Gold prices could be at crossroads
Abraham George Macro View
Since the start of the year bond yields have been moving up. The 10 year yield has risen up to 1.15%. In absolute terms it is not that big but the rate of change is huge. It is a rise of 25 basis points in a week, from a very low base.
A sharp move higher in rates can shake the confidence of many leveraged participants in the equity markets. If there is foreign selling of US treasuries, it is bound to happen. Volatility can get a bit out of control.
One thing we can be assured of is that the Fed and its enablers will be out there to respond to any destabilizing force. They will do anything to maintain confidence and stability. Don’t be surprised if they bought stocks in the open markets.
Equities
As explained in the last report the Dow and S&P are tracing out a five wave rally from its Jan 04 lows. If it is so this rally should happen starting today.
The NYSE advance/decline ratios closed marginally lower. The trading index (TRIN) closed at .62. A low TRIN relative to negative breadth increases the potential that buying power is being exhausted. A lack of buying power often leads to lower stock prices. So we are mindful of the fact that if the “five-up” sequence could be already complete.
The S&P 500 low on Jan 04 was 3663. The high so far is 3827 on Jan 08. As long as the index stays above 3784 the odds are for a further push higher. So let’s see how this plays out.
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Bonds
Bonds have closed lower for six consecutive days. The longest we have seen in almost three months. A snap back rally can take place which should be a selling opportunity. A good close below 167 can open the doors for much bigger falls.
Euro
Euro fell to 1.2132 meeting the prior low at 1.2129. Think there’s further downside potential to 1.2060. Upside should be capped at 1.2250.
Gold
Last week, Large speculators were heavily long gold. They were around 47% net long of the total open interest. The commercial hedgers have been selling gold futures and options. They are now net short of open interest by 54%.
These sort of price behaviors are often seen at market tops. I will bet on the side of commercial hedgers. As long as gold does not move above Jan 06 high at 1959, the path of least resistance is to the downside.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.