The recent volatility and weakness in gold has been worrisome to many investors. Is this it? Is the bull market rise over? Or will gold head higher again? These seem to be the questions of the day, and at times like this it’s important to stand back and look at the big picture since it helps to put things into perspective.
FUNDAMENTALS ARE INTACT
First, the recent weakness in gold has primarily been caused by the strength in the U.S. dollar. But considering the dollar dropped 30% over the past couple of years, the 7% rise over the past few weeks is not a big deal. It’s simply a rebound following the dollar’s steep decline, which is normal.
The more important question is, has anything really changed for the dollar? The answer is no. The dollar’s major trend remains down and as long as that’s the case, it’ll be bullish for gold.
Plus, the twin trade and budget deficits continue hitting records and these have been key factors pushing the dollar lower. The war in Iraq has also been important and since it’s now intensifying, it’s going to become even more expensive, resulting in greater spending and ever larger budget deficits. This also increases the likelihood of terrorism as we’re now seeing and considering 9/11 triggered the dollar drop to begin with, that doesn’t bode well for the dollar either.
Low U.S. interest rates have also kept downward pressure on the dollar as well, especially since U.S. interest rates are much lower than rates in most other countries. But lately there’s been a lot of talk about U.S. interest rates soon rising, which has given the dollar a boost because it would make the dollar more attractive. The facts, however, indicate otherwise.
Don’t underestimate the election
This is an election year, and the White House and the Fed know very well that rising interest rates would hurt the housing market, the economy and the stock market. With Iraq turning sour, they obviously don’t want the economy to turn sour too so they’ll likely be slow to raise interest rates until after the election.
If they simply can’t hold off, however, then rates could rise moderately but they’d still be lower than interest rates in other countries. In other words, the dollar would still be unattractive.
The bottom line is, nothing has really changed. Gold’s major trend, which is the most important, remains up and the dollar’s major trend is still down. And with inflation now starting to perk up, we believe these major trends will continue since inflation is very bullish for gold. If they don’t, it would be unusual but we all know the markets can do unusual things when you least expect it, which means you have to stay alert.
TECHNICALS ARE INTACT TOO
One simple tool we’ve found to be extremely valuable over the years is gold’s 65-week moving average because it’s been very good in identifying gold’s major trends (see chart). When the gold price is above this moving average, the major trend is up, indicating gold is headed higher. On the other hand, when the gold price is below the average, it’s bearish, the major trend is down and gold is going lower.
Currently, gold is above its moving average and it has been since 2001. This tells us gold’s major trend is up and that’ll continue to be the case as long as gold stays above the 65-week moving average, which is now at $375.
So regardless of what gold does in the weeks ahead, it won’t be a problem within the big picture if it stays above $375. If it doesn’t, then it would be another story. But considering gold and gold shares are now oversold and the dollar is near overbought, it’s telling us these markets are near their lows and highs. That in turn suggests gold will not break below the $375 level. The fundamentals are also telling us the same.
Again, nothing has really changed and that’s essentially the case for gold today in a nutshell.
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Mary Anne & Pamela Aden are internationally known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, gold shares and the other major markets. For more information, go to http://www.adenforecast.com
