How Gold Links Treasuries & the Dollar

by Ashraf Laidi
Jan 26, 2009 18:43 | 30 Comments

US Dollar & Treasuries. The emergence of last week's unsual direct relation between the dollar and gold provided a valuable signal to the validity of the rally in the precious metal. It could also be explained by the rise in bond yields (fall in prices). Last week witnessed a rise in bond yields that was accompanied by a not-so smooth strengthening in the value of the dollar. Despite the dollar's leap to 23-year highs vs GBP, the currency made more modest gains vs the euro while nearing 14-year lows against the yen. The dollar's gains proved sketchy at best as the rise in bond yields emerged from supply concerns (excessive borrowing) rather than improved economic data. Yields on 10-year treasuries hit 6-week highs as the Obama Administration is expected to step up the nations borrowing to a new record high, taking the fiscal deficit to as high as $1.4 trillion or (9.5%-9.8% of GDP). This week, auctions of 2-year notes, 10-year notes and 20-year TIPS will raise $78 billion. As the dollar is unable to fully respond to rising bond yields resulting from supply worries, gold prices take over the mantle of safety.

How Gold Links Treasuries & the Dollar - Trsrys &Amp; USD (Chart 1)

Gold has comfortably held above the $900 level as the unusual decoupling with the euro (and unusual coupling with USD) continues due to the metals improved luster resulting from widespread global economic gloom and ultra low global interest rates. As the price of money (interest rates) is held down by central banks, the price of its competitor (gold) pushes higher on the lack of yield reward in monetary alternatives, excess printing by Fed, BoE & ECB as well as the absence financial market shocks (which have proven negative for risk appetite as well as gold).

My Friday outlook for $900 gold was especially highlighted by the notion that gold remained lower in yen terms than in terms of USD, GBP or EUR, thus, more likely to lure Japanese investors into lifting the metal towards the YEN 82,000, which is technical resistance. As this ensues, retail investors worldwide begin to chase the headline-grabbing trend (+$900) and drive the metal further up. While having breached well above its 200-day moving average against both the euro and the dollar, gold remains 11% lower than its 200-day MA in yen terms. Reports of gold shortages in popular gold shopping places such as Dubai have are also starting to provide the real demand element to the rise in spot price of gold. Despite golld's breach above the psychological level of $900, The $920 trend line resistance remains the more essential target to break. Tuesday's release of the Germany's January IFO survey on business sentiment may well be teh catalyst for further gains in GLD and EUR in the event that both the expectations and current assessment indicators meet or beat forecasts.

For more on the Gold/USD relationship, visit Chapter 1 of my book "Currency Trading & Intermarket Analysis".

Wednesday's FOMC decision will no longer carry the usual suspense associated with the size of the rate cut after the FOMC clarified it will keep rates near zero for some time. Instead, the quantity of bonds purchased will be the new focus as the Fed implements the Term Asset-Backed Securities Loan facility, which case Treasuries may stabilize, yields weaken and the dollar ease lower.

Euro has a firm grip above the $1.29 figure after last week's successful stabilization at the $1.2760 low kept bears at bay despite the latest S&P downgrade of a Eurozone member. Tuesdays IFO survey will be mulled for its components as both the current conditions and expectations index will have to show declines in order for EURUSD to fall markedly. EURUSD is unlikely to repeat last weeks wobbly tone especially ahead of the zero-bound FOMC. Trend line resistance remains firm at $1.3250, followed by the 50-day MA of $1.3320. EURGBPs 6-day rally is being reversed amid a partial pick-up in risk appetite. 0.9275 is seen as a temporary support that could be broken only in the event of accumulated buying in global equities.

GBPUSD
made its obligatory bounce from the latest 23-year low of $1.35, but gains are increasingly capped at $1.3980. The main drivers of any sterling rebound are seen as technical buying, overall USD selling on Fed credit easing and the resulting bounce in risk appetite. Subsequent gains could emerge towards $1.4070.

