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Gold prices jump as Treasury yields decline and move the dollar lower

Commentaries & Views

Yields on U.S. debt instruments such as the 10-year note, and 30-year bonds have been rising as the Federal Reserve has raised interest rates at each of the last FOMC meetings since March of this year. Currently, the Fed funds rate is between 3% and 3 ¼%.

Today US treasury notes declined by 0.87 points moving the yields from 3.829% to 3.642%. When yields on U.S. debt instruments rise it moves the dollar higher, which also means that when yields decline so does the dollar. That is exactly what we saw today with the dollar declining by 0.45% a total of 0.504 points with the dollar index currently fixed at 111.58.

Last week on Wednesday, September 28 the dollar hit its highest value in the last 20 years at approximately 114.60. The dollar index has closed lower on three of the last four trading days.

The chart above is a daily Japanese Heikin-Ashi chart of the dollar index. The Japanese Heikin-Ashi chart is a variation of a standard Japanese candlestick chart in that it uses the same for data points; open, high, low, and close. However, it is the open that is calculated differently than a standard bar or candlestick chart. In both of those charts, the open is fixed from the actual opening price of trading for that day (on a daily chart) and on a weekly chart the open is fixed from the opening price on Monday and the closing price on Friday. This creates the “real body” regardless of the color.

The Heikin-Ashi chart fixes its opening price from the midpoint of the prior candle. The result is that this type of chart effectively filters out some noise and is used to define many aspects of the current trend. It provides insight into the strength of the trend with two variables. The size of the candlestick itself. And the absence of a lower wick during an uptrend, and an absence of a upper wick during a correction. It also provides visual information at key and critical pivot points when a trend has a key reversal. In the case of the chart above, you have a series of large green candles all with no lower wicks up until Wednesday of last week.

On Wednesday the candle that formed was extremely small-bodied (the green or red rectangle drawn as a box around the open and closing price) with extremely long upper and lower wicks. This candle configuration when found after an extended rally or correction can be a strong indication that a key reversal is imminent. In the case of the dollar chart above following Wednesday’s candle, the color of the real bodies changed from green to red indicating the beginning of a correction.

Another type of Japanese chart that is excellent to determine the trend and more importantly key reversals is called a Japanese three-line break chart. It is analogous to the Western point and figure chart in that it is based on price and not time. The chart above is an example of the dollar as seen through a three-line break chart.

It differs from both the Japanese candlestick and Heinkin-Ashi chart in that a candle is only created under certain conditions which are based on price changes and not dates. Each new close can result in one of three possibilities.

• A new candle is created when the price continues in the same direction

• A new candle in the opposite color is drawn when the price change is large enough to warrant a reversal

• no candle is created when the current price does not extend the trend or the change is not enough to warrant a reversal.

Lastly, this type of chart adds a projection candle which is drawn in a different color than created from a rally or correction as seen in the dollar index chart above.

Because there is a negative correlation between dollar strength or weakness and strength or weakness in gold next two charts (charts 3 and 4) also show a key reversal or pivot point in gold as the overall trend changed from bearish to bullish. They are the mirror opposites of the dollar charts above.

The shortcomings of both of these chart types are that during a choppy and range-bound market you will get alternating candle colors and no clear picture of the trend. Also although it is clear that a key reversal has formed in both the dollar and gold, these trends can be short-term and reverse at any time as the fundamental events behind a rally or correction change.

As of 5:28 PM, EDT gold futures basis most active December contract is currently up $36.60 or 2.19% and fixed at $1708.60.

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Wishing you as always good trading and good health,

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.