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Gold, China's Yuan and the Dollar

Advice herein is provided for the general information of readers and does not have regard to any particular person's investment objectives, financial situation or needs. Accordingly, no reader should act on the basis of any information contained herein without first having consulted a suitably qualified financial advisor.

By Colin Twiggs
May 16th, 2016 3:00 a.m. EDT (5:00 p.m. AEST)



A weak Dollar, low interest rates and rising inflation in the US all fuel demand for Gold. But I believe that the primary driver is safe-haven demand, driven by expectations of a depreciating Yuan.

Gold flags further gains

Not quite a classic cup and handle pattern, but gold's 2-week flag after a broad saucer through March-April suggests strong buyer interest. Breakout above $1280 would signal a fresh advance. Follow-through above $1300 would confirm.

Gold

* Target calculation: 1300 + ( 1300 1050 ) = 1550

Any weakness of the Yuan would be likely to drive gold through resistance at $1300/ounce, signaling another advance with a long-term target of 1550 (the lows of Sep/Dec 2011 and May 2012).

Disclosure: Our managed portfolios are invested in Australian gold stocks.

The Dollar

The US Dollar Index rallied off long-term support at 93 but this looks more a pause in the primary down-trend, signaled by decline of 13-week Momentum below zero, than a reversal.

US Dollar Index

Explanation for the Dollar rally is evident on the chart of China's foreign reserves: a pause in the sharp decline of the last 2 years. China has embarked on another massive stimulus program in an attempt to shock their economy out of its present slump.

China: Foreign Reserves

But this hair of the dog remedy is unlikely to solve their problems, merely postpone the inevitable reckoning. The Yuan is once again weakening against the Dollar. Decline in China's reserves, and the US Dollar as a consequence, is likely to continue.

USD: Chinese Yuan

Interest rates and Inflation

Inflation is giving mixed signals. CPI fell to 0.87% (year-on-year) for March 2016, while Core CPI (excluding energy and food) is a healthy 2.2%. I would have expected the two to converge by now, after the initial oil price fall pushed CPI into negative territory.

CPI and Core CPI

The Five Year Breakeven Rate (Treasury yield minus TIPS) recovered to 1.53%, while growth in the hourly manufacturing earnings rate (production and nonsupervisory employees) rocketed to 2.98%.

5-year Inflation Breakeven and Manufacturing Hourly Earnings Growth

Despite this, long-term interest rates are weak, with 10-year Treasury yields testing support at 1.70 percent. Breach would signal another test of the record low at 1.50% in 2012. Fed softening of their tightening bias may be a contributing factor, but so could safe-haven demand for treasuries for investors wary of stocks....

10-year Treasury Yields

Doubt is not a pleasant condition, but certainty is absurd.

~ Voltaire

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