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-- Posted Wednesday, 22 August 2007 | Digg This Article

Gold held up remarkably well last week given the carnage all around, with silver and Precious Metals stocks cratering, and despite the sharp drop on Thursday it did not break below critical support, unlike silver.

While we are certainly not out of the woods yet with regard to the US sub-prime crisis, Central Banks and the Fed have made it clear over the past couple of weeks, and notably with the Fed’s surprise announcement of a 0.50% reduction in the Discount Window early last Friday, that they will use any and every means at their disposal to avert a global deflationary crisis. The main constituents of their “medicine” are massive infusions of liquidity, which we have already seen, and capped or falling interest rates. What all this means is that the party can be expected to resume with stockmarkets resuming their upward march, and inflation continuing to climb. To achieve this the dollar may need to be sacrificed, which from the standpoint of the US is not so dumb, considering its formidable army of creditors. However, it may not need to be as we can be quite sure that the Fed is working robustly to protect the interests of US bond holders, which means that there is some serious arm twisting going on behind the scenes - and not just behind the scenes - In Barrons last week was a small article that essentially said that the EU Central Bank now must seriously re-think any further interest rate rises. Let’s hope for their sake that the European central bankers read this over their cornflakes. Although the Discount Window is in itself not important, the cut implies that the all-important overnight Fed Funds rate is going to come down - and for that to happen other countries, especially major power blocs such as the European Union, are going to have to play ball, and if they do the threat to the dollar will be alleviated.

Thus gold can look forward to basking in the glow of at least two of three major bullish drivers - capped or falling interest rates, robust inflation and a possible significant decline in the dollar. We shouldn’t count on the latter but the other two appear to be “in the bag”.

 

Looking at the 2-year chart we can see how significant differences have emerged between gold and silver in recent times. Gold has been looking stronger than silver for months, and managed to break above the “Distribution Dome” shown - silver did not achieve this and paid the price last week when the Dome forced its collapse below an important support level. Gold remains within a tight range bounded by the important red support level shown at and above $635 and the strong resistance at and towards the April high approaching $700, and although it is believed to be in position to break higher soon for the reasons set out above, with the fundamental picture brightening rapidly in recent days, we should not overlook the potential Head-and-Shoulders top on the chart that has formed between February and the present. Our stops have been set below the March low at $635 for some time, and stops should continue to be set below this level, although holders should be aware that if it drops below this key level a rapid plunge is to be expected similar to that which occurred in silver last week when it breached its key support. That said gold looks good here and the Head-and-Shoulders danger will be negated by a move above the April high towards $700 which would likely mark the start of a breakout drive above last years’ highs at about $730. It is logical to suppose that gold will mark time for a while before it breaks higher to allow sentiment in beaten down silver to recover sufficiently to enable it to break back above its new resistance level in the $12 - $12.50 zone.

-- Posted Wednesday, 22 August 2007 | Digg This Article

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