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Are Gold bulls back on track?

22 August 2008

The Technical Trader’s view:

The market has pulled back near to excellent support at $732-45 ( from both the long-term continuation chart and the Oct contract) - and bounced.

Is this the moment for Gold bulls who missed the rally in 2007 to get back on board?

The failure of the market has been much greater than merely the pull-back through the Low of $848.

The failure of the market to hold above the support from the Prior High of 1980 at $873 is very poor and bearish.

Only if it managed to get back above that level – say through the falling diagonal – could the long-term bulls gain any confidence.

And in any event, the market really has (in the short-term) to prove its bullishness by driving up through the resistance from the old low at $855-65.

(And indeed, a more convincing reversal formation in the day chart would help convince the bulls.)

So, in the short-term, we are sellers on any close approach of the band $855-65.

The Macro Trader’s view:
Readers of the Macro Trader will know that we judge the long Bull Run in gold is essentially over, but we have held off going short over recent weeks due to heightened geopolitical tension.

The long Bull Run in gold was essentially driven by two linked factors:

1.The weakness of the US Dollar which now seems over, and

2.The weakness of the US economy, caused by the Sub-prime mortgage crisis and housing market correction.

Over recent months, the US economy appears to have stopped deteriorating, allowing traders to switch focus onto the other major economies which are now flirting with recession. As a result the Dollar has broken its Bear trend and begun what we expect to be a new Bull trend.

The emergence of global economic weakness has allowed for a correction in oil, reducing inflationary pressure and removing another key support from gold. But another key element in this market is geopolitics.

Aside from the ongoing standoff between the west and Iran, the recent crisis involving Georgia and Russia, which initially had little impact on the Gold, or even, oil markets, has taken a new turn.

In response to Russia’s military action in Georgia, NATO has united behind offering Georgia eventual membership, with talks starting around year-end. But more important than this, the US and Poland have in recent days signed an agreement allowing the US to station elements of its anti missile shield on Polish territory.

This has angered Russia as it views NATO’S inclusion of former Warsaw pact countries as a direct threat to its own security. As a consequence, Russia has broken off high level military relations with NATO and threatened a response stronger than diplomatic protest.

Although a Russian General recently said that Poland would be open to a nuclear strike if it allowed the US to station elements of its missile shield there, it is inconceivable that Russia would carry out such a threat. Poland is part of NATO and the EU, an attack on it would invoke the collective security agreement placing Russia at war with NATO, with a counter US nuclear strike the probable response.

Does Russia want to travel down that route when the west intends Russia no harm?

No! The likely response would be a disruption to Europe’s gas and oil supplies. While this would be a major inconvenience it would also damage the Russian economy since its new found prosperity is based on Petro-Dollars.

What then does this mean for Gold?

In our opinion a period of safe haven buying is likely, but unlikely to send the market back towards the highs and once the situation settles, we expect this market to resume its slide, so are we bearish; yes, sellers; not just yet.

Mark Sturdy
John Lewis
Seven Days Ahead

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