From Ben Morris, Editor, DailyWealth Trader:
Gold is on the ropes… and heaving.
Last week’s announcement from the Federal Open Market Committee (FOMC) caused a wave of selling.
The FOMC not only raised interest rates by a quarter of a percentage point (as expected)… It said it plans to raise rates three more times in 2017.
And at least for now, the “expected” reaction is playing out…
Rising interest rates make current bond holdings – which pay a fixed rate of interest – less attractive by comparison. So bond prices are falling. Rising rates also make the U.S. dollar a more attractive place to hold cash. So the dollar is rising relative to major foreign currencies… and relative to hard assets that are priced in dollars, like gold.
As I write, the precious metal is trading at around $1,135 per ounce. That’s its lowest level since early February. It’s now down 17% from its July peak.
Is the bull market that began almost exactly one year ago over? Today, we’ll dig into that question…
Before anything else, I want to note that the FOMC raised rates for the first time (in nearly a decade) on December 16, 2015. Gold bottomed – at what is now its seven-year low of $1,050 – the next day.
That doesn’t mean gold will follow a similar pattern this time around… But in the context of what comes next, I wouldn’t discount the possibility.
In October, we looked at the big picture in gold. We looked at 10-year U.S. Treasury yields and the dollar. The yield on 10-year Treasurys is the world’s benchmark for interest rates. To review in a little more detail why these are important, here’s what I said in October…
Because gold doesn’t pay interest, it is less attractive when yields are high. So as yields rise and fall, the price of gold often (but not always) does the opposite.
And because we look at the price of gold in dollars, the value of the dollar itself is important. A more valuable dollar buys more gold… So a rising dollar can also be seen as a falling gold price. A weaker dollar buys less gold… So a falling dollar can also be seen as a rising gold price. They’re two sides of the same coin, if you set aside all of the other factors that affect gold.
(Of course, because there are other factors, the dollar and gold can move in the same direction for extended periods of time.)
We looked at the big support and resistance levels for each asset. Now, it’s time to take another look…
In the updated chart of 10-year Treasury yields below, you’ll see that they broke out of a long-term downtrend, through resistance, and haven’t looked back…
That’s a punch in the gut for gold.
In this next chart, you’ll see that the dollar broke through its resistance at around 100, came back and tested its resistance (as assets often do), and is now charging to new 13-year highs…
And that’s a broken nose.
This last chart, though, shows that gold is still standing. It may have some fight left.
Gold’s support level is around $1,100 per ounce today. And as you can see, it is still trading above that important level right now…
If you want to use today’s low prices to add to your physical gold (and silver) holdings, that’s fine. Physical precious metals should be viewed as long-term chaos hedges… something you never plan to sell.
But I don’t suggest buying gold stocks today for anything other than a short-term bounce. The big-picture price action doesn’t look good.
The year-old bull market in gold is in dangerous territory… But it isn’t over just yet. Two major forces – U.S. Treasury yields and the U.S. dollar – are going strongly against gold right now… And it hasn’t broken its long-term support.
That says a lot. Maybe we will see a repeat of last year with a bottom coming shortly after the FOMC interest-rate hike… Or maybe gold will break down.
My only advice today is stick to your stop losses. If gold breaks down, it could get very ugly, very fast. If it holds up and turns higher, we’ll have plenty of opportunities to profit.
I’ll be watching closely. And you should, too.
Good trading,
Ben Morris
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