Gold Awaits its FOMC Fuse

Gold Awaits its FOMC Fuse

Written by David Brady, Sprott Money News

 

Nothing much has changed since last week, when I wrote:

“Gold is at or close to a low here that is likely to set off a rally to 1360 or higher in the coming weeks. 1270 is strong support. Ideally, I would like to see a positively divergent lower low in price below 1288 with a higher RSI, DSI, and/or MACDs to confirm the low is in place for the next big rally to begin.”

Gold has not changed price since. Positioning, sentiment, technicals, and EWT still support a significant rally.

https://www.sprottmoney.com/Blog/gold-preparing-to-launch-david-brady-16-052018.html

This week I want to address Fundamentals and Inter-Market Analysis.

By Fundamentals, I am specifically referring to the Federal Reserve’s (“Fed”) monetary policies. The Fed is expected to raise interest rates another 0.25% at its next meeting on June 23. Gold has rallied after five of the last six rate hikes, and given the decline from 1369 to 1281 in recent weeks ahead of the next meeting (with the risk of a slightly lower low yet to come), plus all the signals pointing north for Gold, this will once again likely be the catalyst for the next rally.

Inter-market analysis refers to determining the direction of Gold by trying to determine the direction of other assets with which it has a direct or inverse correlation with, such as the dollar index and the 10 year treasury bond (“10Y”) yield.

Since its trough on April 17, the dollar index, or DXY (“Dixie”), has had a very high positive correlation with the 10Y Bond Yield, meaning that higher bond yields are positive for the dollar, and lower bond yields are negative.

Meanwhile, the DXY has also been highly correlated to Gold on an inverse basis, meaning that if the DXY rises, as it has, Gold likely falls. It’s no surprise then that the inverse correlation between the 10Y yield and Gold is also significant, and that higher yields mean lower Gold prices and vice-versa. Correlations come and go, but for now it is clear that the 10Y bond yield is a key driver for the DXY and even more so for Gold.

This can be even better illustrated by the following graphs of each asset’s performance relative to the other since Apr 17. Note that each asset’s price has been indexed to 100 on Apr 17, and the performance of the 10Y represented by TNX has been halved to better illustrate the correlations:

 

 

The reason I am sharing this with you is that the 10Y yield has risen dramatically in recent weeks to 3.11%, but Large Specs have already begun cutting their short position in 10Y Bonds. Commercials have also been cutting their long position, both from record levels, signaling higher prices and lower yields in the short term.

The 10Y Bond’s DSI also bottomed at a positively divergent 15 on Thurs last. It has been rising ever since—now at 31—also indicating lower yields. Such divergences were also observed last Thurs from a technical perspective. Since hitting 3.11%, the 10Y has already started to fall and is now down to 2.99%.

Using Fibonacci retracement levels based on the rise in the 10Y yield from a low of 2.73 to 3.11, a 61.8% retracement is 2.88%, and a 76.4% retracement is 2.82%. These are reasonable targets for the 10Y yield from here.

The DXY has also rallied from 88.94 to 94.11 so far. It could still go higher, but has shown multiple negative technical divergences recently.

Its DSI has also topped out at 91 and has fallen back to 83, even as the DXY continued to rise—also negatively divergent. The only caveat is that short positions in the DXY (long EUR) on the futures market have been falling but remain high. They need to go lower to be confident that a peak in the DXY is close. We’ll know more about that on Friday.

Suffice to say, if the 10Y yield continues to fall and its correlation with the DXY remains intact, the DXY is about to peak imminently.

Given Gold’s inverse correlation to both the 10Y and the DXY, and given what we know about its positioning, sentiment, and technicals, after a significant decline from its peak of 1369, if the 10Y yield continues to fall and the DXY does peak and reverse too, it’s safe to say that this means Gold is about to begin its rally.

In summary, everything points to a significant rally in Gold either before or immediately after the FOMC meeting on June 23. The only caveat that remains is positioning in the DXY and a higher than expected peak in the dollar.

