Bond Yields, Gold and Following the Money

Monday, 24 August 2020
Melbourne, Australia
By Greg Canavan

Today I’m giving the floor to a few of our editors.

Each week our stable of talented people give hugely insightful comments and advice to their readers.

Instead of hearing from me again today, I thought I’d give you a taste of what our editors are seeing…and saying.

First up, Pivot Trader’s Murray Dawes is looking for a potential bond market sell-off. As he wrote on Friday:

‘…the biggest news this week is that the US Fed has backed away from their recent comments about yield curve control. The minutes of the Fed meeting stated that they weren’t looking at starting yield curve control and think it won’t add much value. They also didn’t mention anything about starting a “twist”, which is when they increase the duration of their portfolio by buying longer dated bonds. A twist holds down yields at the long end of the yield curve.

Watching how US bonds react to this news over the next few weeks will be extremely important. After the weak bond auctions we have seen over the last few weeks, there is increased risk that bonds could continue to sell-off and yields rise.

That would have a negative effect on the markets that have been rallying strongly on the back of expectations that yield curve control was on its way, and the yield curve would remain flat as far as the eye can see.

There is immense supply coming as a result of the actions taken to contain the COVID crisis. The Fed has been printing away like mad, although they aren’t increasing the size of the balance sheet massively right now.

You would expect based on simple supply and demand that US yields should start increasing from such incredibly low levels. Especially if the market thinks the worst is behind us with the virus.

Without yield curve control on the table and no sign of the twist, bonds should sell-off.’

The 10-year US bond yield is currently 0.636%, just over 10 basis points above its ALL-TIME LOW, which it hit just a few weeks ago.

In my humble opinion, that yields haven’t picked up much more, despite the ‘inflationary’ actions of central banks around the world these past few months, tells you just how much economic damage this virus (and the government overreaction to it) has caused.

Sure, yields can rise from here, but I’d be surprised if it were a sustained rise. A sustained rise suggests an economic recovery is gathering pace. Given the relatively weak economic data we’re seeing, that is a low probability outcome.

If yields do rise in the short term though, it has implications for the gold price. Which brings us to Shae Russell’s analysis of gold, sent to Hard Money Trader readers last week. Shae used Fibonacci retracement levels (see chart below) to get a sense of where gold’s next move might be.

Port Phillip Publishing

Source: TradingView

[Click to open in a new window]

There’s a couple of things this Fibonacci retracement reveals.

For starters, the gold price has effectively “bounced” off the 23.6% level. This means gold could be heading up to US$2,020…or even move back up to revisit the all-time highs of US$2,080.

However, bouncing off the 23.6% level in an uptrend can often suggest there is a reversal ahead. Generally speaking, a sell-off to 23.6% followed by a quick pivot higher can mean that an asset price will be stopped dead in its tracks when it moves towards the previous highs.

Though spot gold saw a sharp drop, it’s still too soon to rule out a fall over the coming weeks to below US$1,900.

Last week’s suggestion of a dip to US$1,850 remains in play. Should that happen, followed by breaking below that price level, we could be looking for gold to hover around US$1,750.

Here’s what’s interesting about both those two price points I’ve mentioned.

They are both very close to key retracement levels noted on the chart.

US$1,850 is a smidge above the 38.2% retracement level. And U$1,750 is very close to the 50% retracement in this trough to peak Fibonacci layout.

Believe it or not, the case for falling to 38.2% is bolstered by the fact that spot gold has already dipped to 23.6%. Meaning the spot price could retest the recent high, before dipping back down to 23.6%…and then onto 38.2%.

And then, perhaps, to the 50% level, which as Shae said, is around US$1,750 an ounce. As strange as it sounds, a correction like this would be very encouraging. 50% retracements of strong moves during bull markets are common. They flush out the weak hands and bring in the strong hands, which provide a foundation for the next advance.

Since Shae wrote this last Wednesday, the gold price has fallen, so she’s right on the mark. It’s currently trading around US$1,930 an ounce.

Meanwhile, Ryan Dinse, editor of Small-Cap Momentum Alert, is doing what all good traders do…following the money.

As he wrote last Tuesday:

I continue to see money flowing into the commodities space.

There’ll be a lot more trades to come here, I think.

But a different way to play a potential mining boom is to look at mining services companies.

The fact is this industry has been in the doldrums for a while now. A lot of smaller operators have gone out of business as owners have retired or went bust.

