Gold/Silver Spread Widens

Apologies for the lack of updates in almost a month. I've been bogged down recently at the office. This is an update on the chart I shared in my previous post. The wide spread currently between gold and silver favors out-performance in gold. Silver is highly volatile and there remains an overhang of supply from its previous spike to 50. Gold, on the other hand is breaking all-time nominal highs in various currency terms.

It faces immediate resistance at $1,800, a confluence of channel resistances of its present intermediate channel and its major channel post-2001.
That's it for now. Back to prepping for my paper.

Gold and Silver for the Long Term

There's a few things to learn about this multi-layered chart.
1) Gold has not closed below 2 consecutive months since it started its bull run in 2001. Consecutive 2 down months is an ideal period to add positions on dips. Any dips should be bought and held till we reach the end of this bull market. The rising 12 month moving average of its volume suggests this bull is strong and is a long way from maturity any time soon.

2) Silver is strongly correlated with gold with a higher beta (volatility). Since 2001, gold has returned 459% in nominal dollar terms, whereas silver has returned 688%, outperforming gold by 40% since 2001. In contrast, the commodity complex returned 52% over this same period, highlighting the monetary qualities of both precious metals against the backdrop of the present global monetary base expansion. Silver's superior long term outperformance is expected to continue.

3) As silver's long-term performance is fraught with a high degree of volatility, I suggest the following tactical approach to investing in silver:

When the gold/silver ratio (5th box, grey line) is above the silver/gold ratio (black line), it means that gold is outperforming silver. When the spread between them is wide enough, it is the optimal time to sell gold and hold silver. I've highlighted three instances in 2003, 2004 and 2008(in dotted vertical line) when this occurs. Vice versa, the best time to sell silver and hold gold is either when the spread is narrow or when the silver/gold ratio (black line) is above gold/silver ratio (grey line). This spread position trade or relative strength tactical approach potentially maximises on the outperformance of the stronger metal at any one time while continuing to stay invested in precious metals for the long term.

This strategy favors gold at this moment.

Good luck to all.

AUD/CHF

I went back long into AUD/CHF again with latest bullish development of an inverse head and shoulders with an ascending neckline - bullish. Stop at 0.8940 with pattern measuring target 0.95. Congestion at 0.9300 horizontal region. Good luck!

Gold

AUD/CHF update: I was stopped out of my longs with profits.

Now for our discussion topic, gold.

As we embark on the last seasonality weak month(for gold) July, it is an opportune time for gold purchase before the start of historically strong August & September months ahead. (I'm referring to data after 2001)

Since 2001, gold has traded within a strong rising channel (in green) as charted below. Ideally, I'd like to see gold correct to the floor of this channel ($1300). However, I think the odds of this is low. More likely is the test of the confluence of its present intermediate trendline and 150 days moving average, $1450, which is a good spot for purchase.


From that entry level, it has 20% immediate upside, which is $1700, a confluence of its channel resistance above and fibonacci arc measured from 2001 as charted below.
COT positioning also reveals the speculative froth has been erased from the gold futures market as large speculators are holding relatively lighter long positions and commercials holding relatively lighter short positions.Let's continue to watch developments closely with the magic number $1450 in mind.
The outlook over the next 2 years remains bright for gold as rising long Treasury yields signal higher future price inflation and central banks reluctant/slow to raise rates resulting in negative real interest rates, a favorable environment for gold.

Good luck to all.

US Treasuries: A Historical Perspective

The following charts examines current US Treasury bond yields within a historical context.

The long bond or 30 Year yield has been in a bear market since the early 80s. However its rate of change has become more gradual (its slope has flattened). Since the 90s, there has been a great deal of inertia for yields to fall down towards its return line. If the brief deflationary period of 2008 were omitted, this would resemble a giant bullish falling wedge. As bonds with longer duration are more sensitive to changes in interest rates, this suggests that the road ahead leads to much higher rates. The 10 year has been the most widely followed as it tracks the mortgage market. In recent times the activities of the US Fed (Treasury Permanent Open Market Operations to purchase the shorter duration US Treasuries) has distorted shorter end of the yield curve.
The effects of which are also seen in the 5 Year chart, with current yields not seen in the last 48 years.
The distortion is more pronounced in the 13 week Treasury bill as the Fed valiantly tries to keep rates low for an extended period of time to support the fragile US economy.Research in the late 1980s on the yield curve has found it a reliable predictor of future real economic activity. The following chart shows this movement.
In June 2007, just before the financial crisis, the flat yield curve (chart shows UK Gilts & US Treasuries) gave an advance warning. Today, the normal yield curve may not represent the underlying reality of the economy with distortion from quantitative easing activities of central banks.

The next big trade will be to short US Treasuries once the long bond yields assuredly moves above 4.6% (currently 4.38%).

Looking back I can see why Bond King Bill Gross and PIMCO is short US Treasuries. (He was, however early) Jim Rogers also recently came out to say he may be joining in the short camp soon. (I found Jim Rogers to be unassumingly a good market timer, although he publicly said he was bad at it)

Aussie + Apple

AUD/CHF printed a high of 0.9070 last night and formed three white soldiers (green bars in this chart), which is a reversal follow up bullish reversal candle stick pattern from its falling wedge.

AUD/USD flag has also broken out to the upside.

Likewise for its AUD/SGD cross.

Apple, the largest (>12%) component of NASDAQ 100, the leading US stock market index has also broken out of its falling minor trendline and is currently testing fibonacci 38.2% retracement. A pullback at this stage is likely. However the overall volume trend still bearishly supports a head and shoulders pattern with the falling red support line acting as its neckline. Unless it could break out of its falling resistance rail on convincing volume, the overall momentum tilts the market outlook slightly to the bears.

The bounce has happened. Now its time to see where this leads us to. Good luck to all.

Silver

Since silver broke its intermediate trendline, it has started a minor reaction in a downtrending channel within a broad horizontal range 33.60 - 38.60. This broad horizontal range is increasingly resembling a bear flag. This bear flag measuring target is 22.50, which is the primary trendline below.


There is a parallel from present price action with the 1979-1980 period when silver almost touched $50. This was shortly followed by a fall towards $20. However back then the reason for the sharp drop was the CME raising margin requirements excessively to drive the Hunts out of their silver positions. Presently there is no one single investor monopolizing the market.



Troublingly from a contrarian perspective, a Bloomberg survey on Monday indicated that the median expectation of 100 commodity analysts is for silver to rally back towards $50 by end year.

Good luck all!