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Resolving the deadlock in Gold

12 December 2008

The Technical Trader’s view:

MONTHLY CHART: The long-term chart is familiar by now: the market’s failure to sustain itself above the Old high of $873. The subsequent pull back … …and support found at the Prior High at $732

WEEKLY CHART: The weekly chart lacks clarity: the repeated attempts to break down through the $732-739.9 band of support have come to nought. Look closer still….

DAILY CHART: Feb 2009 After vacillating around $732 the market has just made a spirited rally back to the resistance from the old low at $829.40- 834.50. If that band breaks, while there is no clear pattern completed, the market will get a fresh bull impetus. A retest of the old high of $938.80 would result.

The Macro Trader’s view:

The gold price has traded in a well-defined range for almost two months, following a bearish trend which began in April this year after making an all-time high.

Gold’s weakness coincided with a turn in the Dollar’s fortunes. After an extended Bear Run, the Dollar began a recovery, driven by optimism generated by the rescue of Bear Sterns. While this has since proved a false dawn, the Dollar’s momentum has been maintained by growing concerns of recession abroad. Economies that had previously seemed impervious to the troubles dogging the US and subsequently the UK, suddenly looked vulnerable. First the Euro zone, then China and India looked ripe for recession, followed recently by Japan.

As recession spread, oil prices fell, leading to a correction in inflation that has much further to run. With most of its key supports withdrawn, gold sold off. But just as it seemed the lows of 2004 were beckoning, gold’s bear trend paused then developed into the current period of range trading.

A new rally looks very possible, and is helped by renewed Dollar weakness, which has emerged as a result of a US economic outlook that looks much worse than it did even only a few short months ago. US unemployment is rising at a pace not seen since 1974, the incoming US President has promised to spend up to US$1.0T to stop the rot and get the economy going, but the massive increase in US National debt is a major concern and has begun to undermine the Dollar to the benefit of Gold.

So for Gold to resume its decline, the US economy needs to show some signs of at least bottoming out, at the same time as the other major economies look set for a further period of recession. Currently that prospect looks remote as the recession in the US continues to deepen. Worried investors are flocking to 3 month T-bills forcing the yield negative for the first time in living memory. Traders have resumed selling the Dollar against the Euro and Yen. Once again, gold seems to be emerging as a safe haven. All the major developed and emerging economies are in, or heading into, recession and fiscal spending in many has been ramped up as politicians try to head off a deep and painful recession.

Worries about who will buy all this debt are beginning to cause investors concern, to the extent that a neutral safe haven is being sought and once again that seems to be gold. So the deadlock in gold looks like being broken to the upside

Mark Sturdy, John Lewis Seven Days Ahead

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