Gold Traders: Why You Need To Watch Treasury Yields Now
New York (Aug 13) As gold prices slip into a quiet summer doldrums slumber, are you watching 10-year Treasury note yields? If you don't have the 10-year note programmed into your charting system –do it now.
The 10-year Treasury note and nearby gold futures prices show a strong inverse correction. As Treasury prices fell from around 2.35% in December 2015 to a recent low at 1.33%, gold prices advanced smartly. A close look at the chart reveals a strong inverse correlation. See Figure 1 below.
Macro picture: Global bond yields remain at historically depressed levels, due in part to sluggish growth in advanced industrialized economies and quantitative easing and negative interest rate policies in Europe and Japan.
Here's a quick snapshot of global 10-year government bond yields now:
United States 1.49%
Key point: That's not much return on your money over a 10-year period. No wonder gold is climbing. Gold becomes a store of value when confidence in the financial system begins to fail. Central banks current monetary policies are not working.
Key levels to watch in US 10-year yields: Since mid-July, US 10-year yields have slipped into a sideways range between 1.62% and 1.45%.
Trading trigger points: These are the key levels for gold traders to monitor. A sell-off under 1.45% would be gold-bullish and a rise above 1.62% would be short-term gold bearish.
SPDR GLD Trade Watch Starts Now
Even though gold is up about 27% year-to-date, the yellow metal is just about to enter a seasonal bullish period, which could provide the impetus for the next leg up.
For the short-term trading crowd: Historically, there is a strong price period for gold from late August until late September or early October, says Jeffrey A. Hirsch, editor of Stock Trader's Almanac & Almanac Investor.
"Demand increases as jewelers again stock up ahead of the seasonal wedding event in India and also, as investors return from summer vacations," Hirsch explains.
The trade: "Entering long positions on or about August 26 and holding until October 1 has worked 23 times in the last 41 years for a success rate of 56.1%," says Jeffrey A. Hirsch, editor of Stock Trader's Almanac & Almanac Investor.
Hirsch crunched the numbers and found that in the 19 years since 1996, "this trade has been profitable 13 times with a cumulative potential profit of $17,550 per single futures contract."
For those who don't trade futures, Hirsch points to SPDR Gold (GLD) as an "easy and cost effective way to execute this trade" GLD has over 31 million ounces of gold worth over $42 billion backing it and typically trades in excess of 10 million shares daily, Hirsch notes.