The Macro Trader’s
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?
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.
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.
crisis morphed into the Greek debt crisis, more safe-haven buying,
all of which worked against Gold.
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.
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.
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.
budget deficit under Obama has exploded and so too the debt to GDP
ratio and recent health reforms compound the problem.
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
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:
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…
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
close above the neckline at 1134 today would sustain the bulls’
measured move implied by the pattern? As far as
bulls are in charge short, medium and long term.