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Gold at the final frontier?

04 September 2009

Gold at the final frontier?

The Macro Trader’s view:

Readers of the Seven Days Ahead’s Macro Trading Guide will know we have been frustrated long-term bulls of this market, forced onto the sidelines as observers while a protracted 6 months period of sideways trading played itself out.

But over recent days the market has rallied convincingly, almost to a point where a run at the previous highs seems possible. Yet again, we have been caught out by failed rallies in this market on several occasions over recent months, and this has made us cautious.

But what has stirred the Bulls this time, and could something more durable develop?

Until recently a familiar pattern was expected to emerge in the markets whereby stocks rallied on recovery hopes and bonds began to weaken, before developing into a bear market as recovery emerged and strengthened towards the year end.

But that pattern has been tested. The sell-off in equities over recent days can be attributed to the heavy selling in China at the start of the week: traders took fright when the long-term ruling party in Japan was dumped out of office. In neighbouring Asian countries such as China many feared the loss of the post-WW11 status quo. We think those fears will abate and stocks should recover.

Bonds too have rallied at a time when a sell-off would have seemed more appropriate. That is because traders have received a rare steer from the world’s leading Central Banks: at the Fed’s recent Jackson Hole retreat, policy makers made it clear that tightening monetary policy wasn’t on their agenda.

With official forecasts for recovery expecting a tepid or timid recovery after the worst financial crisis/recession in living memory, Central Banks are relaxed about short/medium term prospects for inflation. They argue the opening up of large output gaps in all the leading economies will keep inflation under check.

They argue this despite the unparalleled expansion of fiscal deficits resulting in an explosion of debt in many of the major economies, especially the US.

So, with inflation neutered for now as a threat, and the Central Banks aiming to keep policy at current exceptionally low levels for an ‘extended period’, bond traders are reluctant to sell, and some short-term government bond markets look bullish.

But for those traders and investors who are not so relaxed about government deficits, and the US fiscal deficit which is set to explode as a matter of policy, Gold might just be the alternative safe haven they need.

The Technical Trader’s view:

WEEKLY futures cont. chart

The drama of the Gold market lies in the astonishing refusal of the market to pull back from the 1980 high of $873.

The attempted sell-off of 2008 found good support at the Prior High of $732.

The moves of 2009 have been largely sideways. But in so doing, a Continuation Triangle has been created.

Look closer …

DAILY CHART

The Triangle may have completed – certainly the initial breakthrough move was in massive volume – but we need a confirming close above the upper diagonal, or better, the Prior High at 974.30.

Note too, the tiny Bull Head and Shoulders pattern inside the triangle.

This may be the beginning of something big…the minimum move implied by the Triangle if it completes? About $135…

Mark Sturdy,
John Lewis
Seven Days Ahead

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A Shorter Term Target in Gold

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USD/CAD – A Recovery from Fibonacci Support?

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