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Has Gold lost its shine?

31 July 2008

The Macro Trader’s view:
The long Bull Run in gold has seen many corrections, which on occasion seemed to mark the peak of the rally, but each time the bulls took the market higher, culminating in an all-time high in March of this year.

Since then gold has moved within a range which only a couple of weeks ago looked set to resolve into further bullish price action, with a retest of the all-time high looking likely.

What then has so successfully constrained this market, when the economic fundamentals on a global scale still seem negative, and are arguably getting worse?

The principle reason, in our opinion, is the correcting US Dollar. As economic data in the Euro zone began to reveal more pronounced weakness, the Euro lost momentum. This coincided with a more Hawkish Fed.

On several occasions Fed speakers have communicated clearly their unease over inflation, but have stopped short of flagging any near-term hike in interest rates. However, this has left the market with the clear impression that as soon as growth allows, the Fed would seek to raise interest rates back toward more neutral levels.

The only problem is the economy is far from returning to a sound footing. Ok, US Q2 GDP released today was almost in line with consensus, but traders were prepared for a number that beat consensus, and since the main reason for any economic recovery in the 2nd quarter was due to tax rebate cheques, the 1.9% annualised growth rate recorded isn’t that great.

Moving forward, the economy now has to survive on its own. The government won’t throw in any more tax cuts. They are busy rescuing Freddie and Fannie, and the Fed isn’t about to ease policy either, unless an economic collapse looks imminent.

But with major Wall Street players still reporting additional write-downs or losses, the Banking Industry lacks the health needed to lubricate a recovery. Moreover the ripples have spread throughout the economy as several regional Banks have collapsed requiring the Fed to orchestrate a rescue.

Today’s release of Jobless claims at 448k paints a picture of an economy still moving towards recession and with non-farm payroll & ISM manufacturing due tomorrow the true extent of the economy’s weakness may well be revealed.

This leads us back to Gold. The current price action is likely a continuation of the consolidation which has extended over several months since March, and when, as we believe, the Dollar’s correction resolves itself in favour of the bears, gold should resume its rally.

The Technical Trader’s view:


The prior high from 1980 has shown itself to be good support already....

In the short-term the market would have to smash down through the $848 level.

Only then could the Bears really get excited.

The detail of the Sep 08 market: Note first, that the $848 level in the continuation chart has turned into a band of support from two prior Highs in the Sep 08 chart.

Bulls were excited when that band held throughout May and June of this year.

And especially excited when there was a completed bull Head and Shoulders Reversal.

The market bounced off the Neckline (and $911 Prior High) before shooting ahead...

The bull rush did not achieve the minimum move suggested by the H&S Reversal.

But the fall back through the $959 level, and then the $940 level was very poor.

Then we smashed the horizontal $912.

Now we are testing the integrity of the H&S pattern – the Neckline support at about $904 (declining)

Is there not a suggestion of another more recent bear H&S Reversal? Use a close beneath the Neckline diagonal before anticipating a retest of the band of support.

But only a break of $853 would signal a medium orlong-term top in Gold.

Mark Sturdy
John Lewis
Seven Days Ahead
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