30 Year Yield at 5%...and Rising? (And Another, Far More Pleasant Surprise)

May 29, 2008

US Interest rates are on the rise, but there’s a bright light at the end of the tunnel – which is not emanating from an oncoming train.

The horizontal count upside yield target, flowing from the chart below, is 5% (Courtesy Stockcharts.com). The vertical count target is 6.1%

The 5% level is confirmed by the targeted move to 5% flowing from the breakup through the neckline of a reverse Head and Shoulders (See chart below, courtesy Decisionpoint.com)

What will 5% yield on 30 year bonds mean?

Well, for one thing it will mean that the 18 year downtrend line will have been penetrated on the upside for the second time in a year

This will happen in context of a series of rising bottoms on the PMO – indicating that there is significant upside pressure for further rises.

What is driving the upward pressure on yields?

According to official statistics, the M2 Money supply rose by 6% over the past 12 months, and the US Public debt rose from $8.8283 trillion to $9.3907 trillion (by 6.37%)

According to those who have taken the trouble to reconstruct M3, the following is what has been happening behind the scenes (Chart courtesy http://www.shadowstats.com/alternate_data )

If debt and money supply are rising at 6% p.a. then money is being devalued at the same time that it is experiencing higher demand from government for borrowings.

Result: Rising interest rates.

Last night I held in my hand a Z$250,000,000 (two hundred and fifty MILLION dollar) note printed by the Zimbabwean Government. I was told that it was worth roughly A$3 and that this is what a loaf of bread costs in that country.

So, what will rising USA interest rates mean? Will this protect against further inflation?

If you look at the monthly chart of the dollar below, you will see that rising treasury yields might possibly protect the dollar from further falls. (Note the non-confirmation between price and momentum)

Unfortunately, rising yields are a necessary but not sufficient condition to avoid inflation. The other side of the coin is that the US government has to discipline itself to stop behaving like the government of a third world country. It has to reign in its expenditure.

But, if it reigns in its expenditure (which, SO FAR , the US Dollar chart seems to be anticipating), and yields are rising, then there is no way we could be in a Primary Bull Market for equities.

The daily chart of the S&P shows a bearish breakdown from a rising wedge, and a technical reaction back up – but the price is still below its 200 day MA.

Also, the PMO gave a sell signal a few days ago

The monthly chart of the S&P below shows a double top and also a sell signal on the PMO when it broke down through its MA from a lower high than in 1999.

Arguably, the sharp rise in the S&P last month was caused by nothing other than short covering. If this is true, then the bearish Double Top formation remains the prevailing signal.

When one cuts through all the noise, the P&F chart below (3% X 3 box reversal) is still calling for a significant pullback of the S&P

If the 985 target is reached (time indeterminate), the long term uptrend line of the monthly S&P chart above will be penetrated on the downside, but the chart above shows that the rising blue trend line will remain intact.

This is an exceptionally difficult market to interpret from a technical perspective.

My own view is that:

We are in the early stages of a Primary Bear Market in industrial equities This Primary Bear Market will more likely manifest as a series of frustrating sideways to downward movements over a period of several years There will not be an outright collapse – either of the US Dollar or of the equities markets The key risk will be one of deflation, as the velocity of money slows and credit tightens

If I am right, then the gold price should struggle to reach new heights – and probably won’t, for some time to come.

The chart below is showing consolidation, and that the gold price recently turned down earlier than expected within the consolidation. It would have been a happier scenario if the gold price had reached $957.

Oops! What happened to the $1400 target?

Well, let’s not panic yet. Things are a lot more complex than they seem.

Certainly, a price of $750 - $780 looks possible from the charts below -

Note the PMO on the daily charts is turning down from below the zero line. This represents weakness.

Note that the two April tops (Year on year) on the PMO on the weekly chart below (the second lower than the first) may reflect a strong non-confirmation of the recently bullish price runup – thereby confirming the inherent resistance to further rises (for the time being).

But there are two things going for gold:

$750 an ounce – even if this level is reached – will still leave the gold price in a Primary Bull Market The Fundamentals are extraordinarily strong. This would imply that any technical pullback of gold would represent a wonderful “buy and hold” opportunity.

What are the fundamentals for gold?

This analyst has been arguing for many months now that gold is the most valuable commodity on the planet; and that the reason it is so valuable has nothing whatever to do with money.

I am pleased to announce that the factional novel I have been writing since October 2005 is now at the printers. Via the medium of its entertaining 430 pages of storyline it attempts to peel away the veneer of political obfuscation and disinformation to reveal what is really happening below the surface of life on our fair planet. One of the truths that it reveals is that Gold derives its value from two unique physical properties (other than the fact that it does not tarnish) that are not possessed by any other commodity.

One unique property is this:

At subatomic level, gold resonates on the same wavelength as DNA.

If you have trouble accepting this statement then just type the words “Gold and DNA” into Google.

Sir Isaac Newton had a vague understanding of this fact, but he was far ahead of his time. He did the only thing that it was in his power to do at that time. He gave up his day job as the world’s leading physicist, positioned himself to become Master of the Royal Mint, and put the British Empire onto a Gold Standard – to ensure that all Britain’s gold would be kept safely in one place, under lock and key, waiting patiently for the time when scientists would eventually work it out.

As you will see from the articles on Google, some scientists have begun to understand. But, so far, they can only see the tip of the iceberg. Beyond Neanderthal reveals the underlying story. Gold was never a “currency”. Gold has been highly prized and sought after since Biblical times because it may well be the physical catalytic source of all biological life.

The mind blowing implications of this from a technological perspective – and gold’s other hidden unique property – are clearly explained in Beyond Neanderthal – which can now be ordered atwww.beyondneanderthal.com

Beyond Neanderthal also reveals what may possibly be an even more startling discovery: The evidence suggests that the Ancients knew far more about energy than we do today in the 21st Century. And, even more mind blowing, modern day scientists might well be at the threshold of discovering the truth about this too. Environmental energy scavenging technologies may be emerging in today’s world which can be explained within the context of the laws of thermodynamics.

Nearly 40 percent of all gold ever mined was recovered from South African rocks.

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