“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Sunday, May 4, 2014

U S Interest Rates Driving Gold Price ( along with Ukraine )

Sorting out the movements in the price of gold recently has been like guessing at the weather forecast. Geopolitical concerns, ( Ukraine ) are keeping a firm bid underneath gold as safe haven buying is focused on the potential for further escalations in those simmering tensions. Other factors are working to pressure it lower.

Having said this, I do want to post up a chart for those who are traders and are tracking fundamental factors driving the price of the metal.

I have mentioned many times now that I am of the view that US interest rates, and more accurately, interest rate outlooks, are either providing support to the metal or are working to add to headwinds.

Look at the chart below in which a comparison is made to the yield on the Ten Year Treasury Note and to the gold price over at the Comex  ( RED LINE ).



Go back to November of last year and notice that as the yield on the Ten Year rose, gold headed lower. When the yield on the Ten Year fell, gold tended to rise. The relationship had not been that close prior to November. If you look at the July - mid-October time frame, you can see that the two markets tended to actually rise and fall in harmony for a while.

Clearly in November the market shifted in its perceptions and began looking at interest rates more closely in determining whether or not to allocate capital into gold. For nearly three months, the markets moved in a near perfect inverse manner.



In early February of this year, that began to change  and while the yield on the Ten Year moved sideways, gold prices rose. Then in mid-March interest rates began to rise and gold prices resumed their inverse relationship and moved lower once again. In early April, Ukranian events erupted and that brought about a safe haven bid into bonds knocking interest rates lower. Gold responded by moving higher. Then as fears subsided interest rates moved back up again and gold moved lower. So far in May, interest rates have continued moving lower as safe haven plays are still around due to Ukraine and gold has moved back above $1300 as a result.

Here is my point in all this - the wild card for gold prices at this time are the events in Ukraine. As long as investors are worried over events there, interest rates are going to stay low due to safe haven flows pushing bond prices higher and thus interest rates lower.

If Ukraine events do subside ( and right now that does not seem to be the immediate case ) I would look for interest rates to start rising again meaning that gold will come under renewed selling pressure.

Here is the takeaway from all this - as long as US interest rates stay subdued, the US Dollar is going to have trouble rallying and that should tend to support the gold price. Take away any safe haven buying for any reason, and rising interest rates should bring a bid into the US Dollar and that will pressure the metal.

What do we get next? Who knows? The truth is no one does. Remember that when the predictions start up again. The market's opinion is the only one that matters.

26 comments:

  1. Thanks Dan!
    Very useful as usual.
    Ukraine : violence always bring more violence.
    If the situation worsens, I will be watching next dominos :
    1) Russian regular army entering Ukraine
    2) War between Ukrainian and Russian regular armies
    3) Nato / West supporting by any means the Ukrainian regular army : the 21st century equivalent of 1939 "Phoney War".
    4) Russia invading the rest of Europe, just as in 1940 Germany invaded France and overran its unvincible army.

    Of course, for the optimists, there is still some way to go before we reach 4) ...but each domino should imho be an additional support to gold prices...if that still matters then.

    ReplyDelete
    Replies
    1. Dear Hubert,
      1. you sound french, and are making a joke about the unvicible army?
      2. Putin is much more cold blooded than AH.
      3. Landwar (outside the financial sector) is not the tool of this century.
      A modern nation ("good's own ...") can do much more harm to a country by forcing it into modern macroeconomic behavior. (via the IMF, e.g.)
      4. When the market regards the situation in Ukraine/borderland as stable/predictable, gold could come off (=down) as it did on that Sunday when Putin invaded Krim (Crimea).
      --> Just my opinion !
      Thanks to all who are contributing here!

      Delete
    2. Hi Alex,

      1. I probably sound french due to the perfection of my english writing... but I would sound even more if you could actually hearRRR me :)

      2. Putin is not the only player of the game. He can be pushed to agression. Invade. Plunder. Dictate conditions of a cease fire. That may sound crazy now. Doesn't sound more crazy to me than the idea of a ukrainian army supported, trained and supplied by European countries to shoot at russian soldiers. Whose army is prepared in Europe for such kind of confrontation? It does make me think about the Phoney War, really.

      3. yes, but war is upon us, whether you want it or not.
      OK, forget the last one, it's from Aragorn in Lords of the Ring.
      Still, landwar may not be the tool of this century, armies still exist...and are on the move. So at some point, armies ARE being used, beyond the mere saber rattling.
      All I see is the fast deployment of russian and ukrainian armies which seem to be pretty real 21st century armies to me.

      http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/05/Ukraine%20troop%20map.jpg

      Let's hope I'm wrong.

      Delete
  2. Dan,

    What would the gold/10yr yield chart look like with the USDX overlaid on it?

    One would expect that during periods of declining interest rates there would be a corresponding rise the USDX level, yet that does not seem to have been the case in recent history as the USDX stays mired in the 79 to 80 range.

    Can you comment on this apparent divergence?

    ReplyDelete
  3. Ukraine is clouding most markets at the moment. I would also argue that a slow down in the economy is also driving down the 10yr yield.

    ReplyDelete
    Replies
    1. Richard Clouting;

      I agree with you on both part of your comments. traders have been pushing rates slightly lower on lackluster economic news. that is why we saw that rate spike when the market initially got the surprise payrolls number last week and the upward revision to the previous report. Then the Ukraine situation had those helicopter downings and the rates dropped lower again as safe haven flows pushed the bonds higher with rates moving inversely.

