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Gold Euphoria Points to an Imminent Correction

Commodities / Gold & Silver Jan 15, 2008 - 05:58 PM GMT

By: Ned_W_Schmidt

Commodities

Gold's explosive start of year move has been enjoyed by all. Has it been over enjoyed? Fundamentals of the U.S. dollar did not suddenly get worse on the first day of the year.

Current euphoria in the Gold market may have been over done. One way of assessing that possibility is to compare the Gold price of the dollar to what is happening to the value of the dollar in other national monies. In the chart below, the red line is the Gold price of the U.S. dollar. It is how much Gold is required to purchase a single dollar, and is measured in ounces. The calculation is 1 divided by the dollar price of Gold. When that red line is falling, the dollar price of Gold is rising. When rising, dollar price of Gold is falling.


Blue line is a proprietary measure of the dollar's value, which does not have distortions of the popular trade weighted index. Two lines run together most of the time. As can be seen in chart, dollar has been trying to put in place a short-term bottom. Given the over sold condition for the dollar, that short-term bottom may have some meaning. Primary weakness is against yen and Swiss franc due to repayment of carry trade loans.

Currently, Gold price of the dollar is diverging from the dollar's trend, as it did in early 2007. See circles. That divergence suggests a correction in Gold is increasingly likely. Catalyst for such a correction is likely to be weakness in oil price, which is in a topping formation. Oil likely to trade below $85 in next month, barring some unusual event. While $1,400+ is still long-term target, we have to live through a period of short-terms which may include temporarily lower Gold price.

By Ned W Schmidt CFA, CEBS

Copyright © 2008 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS are from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. For a subscription go to http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html

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