10 YEAR US T-NOTES & GOLD
Aksel Kibar
8 November 2009
10 YEAR US TREASURY NOTES
Created in MetaStock from Equis International
Oct. 24 (Bloomberg) - Treasuries Fall for Third Week on Fed Speculation; Supply Looms. Treasury 10-year notes fell for a third week as investors speculated the Federal Reserve may begin to signal an increase in interest rates from historic lows and as the U.S. prepared to auction a record $123 billion of notes. The U.S. will sell $7 billion in five year Treasury Inflation Protected Securities on Oct. 26, $44 billion of two-year notes on Oct. 27, $41 billion of five year notes on Oct. 28 and $31 billion of seven-year securities on Oct. 29. The Fed is scheduled on Oct. 29 to complete the $300 billion Treasury purchase program it began in March, part of its effort to cap consumer borrowing costs. At their most recent meeting, on Sept. 23, members of the Fed's policy-making Open Market Committee kept the benchmark rate in a range of zero to 0.25 percent. In a statement, they said economic conditions will warrant keeping the rate low "for an extended period." The chart above analyzes the 10 Year U.S. Treasury Note for the past three years. TECH TALK analyzed the Treasuries in the previous reports. The latest report drew attention to the weakness in the Treasury Note's prices and identified strong support and resistance levels. In the last five months the 10 Year U.S. Treasury Note formed a rising (bearish) wedge pattern. It is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. As a continuation pattern, the rising wedge slopes up, but the slope is against the prevailing downtrend. The final break of support indicates that the prices are headed to lower levels. 117 levels is a strong support while 120 is the important intermediate term resistance. Lower 10 Year Treasury Note prices will signal higher interest rates and reduced demand for the U.S. treasuries.
GOLD ($/OUNCE)
Created in MetaStock from Equis International
Parabolas, or constantly accelerating slopes, are very common in the financial markets. Parabolas are usually unsustainable. Parabolic moves are mainly driven by mass participation in that asset class and result in a sharp increase in price in a very short period of time. The increasing angles of the trend lines usually help us to identify a parabolic uptrend. The chart above analyzes the Gold price between 1970 and 2009. The chart can be divided into three different periods with two long term uptrends and a major correction. The first uptrend was between 1970 and 1980. During the strong uptrend Gold moved from $35 levels to $850 levels in 10 years. Gold broke above the $200 level in 1978 and started moving higher. In three years the price reached $850 level. The uptrend took a parabolic shape. However, the sharp increase was not sustainable and it was followed by a 20 year long correction that pulled the prices to $250 levels. The second uptrend started in 2001 at $250 level. In 2008, Gold broke above the $850 level and tested $1,035. After a yearlong hesitation at the historical high levels, the price started accelerating on the upside in the beginning of 2009. In the last few months Gold moved to new high levels. Is Gold price entering into another parabolic uptrend? Monthly closings above $1,000 level will be bullish for Gold. The technical outlook continues to be positive.
DOW JONES INDUSTRIAL vs. GOLD
Created in MetaStock from Equis International
Relative performance is a measure of price trend that indicates how a stock, index or commodity is performing relative to other stocks, indices and commodities in its group. It is calculated by dividing the price performance of a stock, index or commodity by the price performance of an appropriate stock, index or commodity for the same period. The chart above shows the relative performance of the Dow Jones Industrial Average versus Gold in the last 23 years. The relative performance chart analyzes two different time periods when equities (paper assets) were preferred to hard assets and when gold (hard assets) were preferred to paper assets. Hard assets like precious metals have always been an inflation hedge and a safe haven during financial instability and monetary expansion periods. 1987-1999 period was an uptrend on the relative performance chart. During the 13 years, investors preferred to be invested in equities rather than gold and other precious metals. However, the relative performance chart changed direction in the beginning of 2000. Even though the equities had a strong period during 2003-2007, the relative performance chart continued in favor of hard assets resulting in an out-performance of gold versus equities. During the downtrend that started in 2000, the relative performance chart continued downwards in a clear parallel trend channel. Every low was broken on the downside which was then followed by a consolidation and a continuation. The stair-step move on the downside pulled the relative performance chart from 40 levels to 10 levels in 8 years. In the last one year, the relative performance ratio accelerated on downside resulting in a massive out-performance of Gold versus the Dow Jones Industrial Average. The ratio reached 7 levels which corresponded to 7,062 levels on the Dow Jones Industrial Average and $944 level on Gold. The equity markets rebounded from the oversold levels in March 2009. During the recovery from depressed levels on the equities, Gold also moved higher. Dow Jones Industrial reached 10,117 levels and Gold broke above its historical high at $1,035 and tested $1,070. In the last few days, the equity markets weakened while Gold held strong and traded very close to its highest levels. Are we entering into another strong outperforming period for metals? Will the equity markets slow down and precious metals take the lead? The ratio is currently at 9.20 levels. We are closely watching the relative performance between Gold and Dow Jones Industrial Average.
Aksel Kibar, CMT
Portfolio Manager
Abu Dhabi Investment Company PJSC
www.investad.ae/en/Home.aspx
Disclaimer: Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. Any and all ideas, opinions, forecasts, market analysis or market data, expressed or implied herein, are for informational purposes only and should not be construed as trading recommendations to invest, trade, buy or sell securities and or speculate in any specific futures contract, option or any other market. Any investments, trades, and or speculations made in light of the ideas, opinions, and or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. The market data contained herein is believed to be reliable, but has not been independently verified. Accordingly, such data cannot be guaranteed as to reliability, accuracy, or completeness, and as such is subject to change without notice. In no event will ADIC or any of its employees be liable for any information contained herein. Data Source: Reuters, Investopedia.
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