RISING OIL MAY BE STARTING TO WORRY THE MARKET -- FALLING BOND YIELDS MAY BE THE REASON WHY GOLD AND GOLD STOCKS ARE BOUNCING OFF SUPPORT LEVELS
OIL ISN'T DEAD YET ... A lot of recent optimism on the stock market and the economy has been predicated on the view that the historic rise in oil prices has probably ended. A lot of economists have also declared the major bull market in commodities over. Both of those predictions may prove to have been premature. Over the last two weeks, the price of crude oil has bounce off its 200-day moving average and then risen to the highest level in more than a month. After a pullback yesterday, it's trading back over $54 today. Chart 1 reflects the recent improvement in the price of crude and suggests a possible retest of its early April high. That explains the recent move back into energy stocks. It may also explain why the recent market rally is running into some profit-taking. Crude isn't the only commodity that's turned up recently. The CRB Index of commodities is rising again after bouncing off major support levels.
Chart 1
CRB INDEX IS BOUNCING AGAIN ... After correcting downward from its mid-March high, the CRB Index of commodity prices has also bounced off its 200-day moving average and is turning higher again. It's ending the week at the highest level in more than a month and has exceeded its 50-day moving average and a two-month down trendline (Chart 2). In Friday's trading, eleven of its seventeen components traded higher. One of the strongest was copper whose 3% gain put the industrial commodity at a new sixteen-year high. In the precious metals group, a two-month high in silver has started to pull gold prices higher. That helped make gold stocks one of the week's strongest stock groups. And that's coming at a good time.
Chart 2
GOLD INDEX CLEARS 50-DAY LINE ... The Gold & Silver (XAU) Index has risen back above its 50-day average for the first time in two and half months. The XAU/SPX relative strength ratio has also turned up for the first time since mid-March. Although this week's XAU upturn has been relatively modest, the level that it's bouncing from may carry good news for the precious metals group. The weekly bars in Chart 4 show that the XAU is bouncing off the bottom of a trading range that started at the end of 2003 near 110. After a failed retest of that overhead resistance barrier in the fourth quarter of last year, the XAU is now testing the lower end the price range formed in the spring of 2004 (see circles). That makes this a logical area for new buying to start emerging in the precious metals group.
Chart 3
Chart 4
BULLION IS BOUNCING OFF FEBRUARY LOW... The next chart shows bullion bouncing off chart support formed during February. That also represents a key support for gold and a logical spot to expect some bottom-fishing. The ability of gold to bounce off its February low also holds out the possibility that bullion may also be in a normal trading range within a long-term uptrend. Although I normally compare gold to the dollar, there's another intermarket factor that may explain the new interest in precious metals. And that's this week's drop in bond yields under 4%.
Chart 5
Chart 6
BOND YIELDS UNDER 4% MAY BE BOOSTING GOLD... Chart 6 compares the price of bullion to the 10-year T-note yield (green line) over the last eighteen months. The chart shows that gold doesn't do as well when rates are rising. The upturn in bond yields in March 2004 and again in the fourth quarter of last year led to gold downturns. The last big gold upturn last summer coincided with a peak in rates. Which brings us to this week. The fact that bond yields fell below 4% to the lowest level in more than a year may have been the main catalyst behind this week's buying in precious metals and commodities in general. Lower U.S. rates may also start to weaken the dollar which would give a bigger boost to commodities. Everyone is asking where's a good place to put new money at this point. A contrarian-minded investor might want to consider some precious-metals exposure at this point in time.
