PRECIOUS METAL HAVE TAKEN A HIT OVER LAST TWO WEEKS -- RISING RATES ARE PART OF THE REASON WHY -- WHY CURRENT FED POLICY OF KEEPING RATES SO LOW MAY BE HOLDING THE STOCK MARKET BACK
GOLD BREAKS 200-DAY LINE -- GOLD MINERS TEST SUPPORT... A couple of weeks ago (February 28) I wrote a positive article on precious metal assets. The entire group has taken a big hit since then. Two contributing factors have been more positive comments from the Fed, which imply little or no more quantitative easing. That pushed U.S. bond yields sharply higher earlier this week and gave a big boost to the U.S. dollar. Stocks also rallied sharply. That combination pushed gold prices sharply lower, and gold miners along with it. Chart 1 shows the Gold SPDR (GLD) tumbling to a two month low on rising volume. It has also fallen below its 200-day moving average. Even with that short-term damage, however, the GLD chart doesn't look that bad. A possible "neckline" can still be drawn over its November/February highs. That makes the current selloff a potential "right shoulder" in a bottoming pattern. The circled area shows potential chart support formed last September and October (the potential "left shoulder"). The price of gold needs to stay above that support zone to keep any bullish hopes alive. Eventually, GLD will also have to break the "neckline" to actually turn the chart bullish. Gold miners have fallen along with bullion. Chart 2 shows the Market Vectors Gold Miners ETF (GDX) falling into a test of its December low. A couple of weeks back it was testing February resistance at 58. It failed that test of resistance. The question now is whether it will survive a test of support. The February 28 message also showed the Gold Miners Bullish Percent Index ($BPGDM) on the verge of a point & figure buy signal. Chart 3 shows the p&f buy signal taking place at 46. That buy signal, however, has been negated with a new p&f sell signal at 36. Obviously, my earlier enthusiasm for precious metals has been considerably dampened.

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Chart 1

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Chart 2

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Chart 3
TREASURY YIELDS JUMP SHARPLY ... Treasury yields jumped sharply this week following Tuesday's Fed statement which was more upbeat on the economy. Chart 4 shows the 5-Year Treasury Note Yield ($FVX) jumping to a four-month high and exceeding its 200-day average (red line). It still remains below its October high, however, which is a more important barrier. Chart 5 shows the 10-Year Treasury Note Yield ($TNX) in essentially the same position. Although I believe that interest rates are bottoming, it's not clear yet if this week's upward surge is the beginning of that uptrend, or an over-reaction to the Fed's comments. Fed policy seems designed to keep bond yields depressed, which could limit this week's upturn. The direction of rates has some bearing on the price of gold. As a rule, rising rates hurt gold.

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Chart 4

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Chart 5
IS THE FED HELPING OR HURTING STOCKS ... Two rounds of quantitative easing, combined with the current Operation Twist, have been designed to keep interest rates from rising. Operation Twist is specifically designed to keep bond yields down. One side-effect of keeping yields so low has been to drive investors into higher-yielding (and riskier) assets like stocks, which is what has happened since Operation Twist was announced last September. By keeping bond yields from rising, however, the Fed is also preventing bond prices from falling. That has given bond holders a false sense of security, and may be encouraging investors to stay in Treasuries too long. Chart 6 shows the 10-Year Treasury Note Yield peaking near 15% in 1981, and falling for the thirty years since then. It started this year below 2% (which is below the rate of inflation). That has caused a thirty-year bull market in Treasury bond prices (bond prices rise when yields fall). It seems unrealistic to expect bond yields to fall much further, or even to stay at these historically low levels. In an economic recovery (with higher inflation) it's normal for bond yields to rise, and bond prices to fall. That bond money usually moves into stocks. The Fed may actually be preventing that from happening by keeping bond yields artifically low. The Fed did the same thing between 1942 and 1950 to help contain wartime inflation and to pay wartime debt. It wasn't until the Fed stopped intervening in the bond market during 1951 that bond yields surged and prices fell. That helped a launch a major bull market in stocks that lasted for nearly two decades. It could be argued that the current Fed policy is actually holding the stock market back by preventing that normal rotation out of bonds and into stocks.
