Gold-weekly chart
• Gold continues to trade well technically having broken out of the triangle formation and through the
neckline of the inverted head and shoulders.
• Subsequently that neckline was re-tested last week before it moved higher to new all time highs. This head and shoulders targets a move towards $1,340 and it would not be surprised to see this level by end Q1 2010.
Market view - Gold will eventually rise above $2000. Funnily enough you
will often hear mentioned in “fundamental circles” that on an inflation adjusted basis the peak in
Gold at $873 in 1980 would translate into a price of around $2,000+ in today’s terms.
Our target above $2,000 is more simplistic.
Gold-Monthly chart
• The last bull market in Gold (low to high) was a move of 764% (Just happens to be our favourite Fibonacci number).
• A replication of that percentage move off the $253 low would give a level of $2,185
• If the present pace of appreciation was maintained (No acceleration or deceleration to this trend of
impulsive moves and consolidation periods) then end of 2012 would actually be the logical timeframe.
• For choice, we would think it could be earlier as strong trends often reach their peak with an acceleration in the move.
This does not look to be an “inflation hedge” move but rather a confluence of other factors.
• USD weakness: this is the basic argument that the USD is weak, Gold is priced in USD, therefore Gold goes up. This ignores the fact that during the material periods of USD strength (USD-Index) since the peak in 2001 the dynamic has been
o 2001-2002: USD-Index bounces over 8% but Gold in this period loses only just over 2%
o 2003: USD-index again bounces over 8% and Gold RISES about 4%
o 2004: USD index rises 9% and Gold falls 8%
o 2005: USD-index rises 15% and Gold falls about 3%
o 2008-2009: USD-index rises nearly 27% and Gold falls about 7% 764% rally
Since July 2001 the USD has lost over 300% against Gold while the USD within the USD-index has lost 60%
(Inverted USD-Index so as to compare like with like by making USD the term currency). So the argument that
this is just about USD weakness shows up for what it is. Utter nonsense. In the same period the Equity market is down about 13% (S&P)
So bottom line on every significant USD rally during this period Gold has fallen less against the strong USD
than the other components of the USD-index and in one instance actually rose against a rising USD. In reality 2008-2009 was probably its most impressive performance when it lost just 7% against a USD that rose nearly 27% against the index components.
Given that the USD has been in a bear market over this period the picture is clear. Since the unraveling of
the heady days of the FIAT currency/asset market bubbles began with the Equity market turn in 2000 Gold has been the dominant “currency” in the developed world. This after being held down artificially by the constant sales of Gold reserves by developed nation countries into the low.
There is the belief that we were in this great economic moderation of unparalled prosperity over this period was (to some extent) a mirage. Policymakers believed there was no inflation and continually drove interest rates lower as a consequence. The reality is there was little inflation in the “traditional” sense at consumer level.
Productivity, low wage settlements, technological revolution, cheaper goods from developed nations with
managed currency regimes etc all served to fuel this. The reality is that there was huge inflation. Where?
• Credit
• Fixed income markets
• Equity markets
• Housing markets
• Reserve accumulation (Reserve accumulation stopped the USD falling to where it should thereby preventing the natural balancing process that should have led to a weaker currency, inflation, funding issues etc)
But this in not inflation that you would buy Gold to hedge against. During most of this period a “blind man” was an “investment Guru” You just needed to own the asset (Fixed income, credit, housing, equities etc).
There was no need for the piece of “useless yellow metal that earns nothing” It was, by definition, the
ultimate “Global ponzi scheme” (You borrow money from us to buy our goods. We lend you the money back to buy more goods. We build up savings. You build up debt. We restrict the weakness of your currency so you can continue to buy our goods in a non-inflationary environment. This reduces your interest rates allowing you to borrow more money against the inflated assets to buy more of our goods. Happy days. However it is a bit of a shame that when the music stops all your discretionary purchases made with credit are obsolete. You have no savings. You have built up huge debt. Your assets are falling in value and your inflated wealth is now deflating.
We, however are in a strong fiscal position with large reserves and savings which will now “tide us through”
for some time to come. In addition we will now diversify our “stash” into other FIAT currencies and assets
(Including Gold whose supply you cannot increase on an infinite basis courtesy of Hewlett Packard (Printers)
and Hammermill (Paper))
But we digress…back to the “yellow stuff”
As we can see below. During the period of “Economic moderation” and “Nirvana” in asset markets. Gold was
“not needed” the FIAT currency system was “just fine without it thanks”.
However, Since 2001 the shoe has been firmly on the other foot and Gold has been an out performing asset…period.
At this juncture, given the continued financial and in particular economic uncertainty, some continue to believe that Gold will retain the “store of value” moniker that has served so well over the last 8-9 years.
• That was a period where Gold out outperformed the EURO when the EURO was outperforming the
USD.
Gold and EURUSD-Suggests a similar dynamic at play
Is there a pattern here?
Gold rallied aggressively over the past two sessions and is trading at new all time highs now. The chart
above shows that Gold has posted significant gains in the first few trading days of each of the past three
months (November included). Furthermore, in each of the previous 2 examples, Gold LEAD the way for a
rally in EURUSD
• September 2nd – September 3rd: Gold rallies $46 in two sessions from low to high. The decent rally in EURUSD did not take place until September 8th
• October 2nd – October 6th: Gold rallies $57 in three sessions (low to high). EURUSD also rallied but not by as much and did not catch up on the overlay until around October 14th
• November 2nd to present day: Gold has so far rallied $53 from the rally that really got under way two
sessions ago and EURUSD has not, so far, rallied aggressively.
EURUSD has however held good supports and if the previous two examples of the lead provided by Gold in September and October are going to repeat then we can expect EURUSD to rally over the coming days.
Since August Gold has started to outperform the S&P again
Creating an interesting divergence dynamic.
• Pretty much since the rally in equities began in march the S&P has been in the “ascendancy” when it comes to Gold- Outperforming all the way up…UNTIL
• In August the S&P hit a new trend high as did the S&P Gold ratio (S&P rules the roost). However since then as the S&P went on to set a higher high in September and again in October the ratio set lower highs i.e. Gold started to outperform. In fact in the chart above you actually have triple divergence between the ratio and the S&P. This does not have to mean that the S&P is going to take a big hit but rather that its days as an out performer to Gold may be numbered at this point.
Gold continues to shine. Will it last???
Linear Mode
