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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Is Gold Still a Buy and If So, Where?

Commodities / Gold and Silver 2010 Jun 11, 2010 - 05:36 AM GMT

By: Seven_Days_Ahead

Commodities

Best Financial Markets Analysis ArticleThe Technical Trader’s view:


MONTHLY CHART

The market is still in the grip of a powerful bull Head and Shoulders continuation pattern.

The pattern has a minimum target of 1350.

The solidity of the Neckline is clear from the way the market bounced off it, completing a bull falling wedge.

But note the reluctance of the market to get above and stay above the Prior High Pivot at 1227.50.
How bad a failure is that?

DAILY CHART

This is rather bad failure -  at least in the short term.

It looks like the market has failed twice to sustain a close above 1230.

A return to the rising diagonal from March looks highly likely.

And if that broke, certainly a test of the good support at 1169 would happen fast.

Only if that broke, forming a Double Top, would the bears get really excited.

We don’t think it will.

But as bulls we want to see the present short-term bear momentum clearly exhausted before we buy.

And that may take some days.

The Macro Trader’s view:

A look at the Gold chart (I do look at charts sometimes!) tells the story of a long-term bull market, but it also illustrates the Bulls’ dilemma: where to buy into the current leg of the long Bull run, if not already involved.

In the last six months or so, gold has made three new all time highs and after each one there has been an immediate correction phase. The correction that took place between the December 2009 and May 2010 highs was very frustrating for the bulls since it included several false dawns, and the same is true of the price action between the May and June highs too, but on a smaller scale.

But why does the market trade like this?  Why does it seem almost impossible for the gold market to hold new highs and move on in a more typical bull fashion?

Though there are many forces at work here one could be forgiven for taking the most simplistic view that the move is simply showing signs of buyers’ exhaustion.  But that would be to miss the complexities of the global economy and governmental interference.

The rally in gold has been fuelled at various times by many concerns, some of which are:

  • The earlier weakness of the Dollar,
  • As a hedge against inflationary fears,
  • As a traditional store of wealth amid the original financial crisis, and
  • More recently, the fear that the Euro zone sovereign debt crisis would spread to other advanced highly indebted economies.

But what of the periods of sideways price action already mentioned? These seem to coincide with the recent strength of the Dollar and the growing belief in the US economic recovery. In short, gold has been a complex market to trade.

Our view of it has been rather simplistic: we view gold as the hedge of last resort in a global economic environment that has seen the almost collapse of the financial system, saved only by an unprecedented peace time ballooning of national budget deficits.

Initially, traders viewed the massive fiscal intervention as an act of salvation. Now they are punishing countries with high debt levels unless they cut spending fast. Sentiment has dramatically shifted towards fiscal retrenchment.

This can be seen most clearly in the US Treasury market. Until recently, the Dollar and Treasuries were the preferred safe-haven trade. As the Greek debt crisis became the Euro zone debt crisis, Gold has rallied even as the Dollar has extended its own rally against the Euro but the US Treasury market has not joined in.

We judge that traders remain negative of the Euro, to the Dollar’s benefit, but they are now casting a more critical eye at the US fiscal landscape and Bernanke alluded to this only this week. The result has been a weak Treasury market but stronger gold.

Can this continue? We think yes. And this is why: the Euro is unlikely to stage a convincing recovery against the Dollar, until the Euro zone authorities either:

  • come up with a plan to foster private sector growth in the weaker peripheral economies that have relied heavily on public spending, or
  • adopt a system of automatic fiscal transfers from the richer countries to the weaker periphery, as occurs in any state sharing a single currency.

But as the focus of attention moves inexorably to Obama’s profligate spending, the US Treasury market looks set to lag its European peers and re-fuel the rally in gold as traders start to fear the long term debasement of the US currency.

So where should one look to buy gold?

How deep are a trader’s pockets? The market is bullish but due to the complexities outlined above, likely to remain prone to frequent corrections.

Mark Sturdy
John Lewis

Seven Days Ahead
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Mark Sturdy, John Lewis & Philip Allwright, write exclusively for Seven Days Ahead a regulated financial advisor selling professional-level technical and macro analysis and high-performing trade recommendations with detailed risk control for banks, hedge funds, and expert private investors around the world. Check out our subscriptions.

© 2010 Copyright Seven Days Ahead - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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