Market Report: Pushing at the upper boundary

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The bear squeeze continues, with the gold price now looking to break out of a bullish rising wedge pattern. Today (Friday), in early morning trade London time, gold was trading at $1237, up $11 from last Friday’s close. Not dramatic perhaps but imagine being one of those bears who sold gold futures when gold looked bad and the dollar looked good. This is fear driving the market. Silver over the same time-frame is up seven cents at $14.69.

The bear squeeze looks like it has further to go, and our next chart gives us some guidance.

DOs


The price has smashed through the 55-day moving average, and other than some minor supply at the round figure of $1250 (partly reflecting the consolidation in early-July as the price was falling, and partly because it is a round number) the next challenge is in the region of the 200-day MA, which is currently at $1273. By then, there is almost certain to be a reversal of negative sentiment, with speculators looking to build long positions.

This analysis simply draws on established patterns of repetitive speculative behaviour and does not depend on further insights. But let’s look at the prospects for other markets for guidance on future prices. The sea-change for investors is in equities, which are showing worrying signs of entering into bear markets. What triggered it was a sudden rise in US Treasury yields, following increases in the Fed Funds Rate. This has created confusion, with the fall in equity markets being interpreted by the commentariat as an early warning of a US recession, and bond yields have backed off as a result.

However, bond yields look like going significantly higher, so what we are seeing is a normal consolidation of a rising trend, as the next chart of the UST 10-year bond clearly shows.

trayes


The trend of rising yields is very well established, and we can be reasonably certain they are headed higher. Much flows from this assumption, but we will focus on just one important point: those investors fleeing the equity market for the relative safety of bonds are making a mistake. The best one can say is their losses will be less than staying in equities.

This is the fundamental problem with the fiat-money world. When the credit crisis begins to unfold (which is what appears to be happening) the only safety is to escape from it entirely. Your alternative is then limited to fiat cash, or precious metals led by gold.

Returning to the current market context, the mainstream has yet to understand that bond yields have further to rise before the next credit crisis hits. Following a sound base now being established for the gold price, gold is likely to be demanded as a significant component in a balanced portfolio.

The trouble is portfolio exposure must be at or close to an all-time low, and the supply of physical gold is extremely limited. Once the gold price surmounts the $1260-70 level, then the rise could become explosive.

 

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