Thursday, June 20, 2013

Gold is broken, again

On April 17th, I posted a blog entry entitled, "Gold is broken." Well, based on the overnight gold futures, gold is broken, again.

I wrote last Friday that gold was approaching a key inflection point, as it was forming a triangle and its apex was near complete. Although it appeared as if there was slight positive divergences occurring in the RSI and MACD, I concluded by writing, "As is always the case, price will ultimately shape my opinion." And as you can see with the hourly futures chart below, price has spoken and it's quite bearish.

The daily chart gives a better perspective:


Clearly we're seeing gold break down -- again. Yesterday Bernanke hinted at easing up on easing (QE) and it spooked markets, gold in particular. Yes, more of the fear-inducing "tapering off" verbiage.

The weekly chart of gold is something to see as it has played out in near-classic technical analysis fashion:


There's the bullish breakout of an ascending triangle in the 2H of 2009, followed by a rally into the 2H of 2011, cresting with a parabolic rise to just shy of 1900, then an abrupt reversal followed by a bearish break through the rising trend line in early 2012, then another run at the prior high in 2H of 2012 only to fail near 1800 (classic post-parabolic action), then the break down earlier this year -- and now another break down. Wow, textbook stuff.

On April 23rd, I posted an entry entitled, "Is Gold Following Expected Inflation," and showed gold's relationship to expected inflation as represented by the 5yr5yr forward breakeven rate. There appeared to be a high correlation between the two and I wrote then, "Judging from history, as long as this 5yr5yr inflation trend remains down or declining, it's not good for gold."
As you can see in the chart below, and undoubtedly much to Bernanke's dismay, the trend for expected inflation has remained down.

 Source: Bloomberg

What I continue to find interesting is what I further wrote on April 23rd:
I have to think Bernanke is keeping a close eye on this 5yr5yr inflation chart, definitely preferring that expected inflation reverts back to the 3% level -- which would be bullish for gold. But -- and it's a big "but" -- expected inflation had been declining since late January in conjunction with Fed balance sheet expansion going through the roof. Question: can the Fed do enough to get expected inflation back to the 3% level, or is it pushing on a string?
Here's the current chart for the Fed's balance sheet:

Source: Bloomberg

The growth in the Fed's balance sheet has continued unabated, and yet expected inflation continues to decline. I ask again, is "Helicopter Ben" out of bullets, i.e. pushing on the proverbial string?

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