Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Investing lessons from the 1987 Stock Market Crash From Who Beat it - 20th Oct 19
Trade Wars: Facts And Fallacies - 20th Oct 19
The Gold Stocks Correction and What Lays Ahead - 19th Oct 19
Gold during Global Monetary Ease - 19th Oct 19
US Treasury Bonds Pause Near Resistance Before The Next Rally - 18th Oct 19
The Biggest Housing Boom in US History Has Just Begun - 18th Oct 19
British Pound Brexit Chaos GBP Trend Forecast - 18th Oct 19
Stocks Don’t Care About Trump Impeachment - 17th Oct 19
Currencies Show A Shift to Safety And Maturity – What Does It Mean? - 17th Oct 19
Stock Market Future Projected Cycles - 17th Oct 19
Weekly SPX & Gold Price Cycle Report - 17th Oct 19
What Makes United Markets Capital Different From Other Online Brokers? - 17th Oct 19
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Gold and Silver Analysis - Precious Points: Why This Rebound Looks Real

Commodities / Gold & Silver Jun 03, 2007 - 04:43 PM GMT

By: Dominick

Commodities

Joe Nicholson writes : “With the market all but giving up on rate cut relief this week, the proliferation of leveraged buyouts and junk bond issuance, and the steady surge in bank loans and global liquidity, give every indication that real interest rates might be too low.” ~ Precious Points: No Lack of Support , May 27, 2007

Weeks ago this update said that what gold needs to get back its shine is a rebound in the U.S. economy. As you know, this is exactly what recent data has suggested, and the metals have acted accordingly. The focus for some time here has been on the Fed's open market activity, and specifically the “sloshing” repo funds. After breaking the streak of reverses two weeks ago with a modest $3 billion net addition, last week concluded with a net add of $6.75 billion. In a rate-targeting regime, this reflects perception of a stronger economy driving demand for more base money, and the overall liquidity is an ideal environment for appreciation of precious metal.


It's not surprising then, that the metals put on a bit of a rally last week. Caution at this point is reasonable, considering that other strong closes over the past month have quickly reversed and frustrated dip buyers. Last week's update required a weekly close above the 5-day moving average to begin confirmation of a new bullish move in precious metals. Notice in the charts below how, particularly in silver, rallies off the weekly lows that nonetheless closed under the 5-day moving average ultimately became extensions of a downtrend, whereas successive closes above the 5-day moving average marked recovery and further rallies from the severe selloffs in early January and late February.

 

Now that both gold and silver have climbed above, the 5-day moving average becomes an important support level which, though not inviolable, signals a relatively low risk/reward trade. Even if the 5-day average is lost during the week, closing on Friday above the 5-day moving average would suggest a larger move, probably to a new interim high, though strong resistance exists in gold at the $690-700 level, and at the $13.95-$14.15 level in silver. Note that previous moves above the 5-day moving average this year, though triggering rallies, have not escaped punctuation by sharp declines. But even here, it's losing the 5-day average in a single week from a fresh high that marks the crucial turn and ultimate retreat back into the 50-day level.

Last week did not see the short term top in bond yields anticipated in the previous update, despite less than 1% GDP growth for the second quarter. As prices sunk even lower, talk centered on the 10-year Treasury and the yield it would ultimately take to tempt investors from stocks to fixed income.

But, just as new highs in the metals are not a foregone conclusion, neither is a Fed rate hike or a sustainable resurgence of the U.S. economy. Strength in job creation, in manufacturing, and in construction all suggest Q2 will be the low mark of this slowdown, and that GDP will be higher in the second half of the year, just as Fed members have expected. Proponents of this outlook essentially believe any loss of wealth effect due to a decline in housing prices has been more than offset by the stock rally and that, unless consumer discretionary spending drops off a cliff, inventories will be consumed and the economy will begin to accelerate from here.

There are flaws to this argument, though. Jobs numbers are widely believed to be exaggeratedly high and, anyway, do not account for undocumented workers, who nonetheless do figure into retail spending. And, though many Americans own stocks indirectly through their retirement or pension accounts, this is not discretionary income that they'll spend at Walmart, though perhaps at the new Macy's. But, despite high confidence numbers, the willingness of consumers to liquidate or borrow against stock holdings as a way to fund new purchases is yet to be proven.

The rate hike camp also assumes that, simply because subprime mortgage defaults have not yet spilled over into the rest of the economy so far, they never will. By Bernanke's own admission, the number and value of defaults are going to increase through 2007 and 2008. Even if the Fed doesn't hike rates, even an incremental rise in bond yields, and the resultant increase in all manner of credit spreads including home and auto mortgages and credit cards, will translate into even larger payments for owners of ARMs, and most likely into a larger number of defaults. The last two Fed statements left the back door open to a rate cut, and this could still materialize if housing defaults increase dramatically and consumer spending deteriorates, since, rather than the virtuous cycle of spending and production anticipated by the rate hikers, this scenario envisions a vicious cycle of deflationary write-downs and tightening household budgets that would see short term weakness in metals, but longer term strength.

The tension between opposing forces which have kept the Fed steady, has thus far created a relatively stable bond market. And, yields that gradually creep higher typically signal a bullish environment for metals. Now, if the impetus to cut rates is in fact removed, bond yields could be expected to reach a more historically normal level, above the overnight rate at 5.25%. As suggested last week, a fixed return of 5.25, even 5.5, over ten years, seems grossly inadequate next to a 6.6% annual increase in M2 and vastly higher returns in foreign and domestic equity. The real risk seems to holders of corporate bonds who face increased exposure to rising yields and widening spreads, though markets are not always entirely rational and occasionally succumb to self-fulfilling prophecy.

So, it's not the nominal rate, at least not at anywhere near these levels, as much as the rate of increase that would determine the effect on stocks and metals. A sudden lurch to higher yields could trigger a liquidity freeze and a sharp correction in stocks and metals, whereas a more gradual rate of climb should be easily absorbed by the markets. Still, this seems unlikely as next week is relatively light on economic data, and bond traders will probably remain patient ahead of further signs of life from the consumer – which puts the weekly chain-store sales figure in particular focus. Obviously, an exodus from stocks to bonds would put acute pressure on metals and mining stocks, but would probably not violate the support outlined last week and, in moderating the climb in yields, could actually strengthen the intermediate picture.

TTC's proprietary trend cycle chart has been doing a great job as shown in the above chart. We have now added Daily and Weekly trend charts to 24 markets!

These charts, as well as the intraday trend page at TTC, are available to members only. The monthly subscription fee will be increasing on or about July 4th due to our ongoing expansion of the Website, computer and software upgrades, and the addition of services such as trend cycle charts. Current members and anyone that joins before the increase takes effect will not be subject to the new price, and will continue paying the current $50 subscription fee on a month-to-month basis. So, if you have been thinking of joining, this is a great time, while it's still less than just 5 oz silver or 1/10 oz gold!

by Joe Nicholson (oroborean)

www.tradingthecharts.com

This update is provided as general information and is not an investment recommendation. TTC accepts no liability whatsoever for any losses resulting from action taken based on the contents of its charts,, commentaries, or price data. Securities and commodities markets involve inherent risk and not all positions are suitable for each individual.  Check with your licensed financial advisor or broker prior to taking any action.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules