New Wild West Strategy for Bonds (IEF, GLD, SPX)

New Wild West Strategy for Bonds (IEF, GLD, SPX)

Last week we told all gold holders to get the hell out of Dodge, and we brought along plenty of chart pudding to prove that we weren’t jiving.

This week, whaddaya know, we find out the whole damn world was listening, because not only did the entire precious metals complex fast-track it to Hades, but even the hedge funds decided it was time to bail.

As BusinessWeek tells us here, hedge funds have been closing their long gold bets for a full month now, bringing open interest on the COMEX down to a five-year low. Holdings in gold ETFs have also slumped, dropping for the fourth time in five months, while short futures positions on the shiny metal have risen by 51%.

That stinks!


Indeed, a look at the chart for gold shows a commodity gingerly wading through a cesspool of troubles.

Take a whiff –


This is gold matched against the S&P 500 for the last half year, a chart that tells it all.

To sum it up, equities gains have been gold’s losses – to the tune of a fourteen-percentage point differential in just six-months. And what’s worse, GLD is now scraping against its last retracement bottom at $119.50.

Will Gold Break Down?


The outlook is bleak, friends.

The only thing that could possibly ignite the gold price at this point is massive investor inflows, and that’s looking less and less likely now that the big guns are pulling out and looking at a surging equity market to mine their profits.

It’s also a trend that has little reason to cease in the near term. In fact, as the massive liquidity in the system begins to splash about more rapidly and the forces of global jihad and anti-glasnost gain in strength, we expect the greater measure of global cash flows to concentrate on U.S. based assets, particularly stocks, pushing them up dramatically for some time to come.

And that will give investors another reason to ignore the precious metals.


Changing Tides


Gold and the precious metals will eventually have their day, but it doesn’t appear to be near.

There’s yet another asset class that could be in for a major turn at present, too.

Investment grade bonds issued by the U.S. Treasury are also due for a secular change in trend. We’ve been discussing this issue for some time, but outside of telling you to avoid Treasury investments, we haven’t yet attempted to pinpoint a top.

Today we’re going to take a stab at it.

We’re going to look at a long term, chart of the ten year note, or at least a proxy of the same, the iShares 7-10 Year Treasury Bond ETF (NYSE:IEF), a stock that generates at least a $150 million turnover on a daily basis.

Here’s the monthly chart for that security for the last ten-years. Note in particular the volume surge of the last four months that coincides with the bump up against resistance from the short term moving average.

The story here is one of potential exhaustion.

After posting all-time highs in the summer of 2012, the ten-year note spent the next two years sliding sideways to lower. And after the latest bout of strength that brought up to her 27-month moving average (in red circle), we see her about ready to concede ground once more.

Volume also supports the top-out thesis, coming in at two to three times the average monthly truck precisely as resistance was hit (blue box).

RSI and MACD are also shaking their heads. Despite a solid 5% gain in the last ten-months, these technicals are struggling to retake their respective midway waterlines. And that, too, speaks to a loss of upside momentum.

The Economy’s Stupid


No it’s not.

With economic numbers now surprising to the upside and enhanced prospects for continued growth apparently in hand, fundamental reasons for holding Treasuries are also becoming muted.

Look now at the weekly chart for the ten-year note –

The weekly presents a story that’s told in the moving averages, specifically the 137-week moving average, appearing on the chart in a deep red.

After providing IEF with a bounce in the winter of 2009/10 and again in 2010/11 (red arrows), the 137-week MA followed price steeply higher until this past winter when a steep drop in bond prices forced it to turn over.

And that’s where we stand today.

Despite some apparently positive action from the weekly RSI and MACD indicators, we say the top is in.

The 137-week MA is now acting as resistance, as can be seen in the action indicated by the black arrows.

There ain’t no more.

Get outta Dodge.

Many happy returns,

Matt McAbby, Senior Analyst, Normandy Research

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