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What\'s got into Gold?

21 February 2008

Gold bugs are flying – why?
The Macro Trader’s view:
After a period of consolidation the underlying bull trend in gold has powerfully re-emerged over the last few days. The forces responsible for the rally since early 2004 have changed little, but their relative importance in traders’ minds has periodically changed, as the focus of attention has shifted between:
• Dollar weakness,
• Fears of higher inflation,
• Anxiety over an increasingly likely US recession, and
• Geopolitical tension.

1. Dollar weakness: in our view the Dollar remains fundamentally weak, but in recent weeks the move lower has stalled as traders have focused their attention on the increasingly negative news coming from other economies; especially the UK and Euro zone which are now both seen at risk of their own recession. But the US economy runs its own unique risks which could cause a deeper than average recession on the back of a deteriorating outlook for the housing market and the financial sector, which would send the Dollar much lower and gold higher.

2. Fears of higher inflation: with regard to Inflation; policy makers continue to fret that if they turn their attention solely to supporting growth, higher inflation will result as oil prices remain at very elevated levels and only this week have traded US$100.00 per barrel on tension between the US and Venezuela, but a growth slowdown or recession should reverse the trend and see oil prices ease lower.

3. Anxiety over an increasingly likely US recession: the possibility of a US recession seems very real and after the recent US ISM non-manufacturing survey they may already be in one; this too will weigh on the Dollar and act to support Gold prices.
4. Geopolitical tension : the other main ingredient is geopolitical tension; this includes the ongoing conflict between Israel and the Palestinians, the crisis over Iran’s nuclear program, Russia’s increasingly assertive stance on the world stage, and the various threats to oil and energy supplies seen at various times around the world which currently involves Venezuela.

All of these factors are powerful influences on the price of gold and although we were uninvolved in this leg of the rally, which now looks a little mature, a pullback will find us seeking a buying opportunity.

In summary, Gold continues to act as a catch-all hedge of last resort and when any or all of the forces outlined above force their way back into the headlines, traders react. But if the US economy really does fall into a deep recession and financial markets become as illiquid as they were last summer, then the Gold market really will enjoy a fresh powerful leg to this long run rally, so in our judgment the next big move is yet to come.

The Technical Trader’s view:


The big picture is beguiling: the market has driven up above the old high from the Continuation Triangle.

When it first happened we wondered whether it would stay there...

But it has.

The detail of the market shows how the market has driven above the old high at $873 and found stability there.

There has been only one test of the very long-term support.

We thought there might be more bear sell-offs to create a bottom above $873.

That hasn’t happened. The market has surged ahead without much underlying structure and driven above the near high.

So we have been caught out by the recent move.

What to do?

Stand fast.

The market needs to establish itself at these levels before we want to buy... and volumes weren’t that impressive on the way up...

Mark Sturdy
John Lewis
Seven Days Ahead

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Trading Short Sterling: it’s only a pullback!

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