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Gold Heading Sideways to Higher


And even if it goes lower temporarily, the move won't be significant.

Various news media reported this week that demand for gold sank to a 5.5-year low in the second quarter of 2009 after jewelry consumption dropped by more than one-fifth. This sounds discouraging, but before jumping to final conclusions, let's take a closer look at the data itself (courtesy of World Gold Council). Let's keep in mind that journalists can sometimes slant the figures or ignore those that don't fit their story.

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According to the tables, total demand was 9% lower in the second quarter of 2009 than it was a year earlier. However, if we take the first half of 2009 and compare it to the analogous period in 2008, we see that during this time frame, demand for gold increased by over 14%.

Some might argue that the investment interest slowed (second quarter of 2009 versus the first quarter of 2009) as the threat of an economic meltdown receded. But this observation fails to take into account the fact that the investment demand for gold is generally lower in the second quarter (please compare the first 2 quarters of 2008: 170.7 versus 151.9 tons). Moreover, investment demand in the second quarter of 2009 is up 46% from 2008.

Applying the same half-year analysis to the investment demand, we get 322.6 and 822.4 tons, which means that investment demand was over 150% higher in the first half of 2009 than in 2008. Since it's investment demand that drives prices in the late stages of a bull market, the fact that this type of demand is picking up is actually very encouraging.

USD Index

In this week's Market Alert I wrote that the USD Index is still below the multi-month trend line, which is visible on the USD chart. This long-term trend line is much more important, so the main trend still remains down.

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The value of the USD Index (charts courtesy of moved lower, but it's still above the December 2008 low.

The confirmed breakdown below the thick horizontal line is likely to result in a significant move lower. The trend is currently down, and it's just declined after touching the upper border of the declining trend channel. Consequently, the odds favor further declines, especially given the fact that the RSI indicator has once again moved lower after reaching the 50 level. The latter development marked a local top during the past few months.
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Positions in gold and silver.
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