Priced in Gold, Bonds Return to Fair Value While Dollar Becomes Overbought.

(Originally published on November 26, 2016 at goldtradingmastery.wordpress.com)

The election-induced carnage in the bond market finally took a breather this past week, with yields on the 30-year Treasury topping out at 3.02%. However, the dollar continued to rally anyway, rising from 0.826 mAU/$ ($1220/oz. gold) to 0.848 mAU/$ ($1178.4/oz. gold).

Last week, I was expecting to see the dollar pull back after bumping up against strong resistance at 0.833 mAU. However, it just blew through this resistance like it was made of tin foil.

As a result, the dollar is now extremely overbought and even more likely to correct soon. Here is the current chart.

one-gold-11-26-16

I normally don’t use a lot of fancy indicators in this blog. I try to just stick with simple trend lines, horizontal lines of support & resistance, and moving averages. Trading really isn’t that difficult, and I don’t like to make things seem more complicated than they really are just so that I can look smart.

In this case though, I’ve had to start using the Relative Strength Indicator (R.S.I.) and Moving Average Convergence Divergence (MACD) in order to make a better bet on where the dollar is going. The price is just moving too fast to catch a good trade any other way.

These two indicators are actually pretty simple to understand though. If the RSI at the top of the chart is above 50 but below 70, it means that the price is moving up very quickly and will probably keep going up in the near-term. If the price is below 50 but above 30, it means that the price is moving down very quickly and is likely continue going down in the near term. If, however, the RSI is above 70 or below 30, it means it is “overbought” or “oversold” and is likely to stall out soon.

MACD, shown at the bottom of that chart, works in a similar way. If the black line on the chart is above the middle and moving up, this means that the price is speeding up as it climbs. If the black line is below the middle and moving down, this means that the price is speeding up as it falls. If the black line is above the middle line but falling, it means that price is going up but slowing down as it does so and vice-versa.

The most important part of MACD to watch, however, is the red line. If the red line crosses the black line, it means that the overall trend is likely to reverse soon.

This chart shows an RSI of 80.37. This is overbought territory and is an indication that the dollar will probably slow down and fall soon. However, MACD does not yet show a crossover. So we’re going to have to watch this over the next week to see if we get a reversal signal. If so, it will be time to start preparing to buy some dollars/sell some gold.

If you are trying to accumulate savings, now is still a good time to save in USD instead of gold. If you already have gold, now is a good time to hang on and wait for a pullback. Once a pullback occurs, it might be a good idea to sell a portion of your gold and buy it back later at a lower price.

Now here’s what is going on with the bond market.

bonds-gold-11-26-16

I used the iShares 20+ Year Treasury Bond Fund for the chart this time instead of the 30-year bond price that I regularly use. I assume this will be more useful to readers as most of you probably buy bonds through ETFs anyway, instead of directly.

Bonds have been in a very, very slight downtrend all year, and this ETF has been bouncing up and down around 102 – 103 mAU the whole time. Since bonds have at least temporarily stopped falling in their dollar-price, they have moved back up to fair value in their gold-price. They may continue up until they reach around 107 mAU before falling again. Or this may be the start of a steepening to the downtrend, in which case they could stop here and reverse.

However, the RSI is currently above 50. And the MACD lines have crossed over, indicating that the downtrend is about to reverse. So there may still yet be an opportunity for a quick trade here.

If I was going to place this trade, I would put a stop at around 100 mAU and a take-profit point at about 106 mAU. However, if you’re only willing to risk your gold on one trade, you may want to wait for the dollar to pull back. The dollar-trade may be more profitable than this one.

So what about stocks?

spy-gold-11-26-16

Like the dollar, stocks are extremely overbought with an RSI of 81.96. Like the dollar, there has not yet been a MACD crossover. This needs to be watched. An opportunity to buy is likely to come soon.

One more note:

There’s been a lot of talk in the financial media as of late about inflation picking up. However, investors who specialize in commodities do not seem to believe the hype. Commodity ETFs have not seen any unusual price increase. So I don’t believe inflation is coming, yet.

So far, it appears that credit is tightening and threatening to bring on a recession. When the recession actually occurs, gold and bonds will skyrocket in value while stocks will sell off. So now is the time to hold onto dollars and stocks while keeping an eye on the economy for signs that the crash is near.

However, if commodity indexes start to move higher, this will be an indication that the economy might just be able to survive the rising bond yields. In this case, we’ll have high inflation or even hyperinflation instead. In such a case, stocks will keep pace with inflation while commodities and gold will skyrocket and bonds will get slaughtered.

So for now, holding onto dollars is a good idea. But I’ll be keeping an eye on commodity indexes in case that situation reverses.

Happy trading, and see you next week.