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Is gold ready to go?

20 March 2009

The Macro Trader’s view:

Since hitting a recent high on February 20th of just above $1,000, gold has been in what we judge to have been a period of correction.

The recent Dollar rally seemed to remove some of the rationale behind buying gold, because the US currency was increasingly viewed as a safe-haven trade. The background to that was the global economy sinking deeper into recession with developed and emerging economies seeing growth contract and inflation correct lower, and oil and other commodity prices sinking due to falling demand.

So, while the US economy remained deeply mired in its own recession, sentiment was positive towards the US where a new President was promising a “new agenda” which would both fix the economy and equip it for future challenges. And even though US economic data continued to deteriorate with unemployment soaring, banks on the brink of failing and the housing market almost in free fall, the Federal Reserve was putting into place a string of policies designed to support monetary expansion, foster bank lending and generally get the economy moving.

Indeed, in recent days the Gold market even looked to some as though it was about to break down and begin testing the lows! Three leading US Banks had received substantial government aid and announced they were now back in profit. That fuelled an equity market rally just when the bears had looked finally to be taking complete control of stocks globally.

But the mood has changed. At the moment when the Gold market looked on the brink of a heavy sell-off, the Fed announced the expansion of many of its pre-existing bond purchase schemes and surprised markets by announcing the de facto start of quantum easing with a US$300 Billion. Longer-dated Treasury purchase program. Bond markets took this positively and equities largely held recent gains. The Dollar sold off.

With so much stimulus being pumped into the US economy, traders/investors have become worried that before that stimulus can be removed, the seeds of a fresh outbreak of inflation will already have been sown.

It may be that given the current weakness of the US and Global economy, the authorities have no choice. To do nothing might risk an economic disaster on the scale of the 1930’s or earlier with massive unemployment. But those traders’ fears are being expressed in gold, an asset class that offers no carry, but is still seen as the ultimate store of wealth as it is beyond the reach of any one nation’s economic policy and cannot be devalued as with paper money.

We judge the Feds decision to start quantum easing to be a major event.
All the more so because some US data had shown small signs of improvement:

- Retail sales were better than expected the previous week, and
- This week housing starts and building permits have come in stronger than expected

The Fed, unlike the markets at the moment, thinks the economic outlook is grim. Hence their new policy action which has clear implications for the Dollar and Gold.

The Technical Trader’s View:

Quarterly bar chart
The market has held above the $8783 Prior high – despite repeated attempts to sell off.
That level looks to have acted as powerful support. The bull trend is intact.

We think there is a long-term move in the offing with $873 as a spring board.

April 09 Daily Bar Chart
The bull potential of the market is unmistakable. The critical level is 1005-7.
We are some way from that. But the volatility of the price action is shocking.
Yesterday had a range of $81. A Key Reversal? Maybe.

Aggressive traders will want to buy now. Others, perhaps wiser, will wait for a
break through 1005-7.

Mark Sturdy,
John Lewis
Seven Days Ahead

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Key Reversal Week in Natural Gas

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