Bond Prices Collapse And Gold Explodes: Weekly Metals Report September 17

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Includes: GLD, SLV, TLT
by: Patrick MontesDeOca

Ratings agency Egan-Jones on Friday downgraded the U.S. country rating to AA-minus from AA, citing the Federal Reserve's latest stimulus program to boost the sluggish economy. The Fed on Thursday said it would pump $40 billion into the U.S. economy each month until it saw a sustained upturn in the weak jobs market.

"The Fed's QE3 will stoke the stock market and commodity prices but in our opinion it will hurt the U.S. economy and by extension, credit quality," Egan-Jones said in a statement about the latest quantitative easing program. "The increased cost of commodities will pressure profitability of businesses and increase the costs to consumers, thereby reducing consumer purchasing power."

Moody's Investors Service currently rates the United States Aaa, Fitch rates the country AAA and Standard & Poor's rates the country AA-plus. All three of those ratings have a negative outlook.

This came as no surprise to the bond markets, as bond prices reacted negatively to the Fed's QE3 decision to leave the zero base interest rate policy status quo for a couple of more years. At the same time, continuing the strategy of providing more stimulus to the economy and the ongoing policy of the Fed purchasing its own debt by buying U.S. Treasury obligations, will continue to undermine the position of the U.S. dollar as the world's reserve currency. This is an unsustainable formula, with devastating inflationary consequences for the long-term.

This is exactly what the bond market is telling us. The fact that bonds dropped more than 2 basis points (Higher Yields) after Mr. Bernanke's QE3 announcement; is a very strong indication of how global bond investors are beginning to price in the risk premium for ownership of U.S. governments securities. If we take a look at the December 30 Year U.S. Treasury Bond Futures charts, we can clearly see that bonds have put in what most classic technical analysts call a Triple Top.

This chart formation is used to identify major long-term changes in price chart patterns. In this case it looks like the downside target objective is in the 142 area, near term. This puts in a yield of approximately 3.5%, as a potential target short-term.

In terms of yield, the 30 Year U.S. Treasury Bond Yields have gone up from a low of 2.46% made on July 23, 2012, to the current levels of 3.09% as of September 14, 2012!

Bond prices have come down from a high of $154.17 as of July 23, 2012, to the current price of $144.30 as of September 24, 2012. That is a staggering increase in interest rates of more than 9 basis points in just a few of months.

Click HERE to enlarge.

This is a major shift in interest rates, in a short period of time and it signals ownership risk of U.S. Treasuries is at a historical high.

Let's take a closer look at what the yield technical indicators are telling us for the bond market near-term.

The September U.S. 30 Year T Bond contract closed at 3.09% yield. The 52 week Range is: 2.46% - 4.39%. The market closing above the daily 9, 18 and 36 day MA's on a weekly basis is confirmation the yield trend momentum is bullish.

The market closing above the VC Weekly Price Momentum Indicator of 3% yield, confirms the trend remains bullish. Look to take some profits if long as we reach the 3.18% to 3.26% levels early next week. If stops are taken out here, we could see a sharp rally up to the 3.25% and 3.48% weekly resistance levels.

Buy corrections at the 2.92% and 2.74% levels to cover shorts and go long on a weekly reversal stop. If long use the 2.74% level as a SCO/GTC ( Stop Close Only and Good Till Cancelled order).

GOLD

In comparison to the bond market during the same time frame, the price of gold rose more than 10% from a level of $1,608 per ounce made on July 23, 2012 to the present levels of $1,773 per ounce as of Sep 14, 2012.

It seems the price of gold has gotten ahead of the Fed's decision regarding the highly expected QE3 announcement. It is implying that it has discounted the announcement, since it was looking for a more universally robust plan than what was announced. As a result the move ran out of steam with gold closing at $1,773 per ounce, a slight gain of more than $33 dollars for the day.

Let's take a close look at the gold charts and see what the technical picture looks like over the near-term.

Click HERE to enlarge.

The December (Comex) gold contract closed at $1,773.6. The 52 week Range is: $1,535 - $1,934.6. The market closing above the daily 9, 18 and 36 day MA's on a weekly basis confirms the momentum is bullish.

The market closing at the VC Weekly Price Momentum Indicator of $1,774 is neutral to bearish. Look to take some profits if long as we reach the $1,780 and $1,787 levels early next week. If stops are taken out here, we could see a sharp rally up to the $1,800 to $1,825 levels weekly resistance levels.

Buy corrections at the $1,767 and 1,761 levels to cover shorts and go long on a weekly reversal stop. If long use the $1,761 level as a SCO/GTC (Stop Close Only and Good Til Cancelled order).

The December (Comex) electronic silver contract closed at $34.66. The 52 week Range is: $26.20 - $40.72. The market closing above the daily 9, 18 and 36 day MA's on a weekly basis confirms the momentum is bullish.

The market closing above the VC Weekly Price Momentum Indicator of $34.65 is bullish. Look to take some profits if long as we reach the $34.99 and 35.32 levels early next week. If stops are taken out here, we could see a sharp rally up to the $36.50 to $37.50 levels weekly resistance levels.

Buy corrections at the $34.32 and $33.99 levels to cover shorts and go long on a weekly reversal stop. If long use the $33.99 level as a SCO/GTC (Stop Close Only and Good Til Cancelled order).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Trading in the financial markets involves significant risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results.