Big Pic Update: Gold, silver, dollar and bonds ...

Issue #58

Dear Member,

Here is this week’s big picture update.

GOLD

Fundamentals:

News of House Republicans’ offer of talks to reopen the government and raise the government’s borrowing limit last Thursday sent gold tumbling after it had reclaimed the $1,300 level from weakness earlier in the week. This weak action in gold suggests further downside is imminent, particularly as news of the White House rejecting the offer failed to attract any gold buyers.

Such gold price action is entirely consistent with my view that the interim bear market in the precious metals is not yet over.

Another bearish sign for gold occurred on the announcement of the nomination of Janet Yellen to be the new Fed Chair. Yellen is known in the marketplace as a staunch dove on monetary policy, and instead of gold bulls cheering this news, the metal was sold off.

Technicals:

Gold barely held support at the critical $1,300 region midweek but crashed through it on news of a possible deal from Washington. Gold remains under pressure and a close below $1,262.50 should add further downside momentum.

SILVER

Fundamentals:

As with gold, silver sold off on the news out of Washington and also failed to reverse course when the offer was rejected by the White House, hinting at more downside for the metal.

Also not helping silver’s cause is the weak action in other industrial metals, including copper, reflecting somewhat of a weaker global economic picture with demand slowing and inflation subdued.

Technicals:

Silver initially broke through its 50-day moving average early last week but failed to hold and subsequently sold off heavily to close the week out in a bearish position.

Silver must now hold previous support at the $20.60 level but a close below this should see a quick move down to test the $19.00 level.

For the bulls, only a close back above the previous high at $22.50 will turn this bearish picture around.

Indicators are confirming the bearish bias in silver with the Moving Average Convergence-Divergence (MACD) proving a false bullish crossover on the daily level and looking to turn back down.

THE U.S. DOLLAR

Fundamentals:

News of talks to end the shutdown coming out of Washington kept a bid under the dollar which saw a huge spike up from strong support down at the 79 – 80 levels.

Traders and investors saw this as an opportunity to get back into the dollar after a three month long selloff.

I expect continued strength in the dollar for the foreseeable future as Europe’s crisis should soon return.

Technicals:

The big bullish candle on Wednesday spiking up from the strong support zone coming in at the 79.75 – 80.00 levels on the chart is a bullish signal for this market in the short term.

I maintain my bullish stance in the dollar for the medium term with minor resistance coming in at the 81.15 and 81.75 levels as noted in last week’s issue. This should be easily cleared and a close back above previous highs at the 82.75 and 85.00 levels will confirm the interim dollar bull market.

Only a weekly close back below the critical 79.75 level, where we have strong support, will we see further weakness in the dollar. But with last week’s strong showing, this is looking less likely.

Indicators are now starting to paint a better picture as the Relative Strength Index (RSI) is now making higher highs after showing a bullish divergence and confirmed by price action last week. The MACD has turned in a bullish crossover on the daily level in the dollar.

Open interest in the dollar is at multi-month lows indicating that traders may be positioning for some strength to come back into this market.

THE U.S. 30 YEAR BOND

Fundamentals:

Bears had the initial edge in this market last week but were spooked by the big news out of Washington on Thursday, giving up most of the gains made as bulls drove prices back up to close the week out in somewhat of a neutral to slightly bullish posture.

Also helping the bullish cause is the nomination of Janet Yellen as the next Chairwoman of the Federal Reserve. Considering her record as an ultra dove, the bond market cheered and came back off of its lows on Thursday.

Technicals:

The long bond is still managing to hold its 50-day moving average as traders tested this line spiking the price to penetrate this area briefly on Thursday before pushing it back off into Friday to close the week out in somewhat of a slightly bullish posture. Bulls have a slight upper hand in this market but will need to waste no time to send a message that prices are indeed heading higher.

We will need to see prices close above resistance, which is now coming in at the 134 level and then at 136, to confirm a sustainable rally in the short term. If bonds can manage this, there will be more upside left in this market. However, long-term my stance is still decidedly bearish in the long bond.

Initial support comes in at the 132 level and a close below this with a subsequent close below previous lows at the 130 level should see a resumption of the bear market. I remain bearish on U.S. (and European) sovereign bonds, intermediate and long term, and bullish on interest rates.

Stay tuned and best wishes,

Larry