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Clear warning of economic storm shows that US bull market is at a very mature stage

Clear warning of economic storm shows that US bull market is at a very mature stage

The gold price is at the same level as in 2013. Over that six-year period the price has encountered resistance at $1,375. Each time it tried a rally in the past six years it has been unable to push above $1,375 an ounce. What is notable is that the price has formed a large rounding bottom pattern over that time.

That is a very large base that potentially sets the stage for a move higher in the longer term if the $1,375 resistance can be broken.

Since it fell to $1,050 an ounce in 2015, the price of the yellow metal has been making higher lows on each successive pullback. That implies that buyers are entering the market at a higher price each time and willing to pay up a bit more each time the price pulls back.

Typically when a setup like this occurs — higher lows and a series of flat tops — the price resolves to the upside as buyers overpower sellers. In the past month, the price of gold has been rising and it looks as if it may make another attempt at the $1,375 resistance area in the weeks or months ahead.

What has pushed the gold price up recently has been speculation that the US Fed may begin to cut interest rates in the latter half of 2019.

Gold yields no return in terms of interest or dividends. So there is always an opportunity cost to holding gold in the form of foregone interest or dividends that may have been earned on other assets. One

must also consider the cost of storing gold.

A lowering of interest rates in the US would probably come about on a weak economic environment and would serve to lower the opportunity cost of holding gold. If a breakout through $1,375 were to occur, and if it could be sustained, that would point to an initial upside target of $1,550.

Much commentary is being dedicated to the inversion of various yield curves in the US.

An inverted yield curve is an interest rate environment in which long-term debt instruments give a lower yield than short-term debt instruments of the same credit quality. Longer-dated treasuries normally provide a greater yield than shorter-dated treasuries. An inverted yield curve environment is not normal.

Historically an inverted yield curve has typically preceded recessions in the US. So a lot of fuss is being made in the financial media about the inversion of various maturities of US treasuries versus the longdated 10-year treasury.

The chart on this page looks back over 40 years at times when the US has seen an inverted yield curve environment. The plotting on the right of the chart measures the percentage of treasury maturities that were inverted vs the 10year treasury (this could be three-month vs 10-year, sixmonth vs 10-year, one-year vs

10-year etc). What is clear is that when a high percentage of US treasuries have been inverted versus the 10-year treasury, that has been a warning of a recession that has occurred between one and three years later. It is during recessions that the equity market suffers a bear market.

The plotting of the S&P 500 shows this in the chart. About 70% of short-term yield maturities are now inverted when measured against the US 10year treasury. The 10-year bull market on the S&P 500 is clearly at a mature stage.