Which means the field is clear for the survivors to potentially “make bank” if mining companies start to spend up big on exploration and production over the coming 12 months.

That’s the theory anyway.

And my two picks today are giving me the right signs on the chart too.

Ryan followed up on the money flow theme a few days later, and gave some insights into how he goes about picking trades:

Looking for the trails of money flow is exactly what we’re trying to do.

We’re not making big predictions about the future in this service, we’re not stating an opinion on what we think will happen or falling in love with any one stock.

We’re just trying to read the trails and piggyback onto the big moves if we can.

Like anything, it takes time to learn.

With experience you get better at reading the signs. Of being able to tell what signals are most likely to lead to success. And of knowing when to cut your losses too.

But as any good hunter (or fisher) would tell you, the most important part of this process is knowing where to look first.

When you’re looking for small-cap stocks to trade, the first thing you want to do is to start big.

That is, you start by looking at long-term monthly charts in big picture sectors.

Taking the long view helps you see what the overall trend is. If you look at daily or hourly charts, you can frequently mistake a correction or pullback for a trend.

So, start big and broad.

That usually means I start my trading week by looking at the big indices like the S&P 500, the Nasdaq and the ASX All Ordinaries Index (usually on Tuesday morning after the US markets have opened).

This tells you a story of what is happening at a big picture level.

If things look bullish — which is good for small-cap trading — or at least not too bearish, I’ll start to look for sectors that are picking up steam.

For example, check out this chart below:

Port Phillip Publishing

Source: Incredible Charts

[Click to open in a new window]

This is the weekly chart showing how different sectors of the Australian market are doing over the last six months.

I’ve labelled the top three sectors which are IT, mining and metals and materials.

Seeing this, it should be no surprise to you why we’re getting so many trades right now in the mining and metals space.

Being such a resource-rich country, there’s a plethora of such opportunities on the ASX in these sectors (less so in the IT space, which probably explains why we’ve not had many alerts there despite the strong move in the sector).

Other things I look at include looking at sector specific ETFs or commodity price charts.

These are all big clues of where money is flowing into.

Once I know what area I want to look for trades, I go through a bunch of stocks in those sectors and look for charts I like the shape of.

I narrow it down to a select group of stocks in each sector (I might have a quick scan at the companies too, to weed out any obvious “bad picks”). I set alerts at prices I think are important or when the MPI triggers an important entry point and then I sit back and wait.

If Ryan’s track record is any indication, the system is working well.

If you want to find out more about Ryan’s service and methodology, you’ve got until midnight tonight to do so.

For more from Murray, please see below for his ‘Week Ahead’ video.


[WATCH] The Claytons Rally
By Murray Dawes


[Click on the picture to watch Murray’s analysis of the S&P 500, US bonds, US Dollar Index and gold. You can access the table of contents in the bottom right hand corner of the video.]

The S&P 500 is at all-time highs, just months after having the sharpest crash in history.

But there are signs beneath the surface that this rally is getting long in the tooth. Volume is dropping sharply the higher it rallies, and market breadth is now so low it is ringing alarm bells.

With Apple Inc reaching a US$2 trillion market cap and rallying strongly, most of the moves in the indices it belongs to can be explained by the moves in Apple alone.

When money is flooding into fewer and fewer stocks, it is a well known sign for market professionals that risks are increasing of a coming correction.

I think the money flooding into the mega-cap tech stocks is similar to the money flooding into gold and silver. It is all a response to US Fed money printing and promises of extremely low rates for as far as the eye can see.

So the response of US bonds to the US Fed minutes last week is important to watch.

They said that Yield Curve Control is off the table as a policy option (for now). With a flood of supply coming and no signs that the US Fed is interested in printing as much money as necessary to keep yields low, there is an increasing risk that US bonds could sell-off.

There have been a couple of weak bond auctions over the last few weeks and my charts are saying the risk of a sell-off in the short term is fairly high.

That would be bearish for Apple Inc and the other stocks that are flying on the back of the low and flat yield curve. It would also be bearish for gold, and the weekly chart for gold has turned negative.

There are no signs of weakness in the NASDAQ and S&P 500 as they levitate on the back of remarkable strength in their biggest constituents. But as you’ll find out in the ‘Week Ahead’ update above, there are enough indicators flashing warnings signs that anyone chasing the rally higher should have their eyes on the exits if bond yields start rising dramatically.


Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader