Update for Week Ending 5-19-17

The profit-taking from gold traders last week moved the dollar down to the 10 and 21 EMAs. I expected the price to reverse there.

But instead, some news came out that there was supposedly a memo proving President Trump committed obstruction of justice. The media claimed that the memo proves President Trump threatened to fire F.B.I director James Comey if he did not end his investigation of alleged ties between the Trump administration and Russia.

The day that the memo news broke, Trump responded by appointing an independent investigator to continue the Trump/Russia investigation in order to prove that he had nothing to hide.

Gold-value of the U.S. dollar.

This action calmed markets. But in the meantime, the gold-value of the dollar fell below the 21-day EMA and kept falling. It got all the way down to 0.7905 mAU (0.0007905 troy oz.) before bouncing back up to 0.7969 mAU (0.0007969 troy oz.) by the end of the week.

In addition to the 2011 uptrend line, which provides very strong support, there is also a new upward-sloping trendline that has developed.

If this trendline is broken, the price will probably fall to the bottom of the symmetrical triangle at around 0.7809 mAU (0.0007809 troy oz.). But it’s unlikely to fall any further than that in the short-term.

On the other hand, the 100-SMA is now providing resistance. So it may take a while for the dollar to rise above 0.8126 mAU.

Nevertheless, I expect the dollar to continue rising from here until it gets close to the top of the triangle at 0.8687 mAU, at which point I expect it to reverse and go down again.

One counter-argument against this view is that MACD is crossing-over and RSI is now below 50. These are signs that momentum for the dollar is bearish. So it may be that we are about to see one more run down to the bottom of the triangle before the fall in the dollar has exhausted itself.

The bottom line is that holding cash is very low-risk right now. The price of gold in USD is probably going to go down over the next few weeks or months. So there’s very little to gain by holding gold instead of dollars.

However, if the 2011 uptrend line is broken, that will change everything. Or if the USD price of gold falls suddenly to around $1151.07, this will also change my opinion.

Gold-value of U.S. Treasuries.

I stated last week that I thought U.S. government bonds were going to rise over the next few weeks. The argument I made for this is that they are now near the bottom of a range that they’ve been trading in since 2015.

However, I realized after publishing that article that Treasuries can also be interpreted as being in a bearish triangle pattern.

It may be best to wait until this triangle is invalidated before making this trade. However, MACD and RSI are both showing upward momentum. So I still think they’re going to move up soon. But we’ll see.

Gold-value of U.S. stocks.

As expected, stocks continued to fall after bouncing off the 2015-2017 line of resistance at around 2 troy ounces/share. The question is: where are they going to stop falling?

There are two places where obvious lines of support can be found. The first is at 1.85 oz./share, and the second is at 1.81 oz. per share. These are places where it might be prudent to “buy the dip” by selling gold and using the cash to buy stocks.

But if I was going to do this, I would make sure I use a stop-loss. The S & P 500 is way overpriced. And it could crash any day now.

In any case, it’s not at a point of support yet. So we’ll have to keep watching this.

Also, RSI is below 50 and MACD is crossing over. This is a sign that there’s more room for this fall to continue.

Interest-rates, the gold-basis, and arbitrage.

If you’ve been reading this blog for a while, you know that I believe supply & demand is the prime determinant of the USD price of gold.

But at the same time, I do understand that the futures market has some effect on the price as well.

So last week, I put together a spreadsheet showing the spread between the gold basis and the interest rates on other assets, such as U.S. bonds or stocks. I calculated the gold basis by looking at the gold futures curve shown here.

Here is a screen-shot of the spreads from this past Monday (May 15).

And here are the same spreads, but from this past Friday (5-19-17).

The most obvious fact that we see when looking at this is that the spreads between yields on long-term U.S. bonds and the gold basis are deeply in negative territory. But on short-term bonds, they are positive.

What this shows is the Fed’s attempt to get people to sell gold is not working. Raising the Federal Funds Rate is only affecting the yield on short-term bonds. So this is making it profitable to sell gold today and buy a futures contract to get it back a month or two from now.

But it’s not affecting long-term bond yields. So right now, if you have a time horizon of one year or more, you will still get a better yield (in dollar terms) from holding gold and hedging it with a futures contract than you will by holding U.S. bonds.

This is why every time the Fed raises interest-rates, it fails to cause a fall in the USD gold-price.

Apparently, the Fed is going to have to do “quantitative hardening” (shrinking the balance sheet) in order to get people to sell their gold and deposit cash again. But of course, that would quickly lead to a recession and a reversal of Fed policy. So it’s no wonder they have yet to work up the courage to do that.

I’ll be keeping an eye on this and reporting on it in the future.

When the price of gold bottoms, you’re going to need a way to buy it quickly and cheaply. So if you don’t already have a GoldMoney account, be sure to open one today.

I use GoldMoney to buy my gold at half a percent over spot.