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Market Update 14th January 2010
Gold sold off after making an all time high in December 2009, and earlier this week, it looked set for a fresh rally, but the market has slipped. What lies behind this price action?
The Technical Trader's view:
WEEKLY CHART
The underlying bullishness of the market is derived from the massive H&S reversal that suggests a minimum move up as far as 1313.
The first impediment was the Fib cluster at 1221-1232.
But the pull back found support exactly where you might expect - the first Prior High at 1072.60.
Look closer. DAILY CHART
The market bounced off that support from the Prior High, and when the resulting surge faltered, not well how the Prior High at 1114.50 was support again - ratcheting the market better.
There's no clear reversal in place yet, but the market appears supported for further bull trending in both the short and the medium-term.
The Macro Trader's view:
Gold is a market that has enjoyed a clear underlying Bullish trend since early 2004. Along the way there have been several corrections lower, some of them relatively steep, but the market has on each occasion shaken off its malaise and resumed its bull trend.
More recently, Gold has tested the lows after making an all time high in December 2009. And earlier this week, it looked set for a fresh rally, but the market has slipped, what lies behind this price action and should bulls be concerned of something more profound emerging?
The rally in Gold has been driven mainly, but not entirely, by the weakness of the Dollar. So it is no coincidence that Gold began its correction at the same time as the Dollar began its own recent correction after a stronger than expected US Non-Farm Payroll report at the beginning of December 2009.
However, the strength implied by that December payroll report hasn't uniformly followed through in subsequent data releases. Once again, this has led to questions being asked about the strength of the US recovery which has resulted in the Dollar giving back some of its gains.
But the recent strength of Gold wasn't just due to the Dollar's price action. As the New Year began traders became more concerned about the level of government debt in many of the developed economies, but especially in the US.
With the current US administration set on a path of almost never-ending debt accumulation, the credit rating of the US has been subjected to scrutiny as never before. The build up of debt, especially in the US, worries investors because they fear the US could be building up a problem it might struggle with in subsequent years. They think the financing of that debt could and probably will drive up long term yields, stifle recovery, hinder productivity and unleash inflation.
All of these fears are reasons to go long of Gold. But just as this market looked set to rally further, the gains were given back. Once again weaker US data was to blame, causing a deeper sense of angst about the recovery.
However, even if it is right to begin fretting about the strength of recovery (and we currently do not hold that view) the long-term outlook for Gold remains Bullish. If ,as we expect, the recovery gradually builds, traders will focus squarely on the budget deficit and debt, which will undermine the Dollar and support Gold.
If, on the other hand, the recovery falters or turns out to be much more anaemic than current expectations, then the outlook for the deficit and debt looks even worse as policy makers would be tempted to pump prime with yet another unaffordable fiscal stimulus.
In such a circumstance we believe the US would be in line for a sovereign debt down grade, the Chinese et al would voice their concerns about the Dollar's long term value even louder and Gold would make new highs.
Timing as ever is the key. For now we think this correction has a little further to play out. But don't be fooled into thinking this is a bear move: it isn't.
Mark Sturdy, John Lewis & Philip Allwright, write exclusively for Seven Days Ahead.com 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 products and subscriptions at http://www.sevendaysahead.com
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