Gold is back in play
09 April 2010
The Macro Trader’s view:
Our views on Gold have been well aired over the months, if not years. We are long-term bulls. But the market has suffered several steep and often protracted corrections that have on occasion endured for months.
We judge the market is currently in such a phase, but shows signs that it is now coming to an end. Naturally we expect price action to resolve into a fresh leg of the long Bull Run. But what have been the dynamics behind the market over recent months and why now is it beginning to retest the upside?
The relationship between the Dollar and Gold has been well-established throughout the current financial crisis/recession. A weak Dollar translated into strong Gold. The Dollar was weak due to a steep economic downturn which led the US monetary authorities and Administration to pump in unprecedented amounts of stimulus, which led China and others to criticize, as they feared a debasement of their own massive foreign currency reserves, primarily Dollar-denominated. So far, so good.
But the Dollar began a strong recovery late last year as several key data releases, principally December 2009 Non-Farm Payroll, came in much stronger than expected. This coincided with the Dubai debt crisis, which led to a sharp rise in risk aversion, benefitting the Dollar as traders heavily bought into safe haven trades.
The Dubai crisis morphed into the Greek debt crisis, more safe-haven buying, all of which worked against Gold.
Now the Dubai crisis is off the radar and the Greek drama, while still rumbling on, now has a safety net, albeit of untested efficacy. As a result traders have largely turned their attention to economic fundamentals, which have improved throughout this year.
Indeed the US economy looks to be slipping into a familiar recovery pattern as both ISM surveys continue to strengthen and non-farm payroll last week reported a healthy 162,000 new jobs.
Why then should this benefit Gold? Surely, stronger US data will benefit the Dollar? Yes to a degree, and the last few days have seen the Dollar bounce on lingering Greek debt fears. |But Gold too has been a major beneficiary. As the US recovery deepens and risk aversion subsides, the Dollar loses its safe haven protection and becomes victim to the Feds low interest rate policy which Bernanke has reiterated will remain in place for an extended period, (several months). But, more important for the Dollar, is the US fiscal stance. The budget deficit under Obama has exploded and so too the debt to GDP ratio and recent health reforms compound the problem.
The Obama administration offers no credible plan to shrink the deficit, so while strong growth supports the Dollar, heightened concern about US public finances undermine it thus the Gold play can reassert itself.
If the US recovery runs true to past form, the current fiscal stance together with current monetary policy could easily resolve in higher inflation. Other countries run similar policy mixes, so the only asset class truly independent from national economic policies is Gold. It is the original form of money and store of wealth.
The Fed’s stance is understandable: they don’t want to act too soon, but will when they are convinced of a self-sustaining recovery. The Obama administration’s stance isn’t understandable. Short-term fiscal stimulus was not only good but very necessary, but as the economy recovers, the Government needs to wind down its spending and repair its finances. Their inability to address traders’ fears on this matter is why we see Gold as a long-term bull market
The Technical Trader’s view:
WEEKLY CHART
The power and potential of the continuation chart from mid 2008 resides in the completed Head and Shoulders continuation pattern set to drive the market up to1350 as a minimum.
Note too, the completed bull falling wedge…
DAILY CHART
But the force of the weekly chart becomes all the more clear when taken in conjunction with this additional Head and Shoulders pattern in the day chart.
The pattern completed yesterday.
A confirmed close above the neckline at 1134 today would sustain the bulls’ hopes.
The minimum measured move implied by the pattern? As far as 1245.
The bulls are in charge short, medium and long term.
Mark Sturdy
John Lewis
Seven Days Ahead
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