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Gold breaks out

Today, gold broke a nearly six-year-long downward sloping trend line that goes back to its all-time high of $1,921 in August of 2011. Gold has not managed to cross above this trend line, currently at around $1,280, since then, although it has come close a number of times including as recently as last April.

Today's breach of this trend line is likely significant; historically, breaking above a five-year long downward sloping trend line has signaled major bull market moves in gold (30% or more) including 2001, 1993 and 1985.

One of the better indicators for gold is the ratio of the price of the U.S. 30 year Treasury bond to the U.S. Dollar Index. Gold rises and falls with this ratio because it encapsulates two important factors driving the gold price. When the dollar is falling while the bond is rising (and rates are falling), as we see currently, gold tends to rise. A strengthening dollar and rising yields—as we saw after the Trump election—generate a headwind for gold. Here is a one year chart of the daily ratio. The red line is the ratio and the black line is the gold price.

A five-year weekly chart shows that the correlations have remained strong over an extended period.

The next confirming step of a breakout would be to see gold stocks outperform gold. Gold stocks have been conspicuous non-performers of late; as gold has stealthily risen, the gold stocks have been very lethargic, as noted below in this daily one year chart of the ratio of the HUI gold stock index to the gold price.

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Application Test

  • 1. A _________ is equal to 0.01 for exchange rates expressed to two decimal places, or 0.0001 for exchange rates expressed to four decimal places.
  • 2. A _________ is used by most forex brokers to close out an open position at the end of the business day, and reopen an identical position as of the next day.
  • 3. A carry trade is based on the interest rate differential between two currencies. The idea is to hold _________ the currency with the higher interest rate, while holding _________ a currency with a lower interest rate.
  • 4. If you have positive carry, your position _________ money while it is open, but if you have negative carry, you must _________ interest while the position is open.
  • 5. "Trading on the technicals" refers to trading based on information derived from _________. This is also known as technical analysis.
  • 6. "Trading on the fundamentals" - or "trading the news" - describes traders that attempt to predict the effect _________ such as interest rate changes and labor reports will have on an exchange rate.
  • 7. Fundamental analysis is the study of _________ in an attempt to predict future market conditions.
  • 8. A _________ order is executed immediately when submitted and is priced at the current spot market rate.
  • 9. A _________ order is an order to buy or sell a currency, but only when certain conditions are met. These conditions are in the form of instructions and are attached when the order is first created.
  • 10. A limit order that has not yet been executed, is said to be _________.