TECHNICALS:

WEEKLY CHART

The Gold trend is unambiguous.

The pull-back of recent weeks has brought the market back to the clear diagonal trendline support.

And it should be noted that there is a double support there – from the Prior High support at 1579.50.

The market has paused at the combination of these supports for the past month.

DAILY CHART

The market’s bounce from the first test of the combined support was halted by the overhead resistance from the low at 1705.40.

The sideways consolidation that followed formed a bear rising wedge.

And that completed three days ago which suggests a retest of the major supports.

But will they break?

It’s not clear. Bear in mind the unfulfilled target of the Double Top that began the bear move from 1917. That is well below the 1579 support.

FUNDAMENTALS:

The rally in Gold has run out of energy and some analysts are calling the end of the long Bull run. Are they right or premature?

Gold’s recent fall from grace coincides neatly with the sharp rally that occurred in the Dollar from the beginning of September, driven by, as ever developments in the Euro zone sovereign debt crisis.

Historically Gold has fared better when the Dollar has been under selling pressure, so recent price action implies that relationship remains in play.

However the reason behind the most recent period of weakness in Gold is more economic. As the global economy stands on the edge of potentially another financial crisis/recession, traders fear that a symptom of that might be deflation.

As a non-interest rate bearing commodity with few applications other than a historic store of wealth, even when used as jewellery, it is easy to see why Gold is unattractive as an investment in a period of deflation where asset prices fall.

But this time round, if a recession does hit, it will be at a time when the governments of the developed economies are heavily indebted, with little or no room for manoeuvre, hence the Euro zone Sovereign debt crisis and the UK government’s austerity drive.

The only tool left would be monetary policy, but that too is near exhaustion as interest rates in the leading economies range from 0.10% in Japan, to 1.50% in the Euro zone. S there is little room to act there. There is of course QE. And the Fed, the Bank of England and the Bank of Japan have deployed it. Even the ECB has resorted to a version of it by providing limitless amounts of liquidity through loans to European banks against collateral of questionable value.

But should a global down-turn hit what would be the reaction of policy makers?

1.The Euro zone led by Germany would revert to type, seek to run a tight fiscal ship and look to exports as their salvation.

2.The US would use her position as the world’s largest economy and chance her luck at proposing a fiscal stimulus, believing investors would still buy US Treasuries in the absence of any credible alternative.

3.Japan would continue to pump prime her economy with debt to GDP ratios at eye wateringly high levels.

4.The UK would continue to opt for the route of QE and allow higher inflation to wither the nation’s Government and private debts.

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In such an environment, bearing in mind foreign exchange trading is a balance of relative, not absolute strengths and weaknesses, which currency would you favour?

In a situation where not all investors are compelled to buy any given foreign currency, they may very well choose to invest in gold as a universal hedge against what would then be a growing threat of sovereign default and not just among the Euro zone periphery.

If economic activity declined sharply in a virulent recession, ASSET PRICES MAY FALL, BUT DEBTS WOULD GROW, making it harder to service those debts from a decreasing economic cake, so instead of deflation making gold seem unattractive, it could make it the obvious investment since equity markets would by then, be in the grip of a harsh bear market.

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