Dear Member,
Here is this week’s big picture update:
GOLD
Fundamentals:
Gold closed the year out in a weak position but managed to reverse itself after the New Year’s Day holiday on Wednesday, closing the week firmly higher. This is typical action in the gold market as a new year brings in a new perspective, and traders reassess the market and their strategies given the oversold levels gold reached into year-end.
Another significant catalyst for the rally in gold was the fact that the major commodity indices such as the Goldman Sachs Commodity Index reweight the composition of the various commodities that comprise their respective index.
Some categories are decreased and some are increased based on their outlook, and in gold’s case it was increased.
This occurs annually, and that means the index funds which benchmark against these indices must buy or sell those commodities to bring their portfolios in line with the new weightings for that year.
This explains to some extent the pop we saw in gold. But given the poor closing for the year and the weak volume during the recent rally, I expect the downtrend to resume, and it probably already has.
Technicals:
Some investors and traders give a lot of credence to a double bottom pattern but almost always, double bottoms and tops fail to hold.
This is what I expect for gold. It WILL move to lower lows. The only question is when, and the timing is still in effect to see a major low this month.
SILVER
Fundamentals:
Silver has lagged gold on the rally, largely due to the poor performance of copper and other key commodities such as crude oil. China has posted some weaker-than-expected economic numbers recently, which is hurting the industrial commodities.
Technicals:
Silver has failed to penetrate overhead resistance at the $20.40 – $20.50 level, giving it an overall bearish tone.
If that resistance area continues to hold back silver, as I expect it will, then we should see lower lows for the metal. Initial support can be expected at $19.50.
I remain bearish silver and expect major new lows, very possibly this month.
THE U.S. DOLLAR
Fundamentals:
The dollar had its largest five-day gain last week against the euro after Federal Reserve Chairman Ben Bernanke said the headwinds that have held back the U.S. economy may be abating.
Perhaps as justification for last month’s tapering announcement, Bernanke also cited “The combination of financial healing, greater balance in the housing market, less fiscal restraint and of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters.”
Traders wasted no time bidding up the dollar in response as the outlook for the euro in the coming year is looking grimmer.
In what is potentially the cause of the massive euro selloff late in the week were rumors of an IMF proposal to confiscate 10% of bank accounts in Europe mimicking the Cyprus model of early 2013.
This was confirmed in a report by German media over the weekend. Traders jumped on the euro in trading on Thursday and Friday, selling it down 4%.
The dollar remains poised for even further gains ahead.
Technicals:
With the strong rally in the dollar, the technical picture is now confirming what I did expect to occur: A breakout to the upside is in the process for the dollar that should see the greenback head higher in 2014.
The dollar now looks set to head up to retest the previous medium-term high in the 81.50 – 81.60 zone. A close above that and the 200-day moving average at 81.70, preferably on the weekly level, should see it retest the old highs in the 82.75 area.
On the downside, a close below the 79.80 level where the lower Bollinger Line rests, which held the previous week’s dip low, should renew the bear market in the dollar.
But at this stage this looks unlikely. Confirming this will be a weekly close below the medium-term low seen last October at the 79 level. Again, this is unlikely to be tested for some time to come.
Indicators are now looking decidedly more bullish with last week’s strong rally.
The Relative Strength Index (RSI) is firmly higher, reaching the 60 level and moving well past the previous peak.
Price action is confirming the RSI as well.
The Moving Average Convergence-Divergence (MACD) is also moving higher, another positive.
THE U.S. 30 YEAR BOND
Fundamentals:
Comments from Fed chairman Ben Bernanke that the U.S. economy is recovering kept the lid on any bullish hopes as traders interpreted the statement that more bond tapering may lie ahead.
In other news, a gauge of traders’ outlook for inflation rose to a three-month high, also dashing hopes of a recovery rally in bonds.
Technicals:
Bonds failed to recover from its oversold conditions of the previous week and have been unable to close back above significant resistance levels for the week.
At this stage, only a close back above 130 would give the slightest of hopes of a continuing rally in bonds.
The 50-day moving average is beginning to curl down, which is hardly a bearish sign.
The MACD histogram is also looking bearish.
I see lower prices in bonds in the weeks and months ahead; although, we can expect some support to come in at around the 126 level.
Should we see a monthly close below 126, and in particular a weekly close below 123, then look out below.
I would then expect a crash to unfold with the next major support not coming in until around the 118 level.
Best wishes,
Larry
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