% by the end of this year, according to individual FOMC members’ expectations. This factor puts the downward pressure on asset prices across the market. Bonds are definitely on that list.

I found an alarming correlation between gold and 10-year U.S. government bonds (10b) that appears these days in the chart below.

Gold VS US 10Y Bonds Monthly

Source: TradingView

The gold price (orange) and the 10b price (futures, black) have a similar trajectory over the considered period since 2006. The blue sub-chart with the indicator of correlation confirms the strong link between these two trading instruments.

The price line of gold looks smooth compared to a volatile 10b line. The major peaks match with each other both during the previous peak in 2011 and the most recent top.

However, the area between peaks does not show the perfect correlation as the gold price continued to the downside from the earlier top while the 10b reversed to the upside in 2014. The top metal had led the drop that time.

This time, we see a strong divergence between assets. The 10b was first to drop like a rock as inflation spiral only grows. The gap is already too big as the gold price stubbornly keeps under the all-time high. Time is ticking away for the yellow metal which should show a breakup of the major top to keep bullish, otherwise… just look where 10b is now.

The bond price has hit the low around $114 this month, the level unseen since June 2009. That time, the gold price had hit the low of $913. I marked the current corresponding level of gold at $910 with the red dotted line. This means that the top metal could lose half of its current price to dive below the valley of 2015 at $1,046.

Do you see the correlation between gold and 10-year U.S. government bonds?

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Last year I had shown you the map of possible large leg 2 down to extend the correction in the wake-up call for gold. It is time to dust it off and update here.

Gold Monthly

Source: TradingView

The right green zigzag inside of the right orange box extended higher than expected. However, it could not break the all-time high to repeat the pattern in the left orange box. The chance to continue to the upside is evaporating over the time.

The drop below the red dotted support ($1,700) with the bearish confirmation from the RSI sinking under the 50 would open the way for the second large red leg to the downside. It could retest the 2015 low of $1,046.

In my previous gold update, I shared with you the bullish ascending triangle pattern spotted on the weekly chart.

The gold price did not progress to the upside within the pattern as it was supposed to. On the contrary, it almost fell out below the support of a triangle to challenge the validity of the pattern.

The RSI is still under the so-called “waterline” of 50. The collapse below $1,677 mark would totally invalidate the pattern.

The Fed could tighten its policy until it “breaks” the economy as there is a substantial lag between its action and the following effect on the economy. In the meantime, let us watch and see which of the gold triggers appear first – bullish or bearish.

Intelligent trades!

Aibek Burabayev
INO.com Contributor

Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Bullish Pattern Spotted for Two Agricultural Futures

There is an interesting bullish pattern popping up in the agricultural markets. It's a pattern I spotted in gold in February, but now I've found it in at least two agricultural markets.

Soybean Futures - Cup & Handle

Let's start with a soybean futures chart.

The soybean futures price hit an all-time high of $17.89/bushel in September 2012. After that, it started to collapse in several legs to the downside, losing half of its price by September 2015. Continue reading "Bullish Pattern Spotted for Two Agricultural Futures"

Dollar Index: The Last Shall Be First

Since my last update, the dollar advanced further to the upside establishing the new multi-year top of $105 in the middle of May. Later, the market started the correction as the dollar index (DX) drifted into the area of $101.

Last time, you bet the most on the further rise of the dollar to $121 (Neckline of Giant Double Bottom pattern). The second choice was the Bearish scenario for the main currency. It is early to judge the results as the price dynamics are somewhat mixed.

Let me show you one comparison graph that shows the underlying fundamentals of the dollar index. But, before that, to refresh the memory, firstly, I put below the chart showing the composition of the dollar index.

Dollar

The euro takes the largest piece of cake with 57.6%; the Japanese yen with 13.6% is the second largest component, although the gap with the euro is huge. The third is the British pound, as its part weighs 11.9%. Continue reading "Dollar Index: The Last Shall Be First"

Gold Update: Window Of Opportunity Still Open

Last month I spotted a “Repeated Bullish pattern” of another Cup & Handle model.

The majority of readers confirmed that they see it either. Most of you supported my outlook of an extended Handle with another zigzag to the downside. This was the right guess. Let me show it to you in an updated chart below.

Weekly Gold Chart

Indeed, the gold futures price followed the black zigzag on the chart to the downside. Hence, the outlook played out as planned. However, the depth of the drop was excessive as it hit below the expected valley of 50% Fibonacci retracement level and even 61.8%. The collapse stopped only close to four-fifths of the Cup. The classic approach would invalidate the pattern in this case. Continue reading "Gold Update: Window Of Opportunity Still Open"

Dollar Index Hits Your Target And More

Three weeks ago, I shared the chart of the U.S. Dollar Index (DX) with a bullish outlook.

You supported the idea with the most votes given to the conservative target of $103 located at the peak of Y2020. Your winning vote played out last Wednesday, the 27th of April. Kudos to all of you.

It is time to dust off the big chart again to update on further prospects.

Dollar Monthly Chart

The green triangular scenario has been eliminated as the price surpassed the last year’s peak of $103. The least favored blue path is the primary plan now. I turned the blue arrow into a blue zigzag as the price could take a break after hitting the upside of the blue dotted trend channel around $114.

The next barrier (black) of the Neckline (Giant Double Bottom pattern) is located at $121. It is that very target I was calling for in the title of the previous post.

It is too early to talk about the plan in case the Neckline is broken, although we have no other large barriers beyond, except the all-time high at the peak of the distant 1985 of $164.7. It would be an ultra-optimistic target with the total dominance of the dollar across the globe.

Where do you think the dollar index will stop?

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I want to show you one chart below that could shed light on why the dollar could rise further.

Historic Interest Rate Chart

There are three lines in the chart above that represent the U.S. interest rate (black), U.S. inflation rate YoY (red), and the U.S. real interest rate (blue). It starts from 1977, and for the considered period, the current real interest rate has the most negative reading of -8%. Thus, the Fed has been forced to admit that this raging inflation is not transitory, and it should respond appropriately to take the rising prices under control. This week, the market expects a 50 basis point hike from the Fed; this would double the interest rate to 1.00%.

In 1980, the real interest rate had dived deep into a negative area to hit the valley -4.90% amid the strong inflation above 14% and the falling interest rate (9.50%). This triggered the fast-paced tightening of the monetary policy as the Fed rate more than doubled to hit the earlier top of 20% in just one year. The inflation quickly dropped to single-digit numbers under such severe pressure. Indeed, the real interest rate made a V-turn accordingly to match even with the inflation rate of around 10%.

If we take history as a sample, the Fed could take the interest rate much higher beyond the most hawkish expectations. The simple calculation shows that the Fed rate topped at the ratio of 1.35 to the peak inflation rate (20/14.8). Applying this math to the current situation, we should multiply 1.35 by 8.5% of the inflation rate. Then the Fed should hike up to 11.5%, an unbelievable number! Although, it will not update the all-time high.

The time lag between the peaked inflation and the first hike was almost a half year in the past. This time, the Fed took the first step almost immediately if we take the March inflation reading as the peak. It could change the size of the tightening, as the speed really matters.

Do you think the Fed rate could hit 11.5%?

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The higher the real interest rate, the more attractive the currency is. The hawkish Fed could spur even stronger demand for the U.S. dollar.

I am eager to see your opinion in the comments below, as it has enriched our view many times before.

Intelligent trades!

Aibek Burabayev
INO.com Contributor, Metals

Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.