Gold Rush or Gold Flush?
A technical overview of the gold market strongly suggests that bullish longer-term investors exercise CAUTION ... and ... that aggressive speculators might explore an intermediate-term bearish stance.
Fundamentals aside, which, from the mega-long-term SECULAR perspective still remain favorable for gold over paper ...... right now, the technical situation STINKS, and, it has become increasingly RIPE, each and every day so far this year, portending a potentially UGLY weekly close.
Hence, we dispense with the normal Money Monitor prose, and cut right to the heart of the technical EROSION taking place ... NOT only in gold, but, MORE 'tellingly', in a variety of related-influential markets, specifically the U.S. Dollar, CRB Index, and U.S. Treasury market.
First, simply, Gold, replete with severe bearish momentum divergence.
Referencing the chart on the bottom of the previous page, we define the pertinent underlying support levels, and, potential downside pivot points, specifically the moving average at $411.80, the trend line at $379.4, and the 2004 low at $371.0, a KEY support pivot.
Additionally, we observe the Fibonacci retracement levels relative to the bull market period from the 2001 low at $255 ... beginning with the 38% level at $379.5, which coincides with the trend line and the 2004 low, all of which point to the $375-ish area as a likely breakdown 'target'.
Hence, a violation of the trend line at $411.80 would open the door for a more severe correction, down to the converged-support derived at $375-ish. Suggesting that just such a breakdown is NOT SO far fetched, is the 'bearishly-skewed push in the forward gold swaps, as seen below. There is NO supply-demand distress signal emanating from the physical market.
And, the U.S. Dollar is rallying, and while FAR from robust, the greenback's early-year revival cannot be ignored.
Naturally, with our tilt towards gold, we focus on the South African Rand and the Australian Dollar, both of which appear 'wobbly' when plotted against the USD, following HUGE 'reflation-rallies' that mimicked the appreciation in gold.
IN the Rand, a move back thru 6-per buck would likely 'ignite' a further technical appreciation in the greenback, amid severe USD-bullish momentum divergence, as exhibited in the chart below.
The Aussie exhibits a potential double-top of longer-term technical significance, NOT coincidental to the FACT that this past year, 2004, will have provided at least a med-term peak in the growth in the value of Aussie exports.
We will NOT get into the other major FACT as relates to the Aussie Dollar, ala the recent string of HORRIFIC housing market data, except to say that this is a valid MACRO reason to be wary of the Aussie Dollar, in terms of the potential return of disinflation dominance.
Speaking of disinflation dominance ... note Aluminum prices, and note the seemingly sudden surge in the number of commodity producing companies that are seeking to "monetize" their "assets", suggesting, at least on a med-term basis, that the pendulum has swung AWAY from commodity reflation.
Overall, like Gold, and like the AUD and ZAR ... the CRB also looks VERY VULNERABLE, technically speaking, as evidenced in the chart below.
Shortening the time-frame on the weekly chart of the CRB, we observe the result below, where the VULNERABILITY seems more pronounced, as the long-term uptrend line in place since the 4Q of 2001, is being threatened in conjunction with a potential head-and-shoulders top.
Comparing the vulnerabilities ... via the weekly overlay study on display below, we note that commodity weakness threatens to 'drag' the dollar higher (USD inverted in chart), a significant development given the commodities sector's past-proven ability to telegraph and LEAD moves in the U.S. currency.
Thus, of specific interest, is the LACK of push higher in commodities in line with the most recent new lows in the USD (or, new highs in the EUR, as seen below). Observe the divergent price changes taking place between the CRB Index and the EUR- USD, as commodities have FAILED to derive the same accelerating reflation appreciation from the latest USD depreciation ... and ... both, the EUR and CRB are turning LOWER.
Ironically, any further appreciation in the EUR might appear UNACCEPTABLE in terms of RISK assessment, when determining the dominant force, whether it be reflation, or disinflation.
In this case, the HAWKISH monetary influence exuding from the appreciation of the EUR is threatening to BREAK the price of commodities, priced in EUR. Hence, the USD rallies, but, it may be TOO late for the CRB, which may now decline in value relative to ALL currencies, amid the return of disinflation macro-dominance.
Evidence the pair of charts shown below,
Prior to yesterday's steep EUR sell-off, the CRB priced in EUR was already in the process of violating the long-term uptrend line, as per the sharp downside move in the CRB on its own.
Changing gears, we shift focus to the paper-gold sector, and observe the BEARISH price action offered yesterday by the Philly Gold and Silver Index, or XAU, seen below on a med-term daily basis.
Perhaps even more telling is the severity of the technical damage being inflicted upon the mining sector's blue-chip big-cap leaders, such as Newmont Mining and AngloGold ... or ... the downside leadership shown by the AMEX Gold Bug Index (HUI) of unhedged gold miners.
But, perhaps MOST telling, is the chart below, revealing a breakdown in the Philly XAU, relative to Gold itself. In other words, amid a rise in the value of paper known as the USD ... paper gold is already leading the metal to the DOWNSIDE.
AND ... relative to paper known as U.S. equities ... gold the metal is teetering on a technical precipice, and threatening to jump, as evidenced in the ratio chart on display below, plotting Gold relative to the S+P 500 stock index on a weekly basis.
This is PARTICULARLY negative for gold, considering that the U.S. equity market has put in its WORST first-two-day performance since 1991.
MMmmmm, perhaps a broader ... reflation-position profit-taking move ... in gold, stocks AND the foreign exchange markets ???
Sure, it likely IS ...just that.
But maybe NOT ... JUST that.
Maybe ... more.
Maybe, thanks to an OVERTLY HAWKISH monetary mantra being pursued by global central banks, one expected to be maintained, as evidenced by the pricing of the forward markets ...
... maybe, the price gyrations seen in the last few days is being driven by MORE than mere position adjustment.
Maybe, a return of DISINFLATION as the dominant macro-force ...
... BECAUSE OF ... global central bank hawkishness, in line with the over-leveraged, savings-less, U.S. consumer ---- bloated UK-US-AUD-housing markets ---- and intensifying stagflation that is choking the EU economies ...
... is the CAUSE for the rally in the USD, the decline in Gold, and the downside pressure coming to bear on the CRB Index.
Maybe, gold is telegraphing the next macro-evolution.
Maybe, IF the Fed goes TOO FAR this year, gold WILL break down to $375.
Indeed, perhaps the BEST chart of the day is saved for last, and, is saved to shed some light on all of the 'maybe' and 'perhaps' queries as relate to our discussion of the macro-scene. We observe the BREAKDOWN and BEARISH stance offered within the chart below, in which we plot the price of Gold relative to the Yield on the U.S. 2-Year Treasury Note.
Simply, the overtly accommodative Fed easiness during the 2001-2003 period resulted in lower rates AND higher gold, which sent this ratio screaming to the upside.
NOW, the COMPLETE REVERSE is true ... an overtly hawkish Fed tightness has driven rates higher, which, until now, has been the sole reason that this ratio has plummeted.
Until now that is ... as NOW ... rates are rising AND gold is falling, completing the macro-monetary reversal.
Simply, this ratio currently sits at its LOWEST level since it was rising rapidly during the middle of 2002.
In other words, Gold, relative to the yield on the 2-Year Note ... sits at a TWO-YEAR LOW.
We hate to tell you that the flat-price of gold was trading in the $325 area during the middle of 2002.
NO, we do NOT see $325 ... but ... maybe, perhaps, $375-ish.
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