TECHNICALS

MONTHLY CHART

The market has been recently driven by a series of powerful bull structures:

1.H&S continuation pattern ( whose target - a minimum -was achieved at 1250 or so)

2. A continuation Triangle whose minimum target remains above the market at 1480 or so.

DAILY CHART

But this chart in the Jun 11 contract adds further excitement to the bulls case: note that the market has overcome the succession of Prior Highs Pivots at 1430, 1436.70, 1447.20 – which move has now established a powerful band of support beneath the market.

Better still, a continuation Triangle has been completed, whose minimum target lies up as far as 1520 or so. The bulls are in charge.

FUNDAMENTALS:

The long bull market in Gold looks set to continue, as the market makes new highs driven by a combination of dynamics that include some new and some longer standing.

A key feature of this market over the last few years has been the weakness of the Dollar, and although there have been periods of Dollar strength, these now stand out as periods of correction.

Why does a weak Dollar matter for Gold?

The Dollar is the World’s sole reserve currency, therefore prolonged periods of Dollar weakness, especially when driven by inappropriate policy, erodes the wealth of those using it as a reserve and forces them to seek an alternative currency. Since none exists there is only one alternative and that is the ancient store of wealth: gold.

The other dynamic which has been less constant, but has re-emerged, is inflation and the fear that rising energy prices and commodity prices will drive up further the level of inflation globally.

The ECB raised rates today for that very reason and the Central Bank of China hiked rates earlier in the week, the forth in the current series, due to similar fears.

These inflationary fears are adding to Gold’s attraction, as it erodes wealth held in paper money over time, but acts to drive up the value of Gold since it is independent from any national policy and is fully convertible against any other currency.

But as the Global economy is still only in the early stages of recovery, with the US economy just beginning to gain traction after the Fed has resorted to several episodes of Quantum Easing after what was a deep and damaging recession, why is inflation presenting as a risk so soon?

The main reason for most economies is the rise in commodity and energy inflation. Unlike previous periods of economic recovery, the traditional developed nations of the west no longer have the monopoly on economic power.

Over recent years they have been joined by the large emerging economies of China, India and Brazil.

The first two are building their economic strength on manufacturing - especially China and they are voracious consumers of natural resources and energy, in particular oil. The Chinese economy faired much better than those of the US, UK, EU and Japan during the recession and kept expanding. So, now the established developed economies are starting to grow, demand for raw materials and energy is increasing from an already elevated level.

With fears that peak oil production may have already passed, the price is being pushed up and the recent uprising in the Arab world has raised the risk premium on this essential commodity.

So as the western economies struggle to respond, while at the same time deploying exceptionally lose monetary and fiscal policy designed to help growth, investors fear inflation will cause a general devaluation of national currencies, especially the US Dollar and seek a neutral hedge in Gold.

Until these inflationary pressures are contained through tighter fiscal and monetary policy, Gold looks set to rally further.

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Crude Oil Upmove Reaches Resistance Territory

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