Gold Awaits its FOMC Fuse

Written by David Brady, Sprott Money News

 

Check out these other articles by our contributors:

Looking Forward to Gold's Next Rally- Craig Hemke (22/05/2018)

Eric Sprott On The Impact Of Higher Interest Rates & The Selloff in Gold Prices - (Weekly Wrap-Up, May 18, 2018)

Ask The Expert- James Grant - May 2018

Are You Still Fearful of Cryptos?- Ryan Wilday (22/05/2018)

Comments

SurfinUSA Thu, 05/24/2018 - 20:15 Permalink

I've been waiting for the "fuse" since 2016.  I'm underwater because I believed the story that the big take-off to $1500 was going to happen at $1340.  I bought Sprott PHYS.  Had I made the better choice, I would have bought the bridge to Brooklyn instead.  

The gold price is going nowhere until the Central Banks and the Bullion Banks decide to take their heavy hand off the market.  With a monetized dollar on Keynesian life support, the chances of that happening are zero until Kingdom Come. 

So, get as excited as you want, just don't strain so much that you cause a hemorrhoid to yourself. 

 

Singelguy Thu, 05/24/2018 - 20:31 Permalink

Gold is not going anywhere anytime soon. The US dollar is still the cleanest shirt in the laundry hamper. The Federal Reserve is the only central bank that has stopped QE and started raising rates. European investors might be wise to buy gold as an insurance policy against a shaky euro. As US interest rates rise, capital will flow to the US resulting in a stronger dollar and lower gold prices in US dollars. The only caveat will be the effect of a stronger dollar on 3rd world US dollar denominated debt. If the dollar reaches a certain threshold, it could precipitate a crisis in 3rd world debt, triggering a stop to the rise in rates and maybe even another round of QE to weaken the dollar and a subsequent rise in gold prices. Time will tell.

CarthaginemDel… Thu, 05/24/2018 - 21:11 Permalink

The dollar is going to go down as soon as EU, Russia and China finally ditch the fukking petrodoll ar and put an end to it. It will happen soo er than we think. The gold will rocket

Singelguy CarthaginemDel… Fri, 05/25/2018 - 06:07 Permalink

It is not that simple. There is no other currency large enough or in wide enough circulation currently to replace the dollar. It would have to be a basket of currencies, like the SDR that the IMF is proposing, but that would be very difficult for world powers to agree on. The dollar will fall when the markets lose confidence in it. Compared to other currencies, we are a long way from that. 

In reply to by CarthaginemDel…

TradingTroll Thu, 05/24/2018 - 23:39 Permalink

I can’t see gold doing anything besides go down. People who buy things that have no utility for pure price movement have shifted their focus to cryptos.

 

The Euro is falling apart so USD will rocket higher, maybe to parity. So this part of the thesis for gold to rally is seemingly wrong.

 

CHX13 Richard Head Fri, 05/25/2018 - 02:31 Permalink

No one dumps several metric tons of paper silver/gold in a few minutes - metal they don't have for actual delivery, just "paper ounces" at the most illiquid time of market activity, to see the *market* take out the whole bid stack and all stops to drop 1 or more percents within seconds... Of course not, because this kills and scares away the buyers - is that your point?

So tell me, why would anyone buy gold if it were not for at least an expected future price movement/increase or better - an expected increase in real purchasing power ???

 

In reply to by Richard Head

CHX13 TradingTroll Fri, 05/25/2018 - 03:45 Permalink

In 40+ countries' currencies gold is at or close to ATHs - for them gold IS a very good alternative to holding $s, if they do not wish to hold worthless fiat, overvalued stocks, unrepayable bonds, or any purely $/fiat-denominated "@$$et" with a systemic counterparty risk. And the BRICS are still accumulating golden BRICS like there is no tomorrow - bcs maybe someday there isn't, at least not TWAWKI... ?!

In reply to by TradingTroll

CHX13 Fri, 05/25/2018 - 02:23 Permalink

I want to see the CONeX/LBMA officially default on their 100+ paper ounces claimed vs. the 1 ounce they have for actual delivery. Anything short of that will not stop their suppression game for this IS the suppression.

MaxThrust Fri, 05/25/2018 - 04:43 Permalink

if the 10y bond yield rises gold is capped because there will be greater demand for USD and a stronger dollar means Gold declines. Great I can buy more for less fiat.

But this author is now telling me that this correlation is not true any more (for unknown reasons) and my gold will rally. Great my gold goes up in USD that are themselves also getting stronger in value. What a great author. I like what he says even though it make little sense.