      As long as Ukraine is around and on peoples' minds, gold will continue to draw buying support. The question is whether the situation over there flares up further or winds down. gold will take its cues from that.

      As a trader, one has to be very quick on the draw when trading gold at this time.

      Delete
  4. Edelson calls the bottom in Gold/Silver ?
    How good is this guy's track record ?
    http://www.moneyandmarkets.com/putin-gold-and-silver-what-you-need-to-know-right-now-60797

    ReplyDelete
  5. Sure glad I have a little INSURANCE and don't believe everything the Marks of the world print. These markets are insane. God is in control. Man's ability to understand is limited. Take care of yourselves. Stay small in relation to him.

    ReplyDelete
  6. Dennis Gartman like Gold action ( excerpted from Kitco News)
    "
    Gartman: Friday Rally Was Upside Reversal On Rising Open Interest

    Monday May 5, 2014 8:25 AM

    Gold posted an upside reversal on Friday and open interest rose as well on the rally, which bode well for the metal, says investor and newsletter writer Dennis Gartman. While he tends to favor holding positions in the yellow metal against other currencies, Gartman points out that gold in dollar terms made an upside reversal for the second time in two weeks. This is where first it trades below the previous day’s low, then turns around and closes above the previous day’s high. Meanwhile, gold/yen and gold/euro are at two-week highs and the metal is also rising in a number of other currencies. “Something is taking place in the gold market that we find impressive,” Gartman says. Finally, he points out that Friday’s rally occurred on rising open interest, as reflected by preliminary Comex open interest data. This would not have been the case if the rally was simply due to short covering, Gartman points out. “Finally, and also supportively, gold mining shares led gold itself,” Gartman says. “That is how gold bull markets work; shares lead bullion.”

    ReplyDelete
    Replies
    1. Gartman is still active?
      (is it that Gartman from the 80ies?)

      Delete
    2. Not sure; that could be a Gartman Sr. if at all.

      Delete
  7. Let's not get crazy gold is only 1314.

    ReplyDelete
    Replies
    1. lets not forget one of these monkeys is short half a bill at 1300 … so … in any case better up than down

      Delete
  8. As Dan has commented many many times...and I do trust him. Gold is trading in a very broad range. 1180-1400 or so with most of the trading in the last 6 mos at the lower level. I have not lost interest in the yellow metal at all, hence my sticking around. However, until a major breakout occurs, staying small sane and without all the hype. The current action driven by the Ukraine is underpinning this market, the dollar is trading in a range as well but on the lower end. I do believe that everything is manipulated right now by pretty much everyone in the financial markets. Information is CLOUDY and will remain so until there is some clarity. The Ukraine situation could blow sky high and take the manipulators by surprise. Look this world changed and changed big a long time ago. The derivatives have been consolidated into the large banks. The CB's are not going to let this go at their own peril...so good luck all. :)

    ReplyDelete
    Replies
    1. I'm checking more precisely the 2day time unit which is heading down with both bollinger bands and its ma20 at 1315.
      Above, you have a range on the daily time unit, with bollinger bands horizontal and top one at 1325.
      It's interesting to see how gold is going to behave right now, no need to wait for 1400 imho.

      Delete
  9. Thanks Hubert...maybe cash in this quick small gain and wait again..sheesh? Just exhausting. Should have crushed the Banks in 2009, we would be in a revival by now, instead just keeping small biz staved and big biz stealing everything. I cannot stand the consolidation, control and big govt. I will pray as that gives me comfort. Since the beginning of time however Babel's form and fall. Now that it will occur in the US, people will have to suffer while the big boys keep on getting richer. Evil sure is painful and Dan is so correct.

    ReplyDelete
  10. GDX/GLD ratio plummeting again, gold stocks not following strength in gold.

    Meanwhile, Facebook and Tesla, the stalwart leaders of the NDX 100 are green today, despite the 200+ warnings of Ukraine problems on jsmineset.com

    LOL.....

    ReplyDelete
  11. Mark after Lerner is jailed Obama care is repealed we can talk again. She will be sorry she ever trusted the Socialists.

    ReplyDelete
  12. http://davidstockmanscontracorner.com/the-devils-beltway-workshop-why-the-warfare-state-must-be-dismantled-part-1/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+AM+Monday this is Stockman's take today on Ukraine, and I think a worthwhile read. from Sparks of course, Angelo

    ReplyDelete
  13. History of communist and Socialists in the Ukraine..
    http://davidstockmanscontracorner.com/the-devils-beltway-workshop-why-the-warfare-state-must-be-dismantled-part-1/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+AM+Monday

    ReplyDelete
  14. Beat me to it Brassey..great find and read huh...more poor citizens caught in the powerful government web of lies..both sides are brutal liars..Leave these people alone..god help them

    ReplyDelete
    Replies
    1. Yeah Wolf, same old same old as the monsters are at it once again; sad

      Delete
  15. Steve, the newly non existent $17 Billiion promised is going to chain the IMF(USA) to a win..win at all costs mentality. Putin on the other hand will not allow this to happen. Such a terrible tragedy. We need less blooding controlling leaders.

    ReplyDelete

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