DOLLARS WEAKENS AS TWO-YEAR TREASURY YIELD FALLS TO THREE MONTH LOW -- THAT COMBINATION IS PUSHING PRECIOUS METALS HIGHER -- GOLD HAS RETRACED 50% OF ITS PREVIOUS BULL MARKET WHICH PUTS IT IN A POTENTIAL SUPPORT ZONE
DOLLAR FALLS WITH U.S. RATES... U.S. interest rates have been dropping on reduced expectations for a Fed rate hike this year. Chart 1 shows the 2-Year Treasury Yield falling yesterday to the lowest level in three months. That's important because that shorter term yield is more sensitive to Fed moves. Bond yields have also been falling. One of the side effects of lower yields is a weaker dollar. Chart 2 shows the Power Shares Dollar Bullish ETF (UUP) dropping as well over the last month. That's because lower rates make a currency less attractive. A weaker dollar has a lot of intermarket implications. The most direct intermarket effect is higher commodities and stocks tied to them, which includes energy and materials. The combination of lower rates and a weak dollar is especially good for precious metals and their related stocks.
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Chart 1
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Chart 2
GOLD EXCEEDS 200-DAY AVERAGE... Precious metals like gold and silver have had a very good month. The daily bars in Chart 3 show the Gold SPDR (GLD) moving above its 200-day average yesterday for the first time May. It has also broken a falling resistance line drawn over its January/May highs. Gold also established a bullish pattern of "rising peaks" and "rising troughs" since August (as has silver). I suspect the new strength in precious metals is part of a potential bottoming process in most other commodities. That includes copper, energy, and agricultural commodities. Gold miners are following the commodity higher. The daily bars in Chart 4 show the Market Vectors Gold Miners ETF (GDX) also exceeding its August high to turn its short-term trend higher. It still has to clear its 200-day average, however, to signal a more substantial rally. The GDX/SPX ratio (below chart) also shows new relative strength for gold (and some silver) miners.
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Chart 3
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Chart 4
GOLD IN POTENTIAL SUPPORT ZONE... Gold has been a terrible performer since 2011, as have most commodities. That period of weakness, however, may be ending. Previous messages have shown prices of copper and crude oil (along with their related shares) starting to bounce off major support while in major oversold conditions. The same may be true of precious metals. The monthly bars in Chart 5 show that the spot price of gold has retraced exactly 50% of its ten-year bull market between 2001 and 2011. The fifty percent retracment line often acts as a major support level. It's also noteworthy that the 14-month RSI line (top of chart) has been trending sideways near oversold territory. All of which suggests that precious metals may be scraping bottom. As I've suggested in previous messages, early signs of a potential commodity bottom should have a positive impact on global stocks, especially those tied to commodities. That may help explain why emerging markets have been rising lately, along with their respective currencies. The fact that Chinese stocks are rebounding may also carry good news for commodity prices.
