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The alignment of Gold

05 November 2009

The Technical Trader's view: 


On the Market Update of 5th October How High Can Gold Go?' We presented this chart. 

It shows the Gold price just about to break above a Neckline 

We were excited because a Head and Shoulders Continuation pattern was just about to be completed. 

As a result we felt the bulls were in charge:  medium and long term. 

From that H&S pattern and various Fibonacci extensions, we were able to build a series of medium and long-term targets for Gold at 1106, 1210, and 1330. 

Now look closer.  


What happened? 

On the 5th October the market had just broken back through the Neckline of the massive H&S pattern. 

The market surged ahead in the very short-term and then ground to a halt at the Pivotal Prior high at 1060. 

The pull-back found support at the prior High at 1025. 

The bounce from that level has driven the market up through the 1060 again - in a typical ratchet-like fashion for a well structured bull trend. 1072 (Prior High) is now good short-term support. 

Short, medium and long-term structures are all in alignment. 

So we are keen bulls.


The Macro Trader's view: 

Gold rallied hard on Tuesday and again on Wednesday, after India announced it had purchased $6.9B worth of Gold Bullion from the IMF, approximately half of the IMF's annual sales. 

But why does it matter whether or not India chose to buy Gold from the IMF? Although the sum is significant it is a small percentage of India's reserve holdings, which like most other countries, is mainly denominated in US Dollars.

However, the deal is significant because China also recently announced it had been buying gold over recent years. China has been a critic of the US Dollar as the World's sole reserve currency. So these purchases mark a decision by two of the World's largest and fast developing economies to begin diversifying their reserves away from the Dollar. 

China holds in excess of US$1.0T in reserves; India's holdings are not far behind. With no other currency alternative immediately available, the big reserve holder nations such as China, India and the oil exporting nations of the Middle East have only one real alternative and that is Gold. 

If this week's actions by India mark a new trend away from the Dollar, then Gold has gained some major support and will surely rally much further. This is so even if India's decision to buy gold this week turns out to be little more than portfolio rebalancing. That is because the Dollar is hampered by the current administration's decision to run massive budget deficits, which are adding hugely to the US national debt. 

China has expressed its unease about the Dollar's long term value and the impact further Dollar weakness would have on China's (and India's) reserve holdings. So we view these recent Gold purchases as a clear attempt to begin a move out of the Dollar and would expect to hear news of similar actions from other countries as well as repeat purchases by India and China. 

At a time when the economies of the US, UK and Euro zone are weakened and burdened by debt, Gold represents (as it always has) a neutral store of wealth, free from the policies of any one nation. Current western economic policy is geared to prevent financial and economic collapse while fostering economic recovery. If that results in a period of higher inflation, Gold will rally. 

So India's purchase of Gold this week is important. We believe it endorses and strengthens our long-term bullish view of this market.

Mark Sturdy

John Lewis

Seven Days Ahead

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