Gold Prices May be Ready to Break Out as U.S. 10-year Treasury Yield Tumbles

Witawat (Ed) Wijaranakula, Ph.D.
Thu Sep 24, 2015

The CME spot price of gold surged 2.38% on Thursday to an intraday high of $1,156.40 per ounce, after Caterpillar Inc [NYSE:CAT] slashed its 2015 revenue forecast and could cut up to 10,000 jobs through 2018, citing a slowdown in industrial activity in China. The company has already reduced its personnel by more than 31,000, or about 2.6% of it global workforce, since mid-2012. Last week, the U.S. Federal Reserve decided to hold off a rate hike and maintain their zero interest rate policy after its Federal Open Market Committee (FOMC) Meeting, noting the economic slowdown in China and emerging markets as the reason for the delay.

Separately, the U.S. Department of Commerce said on Thursday that durable goods orders fell 2% in August, in line with the expectations of economists. Excluding the volatile transportation sector, “core” orders were flat in the month. 

The U.S. 10-Year Treasury Note yield, which is inversely correlated to the gold price, tumbled 2.94% on Thursday, to an intraday low of 2.081% before bouncing back to close at 2.127%. The U.S. dollar index closed practically unchanged at 96.15, down 0.06%.

As of September 15, there are 134,678 short positions for gold futures [COMEX:GC], by non-commercial dealers, compared to about 174,225 long positions, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. The non-commercial dealers have decreased their long positions by about 9,390 contracts while they increased the short positions by about 10,356 contracts from the previous week, resulting in a gain in the net short positions of 19,746 contracts, worth about $2.23 billion, where gold contracts are traded in units of 100 troy ounces. 

Hedge funds have been shorting gold due to lack of demand from both China and India, as well as safe-haven demand. Analysts expect gold to rally as the China slowdown worsens and demand from India picks up. Indian gold demand traditionally peaks in the fourth quarter, driven by festival seasons beginning at the end of September, the wedding season, as well as Diwali, the festival of lights, starting in November.

Looking at the bond side, there are 775,051 short positions of 10-year U.S. Treasury Notes traded on the Chicago Board of Trade (CBOE:TNX), by leveraged funds as of September 15, compared to about 359,622 long positions. Hedge funds were expecting the Federal Reserve to hike the interest rate and hence increased their short positions by about 18,870 contracts, worth about $18.87 billion, from the previous week, where TNX contracts are traded in units of $100,000 face value.

As of September 24, the federal-funds futures indicate only 11% odds for a quarter-point rate hike at the October 2015 policy meeting, while the odds are just 35% at the December 2015 meeting, according to data from CME Group. 

From our technical viewpoint, the gold price, which has been moving in a bullish descending wedge chart pattern since the beginning of the year, is testing the upper trendline resistance of the descending wedge. The gold price could break out if U.S. and global economic news get worse or the U.S. Federal Reserve decides to delay the first interest rate hike until next year.

On October 1, when the 2016 fiscal year starts, the U.S. government will shut down unless Congress and the White House can agree on a bill that would keep money moving from the Department of the Treasury to the federal agencies and programs it funds. The U.S. debt ceiling deadline may also prevent the U.S. Federal Reserve to make any move until the Congress and the White House can agree on the terms of raising the nation’s debt limit, which could be between mid-November and early December or when the Treasury Department starts to run out of cash.

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