Tuesday May 31, 2016 09:09
(Kitco News) - The US Dollar Index is likely to end the month of May with an outside-month-up formation. Market technicians generally have a lot of respect for monthly key reversals. May 2016 would be the first monthly key reversal up for the US Dollar Index since July 2014.The Index ended July 2014 at 81.5, which is about 15% below current levels. In July of 2014, spot gold closed at $1,282 (about 6% above current levels) and the US 10yr Treasury note yielded 2.56%, about 70bps higher than currently. TLT, the most widely traded US Treasury bond ETF, has returned about 19% since the end of July 2014. SPY (the S&P 500) has had a total return of 13% and GLD is down about 6% over the same time period. Not a bad bond performance for a period including the end of Q3 and Fed tightening, when the consensus was inflation is increasing, that yields would go higher and TLT was supposed to have been the worst performer. Most of us are well aware of the trend in economic data, with the latest update on US employment for May coming out this Friday. Most of us are also well aware that the vast majority of market professionals and economists, including the Fed have been warning about increasing inflation for what can now be measured in years, yet US, and global sovereign bond yields have continued to decline. Is it different this time?
What needs to change – Until investors in US Treasury bonds begin to suffer losses due to prices declining more than the coupon yield provided, we should not be concerned about inflation. The current flattening curve condition of increasing rates coinciding with declining yields indicates that the greater risks are leaning towards economic contraction and deflation.
What about gold? May 2016 has been a good month to sell gold. The month began with gold trading above the $1,300/oz. for the first time since January 2015. In May, the spot price of gold exceeded the March and April highs and lows. If gold closes below the April low of $1,209/oz., it would be an outside month down, a potential key reversal on the previous two months - pretty bearish stuff for most market technicians. Or is the gold market simply building a new base near the $1,200/oz. level? The low for March, April and May has been within $10 of $1,200/oz. Often times widely watched market price support and resistance levels end up just frustrating most participants – if it were that easy?! Gold appears to be building a new base near $1,200/oz. as we enter the summer doldrums, and we all are data dependent. If gold ends the month of July above $1,200/oz. the foundation should be that more solid.