Last week (May 10 - 14), US Treasury bond prices were on the verge of slipping below the trendline which had supported them ever since 1994 and US stock markets were on the verge of a serious relapse as the Dow closed below the 10000 level for the first time this year. This week (May 17 - 21), both the US bond and stock markets have stabilised. Instead, it was the Dollar that began to struggle to hold onto its recent gains. And with the renewed weakness in the US Dollar has come solid support, followed by a useful upmove, in the nearly two-month old $US Gold correction.
For the first time in eight weeks, the $US Gold price shows a GAIN on the week just ended, quite a useful gain too as you can see from the charts. There has been a so-far quite subtle change in outlook. It has been generally accepted since the beginning of the year that the Fed was going to start raising official US rates at some point, but up until the last FOMC meeting on May 6, most thought that they would wait until the November 2 Presidential elections were out of the way.
That changed with the communique from the last FOMC meeting. It is now regarded as almost a certainty that the Fed will raise rates (by 0.25%) at their next official opportunity to do so, the FOMC meeting on June 29-30. The conjecture now is will that rise be "enough", or will they do it again before the election, or how many times will they do it before the election.
But the main conjecture, which is being discussed mostly in private - because few are game to start speculating about this one in public - concerns the shape of the US yield curve. The US yield curve, the difference between short-term rates and long-term rates, is much steeper than anywhere else. To bring the yield curve into alignment with the rest of the world would require either a VERY sharp (1.5-2.5%) rise in short-term rates or an equally sharp fall in long-term rates. Not many are betting on a fall in long-term rates. Concern is slowly but surely growing that the Fed might have to raise a lot more and a lot more quickly than might be preferred.
Here are the relative performances of $US Gold, the $US Index, and the Dow since Gold broke above $US 300 to stay on March 27, 2002:
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If you doubt that Gold's breaking back above the $US 300 barrier to stay in March 2002 was a "sea change" for world markets, a glance at the percentages in this table should settle the matter beyond all reasonable doubt. As you can see, that has not changed despite Gold's current correction.
As you can see on the daily chart, Gold has now definitely found support in the mid $US 370s and has broken higher. For the first time since it lost contact with the $US 420 level, the Gold price has closed above BOTH its 10 and 20 day moving averages.
On the weekly bar chart, Gold remains below its longer-term (200 day) moving average bit has just enjoyed its first UP week (up $US 8.40) in the past eight weeks. This is the first sign of support since the correction began, and the uptrend line is still perfectly intact.
Here's what we said about the point and figure chart last week: "Gold hit that level (its uptrend line) with a close of $US 374.90 on May 13 before gaining $US 2.10 on Friday to cloe the week at $US 377.10. This line 'should' provide support, it will if we get a close of $US 378 or higher in the coming week.". As you can see on the chart, the line DID provide support - SOLID support.
Here's another perspective - a comparison between Gold's 2002 low and its present price and the $US index 2002 high and its present "price". All data is on CLOSING levels:
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The Fed governors have again been out in force this week to assure all that inflation is "within the bounds of price stability" and that the Fed can indeed afford to be "measured" in its easing of "policy accommodation". But all the talk around these Fed reassurances is about HIGHER rates and whether the Fed can pull off a rate RAISING timetable which will not hobble or even stop in its tracks the present economic "recovery".
ANY rise in official US rates will have a disproportionate effect on the risk/reward ratio currently enjoyed by participants in the US Dollar "carry trade". ANY unwinding of this carry trade will diminish the demand for US Dollars far more than can be replaced by the expected 0.25% rate rise, a rise which is not expected for almost six weeks.
Thus, the pressure on the US Dollar is again growing, and is seen to be growing. This is both for the reason already stated and also because the Fed is NOT expected to raise fast enough to maintain the Dollar's attractiveness as a "safe haven" if part (or all) of the rest of the world keels over. The fact that US investment markets did NOT benefit from the recent severe falls in Asian (and to a lesser extent European) stock markets has been noted.
This weekend, both the G-8 Finance Ministers and the OPEC cartel are meeting. In early June, the main G-8 meeting takes place in the southern US. The Fed's doesn't meet again until the end of June. This is a perfect situation for Gold to regain some of its recently lost lustre. Gold rose in $US terms this week, it didn't rise much in terms of other major world currencies. The last time THAT happened was in late March. We're waiting for a replay. Stay tuned.