Issue #76
Dear Member,
Here is this week’s big picture update.
GOLD
Fundamentals:
Gold lost more ground last week, shedding over $40 on the back of the Fed minutes released at 2 p.m. EST on Wednesday — once again surprising the market with indications of an imminent tapering as early as the December meeting. Gold immediately sold off on the news and has failed to show any resilience heading into the weekend. Not surprising as my models remain bearish.
In other news not supportive to gold were reports out of Germany, the second largest holder of gold reserves, indicating its central bank sold gold in the month of October. Also, a continued decline in holdings of a major ETF and weak global physical demand continue to weigh on the price of gold.
What is perhaps disconcerting to the gold bulls was the fact that the dollar was weaker through the week yet gold failed, which possibly caused more traders to be unnerved and pull out whatever support was left in the market.
The recent closing below $1,262 in gold puts it back on track for a major January 2014 low.
Technicals:
Technically, gold is now in a weak position, and in the weeks ahead, looks even more likely than ever to be heading to new lows below those of June, especially given the weak close for gold on Friday below the previous $1,262 level. We may get a corrective bounce for a week or two to test resistance, but this will likely be short selling opportunities for the bears as prices head lower.
The 50-day moving average now sits at just above the $1,300 level and any retracement we get will likely test this area. The chances for gold to clear the $1,300 level to the upside are looking slim, yet this is what bulls need to achieve at a minimum to prevent gold from falling further.
The next level of firm support is $1,210, where I expect some short covering in gold and some sort of a bounce to develop. However, if we see a close below $1,210, gold is likely to head straight down to retest the lows of June. If we see a weekly close below this area, then things will get even uglier for the yellow metal and we could potentially face a wash out in this market with a swift move lower to test the $1,100 area and possibly even $1,050.
SILVER
Fundamentals:
Silver performed just as badly as gold last week, if not worse, also on the back of the Fed minutes indicating a taper sooner rather than later which caught the market off guard. Further exacerbating silver’s weakness was weak inflation data that came out showing the consumer and producer price indexes were below expectations suggesting that tapering may be delayed only to find the minutes showing otherwise.
Commodities in general did not like the inflation outlook and reflected this by another mediocre showing for the week as seen in the Continuous Commodity Index. This no doubt added to the pressure in silver that has bulls now clearly on the back foot and not even a weaker dollar was able to come to the rescue.
Technicals:
Silver’s poor technical outlook worsened last week with continued selling that saw it lose almost another $0.90 for the week. I have been warning against a close below important support at the $20.40 level on a weekly basis and this was exactly what happened with a close below the $20 level. Silver may now retrace somewhat back to the $20.40 level as we head into next week where it will find some strong resistance.
On the downside, there is some support coming in at around the $19 level. But a close below this and things will get nasty as the lows of June will likely be tested where I expect initially some support to come in. However, this is unlikely to hold and new lows should follow. If silver is to make new lows, then we should see it test the $16 to $17 level quite quickly.
THE U.S. DOLLAR
Fundamentals:
The Fed minutes, which revealed to the surprise of the market of an imminent tapering within the next few meetings, sent the dollar higher on Wednesday only to give back the gains the following two days.
The dollar perhaps may have held those gains if not for the strong IFO report out of Germany showing growth in Germany’s business climate index. Also, it was reported that Germany’s economy had expanded by 0.3% and that gave the euro a temporary boost. The IFO survey also expects stronger GDP numbers for the last quarter and 1.7% for 2014.
PMI data released earlier in the week confirms the IFO report of improving economic conditions for Germany with its composite headline index increasing from 53.2 in October to 54.3 in November, the highest level since January and above the 50 level threshold for seven consecutive months.
However, the euro’s recent strength is short-term.
Technicals:
The dollar spent the week pretty much stuck in a trading range that saw support coming in at the 80.50 area and resistance at around 81.50. It does look like we are going to see the dollar consolidate a little more, perhaps into next week, and potentially trade down to test the 50-day moving average currently standing at the 80.40 area before heading back up for another rally.
For any rally to be convincing I would like a close above 81.50 with a subsequent weekly close above 82.80. Initial resistance can still be expected at the 200-day moving average which now stands at around 81.86. One positive for the bulls is that the 200-day simple moving average line is still sloping upwards suggesting the medium- to long-term trend in the dollar is still bullish. Beyond that, we can expect stronger resistance for the dollar at the previous highs in September coming in at the 82.80 to 83 level.
On the downside, initial support for the dollar can be seen at the 50-day moving average currently standing at the 80.40 level. We may see the dollar consolidate and test this level and even perhaps penetrate it briefly next week or the week after before heading back up.
Indicators are now showing some caution to the bulls as the Relative Strength Index (RSI) and the Moving Average Convergence-Divergence (MACD) are threatening to break below key levels. The RSI currently stands at the 51.21 level and is looking to break below the previous low and the 50 barrier. MACD is forming a bearish crossover and any further slide in prices next week will likely confirm this pattern.
THE U.S. 30 YEAR BOND
Fundamentals:
Following the big news on Wednesday with the release of the Fed minutes, traders wasted no time dumping the long bond in anticipation of a sooner than expected Fed taper only to see the bulls come back into the market to alleviate the selloff into the close for the week.
Bulls may have taken cues from some Fed commentary speaking in favor of accommodative monetary policy for years to come although they are still weary enough to be bidding the market up too much in light of next week’s Treasury issuance of two, five and seven year notes.
As I have noted in our recent reports, I do not expect a complete breakdown in the long bond just yet, although it may be right around the corner. I am looking out for signs of this but with equities at elevated levels and fund managers potentially ringing the register into year end on gains in equities, there is a chance of a decent rally in bonds in the near term.
Technicals:
With Wednesday’s big selloff in bonds, further technical damage was incurred in this market albeit limited thanks to the relief rally seen on Thursday and Friday.
If we do see continued selling in bonds, with a close below the lows seen in September, then the picture will look grim for bonds and the potential reverse head and shoulders pattern will be negated. Support in bonds will be last week’s low and then the lows of September where bulls will need to prevent any closing below to stand any chance in this market.
On the upside, I see resistance coming in at the 132.30 level, which is the 50-day moving average and the highs of last week. Bulls will need to get past this area with a closing above it to then have a chance of reclaiming the 134 to 135 levels where I expect firmer resistance. Only a weekly closing above this can we see a renewed interim bull trend for bonds.
Indicators are still showing a lack of conviction for either side on the daily level with the RSI meandering sideways between the 40 and 50 levels and the MACD, which was looking for a bullish crossover last week, now showing hesitation.
Stay tuned to your inbox.
Best wishes,
Larry
