Right about the time that a pattern becomes somewhat obvious it is bound to change but… on the off chance that it will run for another month or two… we thought we would start off today by focusing on the recent relationship between the dollar and gold futures prices.
Below is a comparative view of gold futures and the U.S. Dollar Index (DXY) futures.
For those who haven’t been paying attention gold prices tend to rise when the dollar is weaker and fall when the dollar is stronger. A general relationship that exists over time has become a very specific day-to-day or, perhaps, minute-to-minute relationship this year.
Through the second half of this year gold futures prices have been rising in 50-point increments on a monthly basis. Gold prices moved up to 950 in August, 1000, in September, 1050 in October, and 1100 in November.
The twist is that in the process of moving up to the new trading range gold prices tend to ‘over shoot’ In other words to get to the 950 trading range in August gold prices rose to 970, declined to 930, and then settled out at 950.
If one looks at the chart at right fairly closely it becomes apparent (more or less) how the markets are stick-handling the gold price to each new trading range. When gold prices rise 20 points above the new trading range (i.e. 1120 today) the dollar hits a bottom and turns higher. The dollar remains somewhat stronger until gold prices have fallen 10 or 20 points below the trading range at which time the dollar starts to weaken.
Our point is that after testing 1120 on Wednesday the pattern suggests that it was time for the dollar to swing upwards to keep gold prices in check. While the dollar could sell off as early as today taking gold prices back up to 1120 the argument is that we will see a better dollar each time gold prices threaten the 1120 range and then a return to dollar weakness once gold prices have fallen back to 1080- 1090.
To the extent that the trend has been based on rallies for the dollar fading whenever it approaches its 50-day e.m.a. line the ‘stop’ on the sequence cuts in on any good push through 76.75.
We are going to take another run at a chart-based argument that we made on page 5 of yesterday’s issue.
Below we compare the U.S. 30-year T-Bond futures and crude oil futures from 1985- 87.
In late 1985 into 1986 crude oil prices collapsed. Utterly and completely collapsed. The offset to tumbling oil prices was a huge rise in the long end of the Treasury market.
Through 1986 bond prices remained fairly flat near the highs which served to elevate equity valuation levels in general and push the share prices of the interest rate sensitive and consumer defensive names upwards.
By the start of 1987 the cyclical trend kicked back into gear with the commodity cyclicals joining the party. This helped create so much upward momentum in the stock market at the same time that the bond market was giving back all of its earlier gains that by October of that year the entire stock market ‘crashed’.
Below is a comparison of the TBonds and crude oil for the present time frame. We had an oil price decline in 2008 offset by an equally strong trend for long-term bond prices. The difference between 2009 and 1986 is that the recovery was not led by lower long-term interest rates but instead was driven by strength in the cyclical sectors.
We have no idea whether this is possible or not but our thought was that perhaps- just perhaps- the markets are getting from ‘here to there’ in the reverse order. Instead of the bond market leading followed by the cyclicals perhaps we will see the cyclicals leading followed by the bond market.
To help make our case we have included a comparison between oil service company Schlumberger (SLB) from 1987 and Coca Cola (KO) from the current time period below. With KO trending up its 50-day moving average line in the same manner as SLB in the spring of 1987 our thought was that we could see stronger equity markets into the second quarter of 2010.
