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GYN Monitor 2
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April 18, 2008
An abrupt about face of the Gold Bull: reasons and consequences
The about face of the Gold was not a complete surprise, its abruptness was. This is case particularly because it occurred in the face of verticallly rising oil prices and a still strong Euro. It was not a surprise because multiple signs had accumulated recently pointing to headwinds against a continuing price appreciation of the metal. Among these signs were a number of technical and fundamental factors:
1. Major currencies had reached extreme levels of overvaluation which in terms of PPP (Purchasing Power Parity) were near historical highs and therefore left little room for further depreciation of the US Dollar ( see: Outlook for the US Dollar and Gold; Will Gold and the EURO succumb to a six-year itch?).
2. The economic and stock market backdrop included many similarities with the 1990 recession witch coincided with a cyclical bottom of the US Dollar and a top of major currencies (see: The scenario for a possible stock market bottom:1990 recession re-visited again)
3. The weekly and monthly charts of the Dow Gold Ratio exhibited extreme oversold patterns indicating a forthcoming turn of the table in favor of common equities (see: DOW/Gold Ratio
weekly and Gold and the Dow/Gold Ratio monthly)
4. A down crossing of the stochastic oscillator in the Gold's yearly chart which indicated the strong possibility of a down year for Gold (see: A simulation of yearly Gold prices as suggested by the current decline )
Given this backdrop, what intervened to trigger Gold's sudden and dramatic fall was a set of important interrelated events: the topping out and roll over of the powerful bond uptrend seen in the past several months and a resumption of the carry trade prompted by the corresponding rise of interest rates. The carry trade normally involves the opportunistic use of low interest bearing instruments such as the Japanese Yen and Gold and usually acts as a powerful depressant for these instruments. Rising interest rates in turn provided a strong stimulus for a burgeoning recovery of a depressed and grossly undervalued US Dollar. The inference of a resumption of the carry trade is derived from the synchronous moves evident in the following charts of the 10-year Treasury Note, the Japanese Yen, and Gold. The reversal of the Japanese Yen is especially noteworthy because it occurred at the end of a period of dramatic appreciation which has been widely recognized as having been associated with a tumultuous unwinding of the Japanese carry trade as interest rates in the US fell sharply in the wake of the housing crisis and developing recession.
An abrupt about face of the Gold Bull: reasons and consequences
The about face of the Gold was not a complete surprise, its abruptness was. This is case particularly because it occurred in the face of verticallly rising oil prices and a still strong Euro. It was not a surprise because multiple signs had accumulated recently pointing to headwinds against a continuing price appreciation of the metal. Among these signs were a number of technical and fundamental factors:
1. Major currencies had reached extreme levels of overvaluation which in terms of PPP (Purchasing Power Parity) were near historical highs and therefore left little room for further depreciation of the US Dollar ( see: Outlook for the US Dollar and Gold; Will Gold and the EURO succumb to a six-year itch?).
2. The economic and stock market backdrop included many similarities with the 1990 recession witch coincided with a cyclical bottom of the US Dollar and a top of major currencies (see: The scenario for a possible stock market bottom:1990 recession re-visited again)
3. The weekly and monthly charts of the Dow Gold Ratio exhibited extreme oversold patterns indicating a forthcoming turn of the table in favor of common equities (see: DOW/Gold Ratio
weekly and Gold and the Dow/Gold Ratio monthly)
4. A down crossing of the stochastic oscillator in the Gold's yearly chart which indicated the strong possibility of a down year for Gold (see: A simulation of yearly Gold prices as suggested by the current decline )
Given this backdrop, what intervened to trigger Gold's sudden and dramatic fall was a set of important interrelated events: the topping out and roll over of the powerful bond uptrend seen in the past several months and a resumption of the carry trade prompted by the corresponding rise of interest rates. The carry trade normally involves the opportunistic use of low interest bearing instruments such as the Japanese Yen and Gold and usually acts as a powerful depressant for these instruments. Rising interest rates in turn provided a strong stimulus for a burgeoning recovery of a depressed and grossly undervalued US Dollar. The inference of a resumption of the carry trade is derived from the synchronous moves evident in the following charts of the 10-year Treasury Note, the Japanese Yen, and Gold. The reversal of the Japanese Yen is especially noteworthy because it occurred at the end of a period of dramatic appreciation which has been widely recognized as having been associated with a tumultuous unwinding of the Japanese carry trade as interest rates in the US fell sharply in the wake of the housing crisis and developing recession.
| Synchronous reversal of T10-Note, JY,and Gold | |||||||||
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| April 18, 2008 - Charts courtesy of futuresource.com | |||||||||
The abrupt turning up of interest rates appears associated with the
prospects of an earlier than expected economic recovery and rising global inflationary winds.
The conseguences such an unfriendly aggregate of interrelated events will be a protracted correction of Gold. The several countervailing positive factors incorporated in the still very bullish Gold Barometer should ensure that the correction will be relative shallow.
The conseguences such an unfriendly aggregate of interrelated events will be a protracted correction of Gold. The several countervailing positive factors incorporated in the still very bullish Gold Barometer should ensure that the correction will be relative shallow.
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