Tuesday, 15 November 2016

Gold Price and US Dollar Index (DXY) Triple Tops - Part 2

This is the follow-up (part 2) of the article that i published on 1st November, 2016. If you haven't read it, you can read it here.

Something quite dramatic, and unexpected had happened that i need to reevaluate the future's gold price movement. I think you know the big event that happened between then and now is the U.S. presidential election.

Just a quick recap (for those who refuse to read the previous part), i sketched out the few probable price movement of gold. In particular, i stated that Scenario 1 is the most probable one that would play out given my anticipated price actions in DXY.

Here's a chart that shows the 2 Scenarios. I expected Scenario 1, the most likely scenario as i stated before, would follow the price action of A → B → C, where A is price on the date i published the article on 1 November 2016.

Different scenarios for gold price action

The chart below shows how the price actually plays out since i published the article. C is where we're at today. While my 'forecast' isn't perfect, it isn't too far off where the prices of gold have traversed A → B → C. Although gold price only crossed the price at B briefly (at the election night). See how the price at B got stopped out cold at the downtrend resistance that i delved in great lengths in part 1 and part 2 of The Gold Market Final Technical Resistance.

Different scenarios for gold price action

Now that we're at C, where do we go from here? In part 1 of the is article, i said that if we're seeing a triple-top in DXY, in other words, if DXY tops out from here (includes a possibility of head fakes), US dollars will come down from here. And i said this is the most likely scenario.

When i entertained that possibility or most likely outcome of Scenario 1, i wrote under the assumption of a Clinton's presidential victory. Because if she had won, the projection of USD can be assumed that it will be no different from that of under Obama's.

Now that Trump had won, i'm not as confident to say that DXY would top out from here. It may still do, but i suspect it's now more likely that DXY could run up further than under a Clinton's presidency.

If the likelihood of DXY breaks out from the resistance level of 100 is higher, then Scenario 4 in the chart is now the more probable course of price action where gold would fall to the year's low of $1050.

In addition to the strong resistance of 100 in the DXY, there's also the strong resistance of the downtrend resistance line in TNX (10 Year treasury note yield curve). These 2 are closely correlated, or equivalent. If DXY crosses above 100, the downtrend resistance in the TNX will be broken out.

Yesterday - on 14 November 2016 - both of the prices of the DXY and TNX had reached this strong resistances and backed off from it, at the same day (within 2 hours of each other). These rejections result in rebound in gold prices.

TNX price reached long term downtrend resistance at 2.30 and backed off from it
TNX price reached long term downtrend resistance at 2.30 and backed off from it yesterday (14 Nov 2016)

TNX price reached long term downtrend resistance at 2.30 and backed off from it
DXY price reached resistance level at 100 and backed off from it yesterday (14 Nov 2016)

These are 3 equivalent pivot levels in 3 markets: DXY = 100, TNX = Long term downtrend (2.3% as of 15 Nov 2016), and gold spot = 1220.

The question now is this price retracements of DXY and TNX are only brief pauses before the next break outs to more sustained higher moves? Or will these strong resistances in DXY and TNX hold?

If they hold, the last leg of Scenario 1 in gold chart that i depicted on 1 November will likely to play out. If they don't, Scenario 4 would more likely to play out.

Before the election, where i assumed Clinton would win, i think Scenario 1 is more likely. Now, i'm uncertain. Trump had said so many things that are simply couldn't possibly pan out. The point is, there's too little clarity in details about Trump's policies for me to even try to speculate.

His fiscal policies would seem to greatly increase the chance of DXY and TNX break outs. The very bullish price actions in DXY and TNX in the last few days projected that. Since they're strong resistances - especially TNX - it would be very surprising if they succeed in breaking out the 1st attempt. But i wouldn't want to under-estimate the strength of this Trump's risk-on, reflation trade.

This huge spike in TNX is, as Bill Miller puts it, the bursting of the bond bubbles. Although not everyone shares that characterization because not everyone believes the bond market is in a bubble state.


Having said all these, even if prices of DXY and TNX do break out and rise much further, that doesn't necessarily imply the bull market in gold is over. In fact, inflation is good for gold price. To understand why, you might want to read Relationship Between Gold and Bond Market.

Once you understand the relationship between gold and bond market, then you realize that the inflation rate, which tends to be a broader and more stable figure, doesn't spike the way bond yields had spiked in the last few days. You don't update your inflation rate week by week, but the bond yields do change minutes by minutes. You could say there's a lag. And so, gold would fall as bond yields spike in the very short term (in days). Gold will fall until such time when the rise in inflation rates data start to show up. Inflation should show up. This is the reason why bond yields rise. It's anticipating inflation coming soon.

Bond reacts to tomorrow inflation, but gold reacts to bond today.

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