Originally published by Chamber of Merchants
Gold
Gold has been caught in a trading range. Even though the US dollar has fallen, gold has actually fallen with it and is holding on to support around $1200.
If gold can hold this trading range, it would be creating a bullish rectangle. A bullish rectangle can be viewed as a coil or compression of energy for the next, powerful leg up. However, fading out of the box and closing below $1198, $1196, $1192 would be a sign of weakness meaning we’ll see a pull back.
Why is gold acting so bizarrely?). I mean the dollar, right Merchant?
Yes. The dollar is showing some weakness, but the relationship between gold and the dollar is breaking down because of…*drum roll*… Bond Yields. Again.
In fact, if you’ve been following the Chamber of Merchants, you’d know that I have, on numerous occasions, explained that gold will pull back if bond yields increase. This is because if bond yields increase, it is a sign that funds are leaving bonds and rather moving over to the stock market. The casualty of this trade is that gold also experiences an exodus of funds as capital moves toward the better return in the stock market.
However, the BIG, picture is this: If yields continue to rise then it gold will continue to suffer…Until the market realises that yields are threatening the stability of all mortgages, loans and debt in the USA and even some abroad. Additionally, if the bond market sells of (yields even higher) beyond expectations, we will probably have a moment of panic where:
#1 The market realises that the high interest rates (yields) are killing the ability to repay debt for average households and businesses.
#2 The market realises that bonds are no longer in demand…Which means the 35 year bond market is, in fact, commencing a bear market. Most traders were born into the bond bull, so reality will implode for them.
#3 How does the U.S government….or any government finance their spending without issuing bonds to borrow money? Usually it would be from tax revenue, however, increasing taxes in our economies is not an option since it would destroy the consumer who already struggles to get by.
#4 The only …. only … only answer to this problem (which is the worst solution) is QE4. (Massive money printing). This would be an attempt to stave off the next and worse financial crisis. Will it work? Maybe. But gold would probably double or triple in price, because it will be the only place to hide your money from the ravages of intense inflation.
That is the big picture.
However, right now, the Trump rally is back on. So gold is not a priority for anyone since there does not seem to be any risk involved in the stock market.
But realise, we’re on a countdown timer… and it’s ticking…on yield point at a time.
On the other hand, if yields relax, the dollar continues to fall then gold will resume it’s rebound to $1240-$1280 and all will be well with the world. (I would also need to move back into miners.) But I may have a few days/weeks at my disposal.
Let’s see.
As a bonus here’s the Australian gold price chart:
That is, the USD gold price, divided by the AUDUSD exchange rate. Interesting, no?
Overnight the US gold miners retreat by some 2%….but maned to recover some and closed out on around -1.5%.
I would like to see some more sell-off in gold stocks to get the bearishness back before entering… I may or may not get it… Who knows…
Interim Trade
In the meantime, I’ve entered the agricultural commodity of milk. A2 Milk (AX:A2M) to be specific…
This is not a long term trade and should conclude around Feb 13th-Feb 21st.
A2M have seen some great peaks and troughs. The peaks usually occur around the reporting period which is Feb 14th 2017 according to their website.
I told you. I’m not a gold bug.
I’m a Merchant.
I trade in things that will be desirable in the future, to then sell at a profit.
This mindset helps me to achieve and maintain profitability. It also keep my funds working in growth areas.
As I said, the reporting for A2M will be on Feb 14th, so I do not expect my funds to be tied up for very long. Additionally I have only used 30% of my capital on this trade.
Let’s see what the next two weeks have in store.
I’m also short Beach Energy Ltd (AX:BPT) and Sandfire Resources NL (AX:SFR) with very small portions of my capital.
I said in my previous email that I’ve been trading forex. This has been beneficial yet very time consuming, hence I have not been posting so often.
However, I am doing it for practice only and do not imagine myself to be anything other than a merchant.
In trading forex I have come across a few indicators that…lo and behold… actually do a pretty fantastic job on ASX shares…
I’ll keep you posted.
Have a great day. Have a Great Australia Day. Have a great World Day, wherever you are.