Has Gold found support?
10 April 2008
Has Gold found support?
The Technical Trader’s view:
MONTHLY CHART
The long-term drama of gold is well-known.
The continuation chart formed over many years from 1980 finally completed in 2002 and drove the market on upwards.
The minimum measured move from the Triangle was just short of the all-time high.
But the momentum was sufficient to carry beyond that high Pivot at $873.
And once surpassed Prior Highs often act as good support...
DAILY CHART:
So it proved.
The pull back to the Prior High Pivot was fast, smashing the minor Prior Highs on the way and breaking out of the parallel channel that had formed since late 2007.
Note the creation of a bull falling wedge in that pull back.
Then came the bounce.
Look closer.
DAILY CHART:
Bulls should be please at the twin pieces of bull evidence:
1. the completed bull falling wedge
2. the solidity of the major support for the bull run at the Prior High.
We too, are disposed to be medium-term bullish.
But short-term, watch the resistance at the bottom of the channel at $946 today...
(And watch for any short-term reversal pattern that would help time an entry in to the market.)
There’s nothing there yet.
The Macro Trader’s view:
Following the low made on April 1st, Gold has attempted a recovery. Is it the start of a fresh leg to the multi-year bull market, or is it only a pause in what might emerge as a much deeper correction?
The conditions that initially led to the bull market in Gold are still very much in play to a greater or lesser extent:
- A weak US Dollar,
- Fears of accelerating inflation,
- The threat of an economic slowdown, now a reality, and
- Geopolitical tension; currently at a reduced level.
The US Dollar certainly remains under pressure as the US economy has fulfilled the market’s fears and entered a recession which could prove protracted. But the cause of that weakness, the credit crunch, has migrated and now other leading economies are seen as at risk.
Although the weakening US housing market was seen as an early precursor of a US economic slowdown, a fierce rally in the oil market and other leading commodities has caused higher inflation and accentuated the weakness.
In relative terms inflation remains contained and to an earlier generation of policy makers inflation at its current level in the developed economies, as measured by headline CPI, of between 2.5%in the UK to 4.0% in the US, would be seen as acceptable.
But in the modern age Central Banks aim to keep inflation anchored at or below 2.0%. So for them the inflation gene appears to be escaping the bottle, and on a global scale.
Take of the Central Banks in turn:
- The ECB currently wrestles with inflation at 3.5% which would normally force a rate hike, but they currently judge the downside risks to growth posed by the credit crisis as too great to risk tightening policy,
- The Fed has no such qualms, the US economy is in recession and although CPI remains higher than they would like, they judge the weakness of demand will return inflation to a level they judge more appropriate and are cutting interest rates to support growth, but the Dollar is the loser,
- The Bank of England sits somewhere in the middle; prepared to ease when forced by intensifying downside risks to growth, but acting with restraint due to their forecast for inflation, and
- Even in China the authorities there see a need to fight inflation as rapid growth has sent inflation to levels not seen for more than a decade.
The traditional hedge against such events and concerns is gold, and we judge the recent negative price action to be a correction in a bull market. Unless the problems outlined above are quickly resolved, which we don’t believe likely, the Gold price action is likely to resolve itself into a fresh bull leg of the rally.
We’re not sure it has begun. But we do not think gold is about to embark on a deeper longer lasting correction, it may just require a little longer to consolidate.
Mark Sturdy
John Lewis
Seven Days Ahead
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