No reversal yet in Gold
08 October 2010
The Technical Trader’s view:
WEEKLY CHART
The medium-term in the Gold market looks very attractive.
The initial catalyst for the bulls was surely the Head and Shoulders continuation pattern that drove the market today to its minimum target of 1350 or so.
But the creation of a Continuation Triangle has given the market a additional catalyst to drive it better. The minimum move implied by that pattern is 1475.
Look closer.
DAILY Dec 10 CHART
The Triangle has been a powerful bull stimulus.
And the upper diagonal will act as good support on any pull-backs.
Today the market seems to have baulked at the resistance of the band of Fibonacci extensions 1370-1380 and may indeed come back to the 1290 level to test that support.
Certainly the good volumes and rising open interest do not suggest a trend reversal yet….despite the violence of today’s trading.
The Macro Trader’s view:
The latest leg of the long Bull run in gold began back at the end of August, when the market made a succession of new all time highs, but today the market spiked higher and then sharply reversed.
Is this the end of the rally, the end of the trend or just yet another round of profit taking?
First, we need to understand what drives this market. Over the last several years Gold has rallied mainly during periods of Dollar weakness and or geopolitical tension. Most recently the main dynamic has been Dollar weakness.
But Gold is also supported by economic uncertainty and the policy mix that is generating. It is well understood that the Dollar is weak because of the fragile nature of the US recovery, but there are also serious concerns about the strength of recovery in the Euro zone, Japan and now the UK too.
The response from policy makers has been a little different in each case:
1. In the US the administration continues to preside over a very large budget deficit and debt build up with the Fed contemplating a new round of QE,
2. In the Euro zone, fiscal austerity has been the masterplan after the Sovereign debt crisis earlier this year almost broke the Euro, with the ECB supplying sufficient liquidity rather than QE,
3. In Japan the economy remains in the grip of deflation, the authorities are now intervening to weaken the Yen and the BOJ has cut rates to zero and announced a Bond purchase program,
4. In the UK the recently-elected government has put together a severe fiscal consolidation that may cause several quarters of slow growth and perhaps tip the economy back into recession. The response of the Bank of England has been to contemplate a restart of QE.
So in three of the larger economies the Central Bank is either reactivating or close to reactivating QE. The Gold market currently has little to fear from QE regarding inflation, globally it is tame, although less so in the UK.
But what un-nerves investors and attracts them to Gold is the nature of the current economic climate and the policy responses it requires. Quite literally no one really knows how all this will end since other post WW11 recessions have been completely different.
While the likes of Fed chairman Bernanke has studied the great depression at great length no two economic periods are the same. The world is a very different place to the 1930’s with many previously economically primitive countries now economic powerhouses that are challenging the older developed economies for dominance.
This is why we judge Gold is currently so attractive to investors and indeed Central Banks. Since the current environment looks like persisting at least into much of next year, gold looks set to make yet more all time highs, so for us, we are now likely witnessing a correction which should ultimately provide fresh buying opportunities.
Mark Sturdy
John Lewis
Seven Days Ahead
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