We made a positive comment or two about the short-term prospects for gold this week only to watch gold prices immediately nick a bit lower. While we believe that gold has the potential to push upwards we thought we had best return to our original thesis while we still had the chance.
Below is a chart comparison between gold futures and the Swiss franc futures.
Over the decades gold and the franc have trended in the same direction. Our original argument was that the run up to parity for the franc relative to the U.S. dollar marked a cycle peak which, in turn, indicated a top for gold prices.
The view was that as long as the Swiss franc was trending lower the concurrent trend for gold prices would also be lower. The twist- the one that resulted in a spattering of positive comments for gold- was that gold prices were rising as the Swiss franc held above the late February lows. Using the 1987 comparison between equities and bonds as a template we suggested that if the franc held above .9200 for a few months that might be enough to send gold prices up to new highs.
Below is a comparison between crude oil futures and the Canadian dollar futures.
A recent argument was that the Cdn dollar appeared destined to rise to parity with the U.S. dollar but if it followed a similar path to the Swiss franc this would also mark a cycle top.
While we linked gold prices to the Swiss franc the idea was that the Canadian dollar was more likely tied to crude oil and copper futures. In other words IF the Cdn dollar hit the ceiling at dollar parity THEN we could be at the top for energy and metals prices as we begin this year’s second quarter.
The thesis remains very much of a work in progress because the Canadian dollar is still trading in the high .99’s. Our enthusiasm for this view would rise somewhat if the CAD were to pivot back to the down side and cross back through .97. This would swing it back below the rising 50-day e.m.a. line. Aside from this the ongoing argument has been that the Cdn dollar has consistently bottomed at or very close to the point in time when crude oil futures fall below their 200-day e.m.a. line. On Cdn dollar weakness- if, as, or when- the first real test may come once crude oil prices decline back to the 75 level.
Equity/Bond Markets
April 13 (Bloomberg) — Intel Corp., the world’s biggest chipmaker, forecast second-quarter sales that topped analysts’ predictions, citing growing worldwide demand for personal computers.
Below is a comparison between heating oil futures, the share price of Boston Scientific (BSX), and the ratio between Intel (INTC) and the S&P 500 Index (SPX).
In 2004 a break to new all time highs by heating oil futures helped push short-term U.S. interest rates higher. As yields began to rise the trend within the markets shifted- to the detriment of Boston Scientific and Intel and in favor of the energy and commodity sectors.
More than 6 years later there is just enough strength in the tech sector (i.e. Intel) to make the case that the INTC/SPX ratio is on the rise. If the wind blows hard enough it might even help BSX one of these days.
Below is a comparison between the U.S. Dollar Index (DXY) futures and the ratio between the Philadelphia Semiconductor Index (SOX) and copper futures.
The basic point is that a stronger dollar goes with ‘tech’ while a weaker dollar goes with ‘commodities’. This is especially true when cyclical growth is strong enough to push long-term Treasury yields higher.
One of the problems with the stronger dollar post-November has been that it has remained weaker against the commodity currencies (i.e. Cdn, Aussie, N.Z. dollars, Brazilian real, etc.) Our view has been that a truly stronger dollar will require strength in both tech and biotech so we have been watching Amgen and Intel quite closely.
What we would like to see is a clear break out through the moving average line by the SOX/copper ratio. Above 1.1 would be nice while something north of 1.2 would be better. With the SOX at 381 yesterday and copper at 3.59 this still will require more work.
