GOLD CONTINUES RALLY BUT NEARS RESISTANCE -- SO DO GOLD MINERS -- EURO STAYS FLAT -- PULLBACK IN BOND YIELDS ARE HELPING GOLD BUT MAYBE NOT FOR LONG -- REBOUND IN SAFE HAVEN BONDS AND THE YEN NOT THAT IMPRESSIVE
GOLD REACHES THREE-MONTH HIGH... The price of gold continues to rise. Chart 1 shows the Gold Shares SPDR (GLD) trading at the highest level in three months. It has reached a point, however, where some overhead resistance may appear. For one thing, it has retraced 62% of its November/December decline. For another, there's potential resistance along its October low. Its also still well below its 200-day average and a resistance line extending back to last August. Its 14-day RSI line (above chart) has reached overbought territory near 70 for the second time in a month. Gold shares have been rising as well. But they too are up against potential resistance. Chart 2 shows the VanEck Vectors Gold Miners ETF (GDX) having reached a potential barrier at its early November peak. Its 14-day RSI line has reached overbought territory over 70 for the first time since last July (see circle). Two factors supporting gold are a soft dollar and pullback in bond yields.
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Chart 1
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Chart 2
EURO HASN'T TURNED UP ... The rally in gold has been helped by a 3% decline in the U.S. Dollar Index since the start of the year. Last Wednesday's message pointed out, however, that gold and the euro were highly correlated. That's because both trend in the opposite direction of the dollar. Chart 3 shows the euro trading sideways since the start of the year. It has yet to clear initial resistance at its early December peak. And it's overall trend remains down. The euro carries a 57% weight in the Dollar Index, and has the most influence on the dollar's direction. In my view, the euro would have to rise a lot more to support a continuing rally in gold.
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Chart 3
PULLBACK IN BOND YIELDS HELPS... Gold is also getting help from the pullback in bond yields. The green bars in Chart 4 show the uptrend in the 10-Year Treasury Yield ($TNX) trading sideways since mid-December. You'll notice that the December peak in the TNX coincided with an upturn in the price of gold (orange line). Notice also that upturns in the bond yields last July and early November pushed gold sharply lower. So the direction of bond yields should play an important role in gold's future. So should the direction of the dollar which is influenced by the direction of bond yields. I believe that bond yields are eventually headed higher along with the dollar. If that happens, it's hard to imagine a major move to the upside in gold assets.
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Chart 4
BONDS AND THE YEN BOUNCE WITHIN DOWNTRENDS... Chart 5 shows the 7-10 Year Treasury Bond iShares (IEF) in a modest rebound since December. It's now testing its January high. The current rebound is taking place within the context of a bigger downtrend. The same is true of the Japanese yen, another safe haven. Chart 6 shows the yen rebounding over the last two months. That also has the look of a rebound within an overall downtrend. Gold is positively correlated to both. As a result, it would take much stronger evidence of a new uptrend in bond prices and the yen to signal a serious move into safe havens in general, including gold. It goes without saying that stock market direction also plays a role. Rising stock prices reduce the need for safe havens. It would probably take a serious selloff in stocks to push safe haven assets much higher.
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Chart 5
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Chart 6
COPPER STOCKS STILL OUTPACE GOLD ... My January 27 message showed the price of copper rising much faster than gold. Today's message is using the same comparison but with stocks tied to each commodity. Chart 7 plots a ratio of the Global X Copper Miners ETF (COPX) divided by the VanEck Vectors Gold Miners ETF (GDX). The ratio turned up last August and surged higher after the November 8 election (reflecting higher copper and lower gold prices). The ratio has been consolidating since mid-December, as gold prices outpaced copper. I suggested on January 27 that copper (or copper stocks) offered a better inflation hedge than gold assets. Here's why. Higher inflation expectations based on more infrastructure spending (and tax cuts) should accompany a stronger economy. That should lead to higher interest rates and, most likely, a stronger dollar. It should also be better for stocks tied to base metals (like aluminum, copper, and steel) than to gold. Chart 7 also shows a strong correlation between the copper/gold ratio and the trend in the 10-Year Treasury yield. Both appear to be consolidating within uptrends.
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Chart 7
EMERGING MARKETS ISHARES NEAR UPSIDE BREAKOUT... The recovery in commodity prices is also lending support to emerging markets. That's especially true for commodity exporters like Brazil and Russia, along with their currencies. That's helped emerging market stocks outpace developed market stocks over the last year, and at the start of this year. Chart 8 shows MSCI Emerging Markets iShares (EEM) challenging highs reached last autumn. An upside breakout would put the EEM at the highest level since mid-2015. There's a slight caveat, however. EM stocks have done better since January as Treasury yields and the dollar weakened. An upturn in those two markets could slow the flow of money into EM assets. A continued rally in commodity prices, however, might be enough to overcome those two headwinds. Chinese stocks (the world's biggest importer of commodities) are also off to a strong 2017 start, as are other Asian markets.