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Comments (Showing latest 10 of 30) View All Comments
mvpydude
South Carolina, United States
Posted Anonymously
11 years ago
Feb 15, 2009 18:51
Excellent analysis on USD/10y!
The correlative stochastic event appears to be overdone as of Friday's close.
However,the recent event could possibly signal a violent reversal to a sustained negative USD/Yield correlation or just be another lucrative arbitrage opportunity.
Given, imho, the substitution effect of GO, the current oil glut and the tradition of countercyclical policy, Gold supply !!COULD?? be artificially increased to boost elasticity of supply while allowing proceeds to subsidize future treasury auctions.
These are, indeed, interesting times.
GL to you on the signing and will try to make it there.
MVPYDUDE.
venu
jaipur,
Posted Anonymously
11 years ago
Feb 14, 2009 13:22
hi.ashraf,

today first time i have visit to your website.i like it very much,but i does trade in indian shares only.do you track indian stock market.
Rob
New York, United States
Posted Anonymously
11 years ago
Feb 3, 2009 15:53
Hi Ashraf,

How about broadcasting your seminar over the web tomorrow, or recording it!
Rob
New York, United States
Posted Anonymously
11 years ago
Feb 3, 2009 15:53
Hi Ashraf,

How about broadcasting your seminar over the web tomorrow, or recording it!
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Feb 2, 2009 14:04
That's another form of proctectionism. And it would surely destor FX FCMS. This is a considerable decline in leverage. I don't think it will pass.

Ashraf
say no
Posted Anonymously
11 years ago
Feb 2, 2009 8:11
Hi Ashraf. There have been 2 disturbing regulation proposals in the trading industry that would basically destroy the 2 biggest markets in existence.

Finra proposes lowering the leverage in forex to 1,5/1 bassically no leverage.
http://www.finra.org/Industry/Regulation/Notices/2009/P117744

Then you have the bill proposal that would destroy the credit default swaps market as we know it wiping out most of the volume. Bloomberg made a story about this but now suddenly it's gone of their site. For those that didn't read it, google "U.S. Draft Law Would Ban Most Trading in Credit Swaps"

What do you think of these new attacks on the trading profession? What do professionals in the trading industry think about these proposals? Do they plan to voice their concern and lobby against these unfortunate proposals?

Or will they just take it because after all, "they" caused this crisis like the goverment is conditioning the public to bealive. And by "they" I mean wall street (in other words traders) and the free market.

So whats their solution? Looks like it's destruction of trading and the free market, and I'm sure most of the public would cheer them on while they did it.
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 31, 2009 0:42
Ced, Lots of event risk next week. nice upward bias in Aussie BUT RBA rate cut may weigh. $1.2670 support for EURUSD.

Ashraf
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 30, 2009 17:06
WAQAR, downside seen supported at $1.2765. US numbers were not as bad as feared. Upside still open towards $1.2930.

FRANK: NZD increasingly looking like GBP.0.5220 looks like a comfortable resistance and traders will want to test 0.50, followed by 0.4770.

SERGE, remains weak vs USD as long as stocks head nowhere fast. We'll have to see 1.25 in USDCAD as early as next week, followed by 1.26 before we see 1.19.

ROB, Aussie shows H&S heading towards 62.30 cents. markets expects 100-bps cut to 3.25% after it decided not to hold a meeting in Jan. USD seen as best gainer vs AUD if they do at elast 100-bps.

Ashraf
Ced
London, UK
Posts: 12
11 years ago
Jan 30, 2009 17:04
Hi Ashraf,

I have up bet on AUDUSD. Should I cut now or wait?
Do you expect it next week to go up or low (how low)?

Also interested in EURUSD short term (two weeks).

Thanks
Ced
Rob
New York, United States
Posted Anonymously
11 years ago
Jan 30, 2009 14:23
Hi Ashraf,

Thanks for your thoughts on GDP and the Yen crosses yesterday.
I'm trying to anticipate who will be the biggest winner against AUD next week, under the assumption that RBA will cut its rates from 4.25%. Do you think it will be the GBP, as in the recent NZD scenario your new Hot-Charts (very nice feature) illustrate? Or perhaps the JPY or EUR? Any thoughts on what will gain the most from a AUD rate cut (assuming that will happen) would be much appreciated! Thanks Ashraf!