-- Posted Wednesday, 21 April 2010 | | Source: GoldSeek.com
It is my opinion that the primary short-term key as to where gold is headed has to do with how the Eurocurrency (Euro) is impacted by Greece. The Euro’s next big move seems to be tied to what the representatives from Greece, the European Union and the International Monetary Fund work out in terms of a recue plan for Greece.
Formal meetings are now taking place concerning the details of the Greek rescue plan. Whether or not Greece accepts the plan remains to be seen, but Greece has already seen what the open market thinks of Greek debt. Today Greek Bonds surged to over 5 percentage points above what similar German bunds command in the marketplace. This translates into a yield of 8.24% that Greece has to pay in the open market to sell 0-year bonds. I view this interest rate as being so high that it strangles Greece’s ability to get its economy under control even if the Greek Government cuts its budget, social programs and the like since what it saves in one part of its budget it ends up spending on interest rates. Adding pressure to the situation is the upcoming maturity date of May 19th, which is the date when Greece is supposed to repay approximately EUR 8.5 billion in maturing bonds. Financial markets are concerned with what happens if Greece defaults.
Credit Suisse Group’s strategy team wrote in a report quoted by the Dow Jones Newswire today that “there are three key questions the market will first be looking for clarity on with regards to the Greek situation: first, whether Greece has made an actual request for aid; second, the exact role of the IMF; and third, whether the commitment of EU governments is still in doubt.”
If these questions aren’t adequately answered, investors will move to safe havens like the US Dollar and US treasury instruments. Whether or not gold would move higher in face of a Greek default remains to be seen since a higher Dollar has not been bullish to gold prices recently.
If the rescue plan adequately answers the market’s questions and Greece asks for and accepts the terms of the plan, my guess is that Eurocurrency would rally. I am not sure about gold.
Bothersome to me are media reports I read today that said it could take 10-days before details of the rescue plan are worked out or accepted by Greece. It seems to me way too long and invites contagion in Europe’s other reeling EU member countries. Portugal by way of example made the news today as market interest rates on its debt are now accelerating.
Last week I made mention that prices on the weekly chart had moved up to resistance posted by the Bollinger Band top.
The concept behind Bollinger Bands is that prices will trade within the upper and lower bands, displayed as the broken black lines on the chart below, 95% of the time. This implies that 5% of the time the market can trade outside of the bands. I use these bands in my chart analysis to find and display potential resistance and support numbers.
The resistance band has been tested the past two weeks. Prices have now backed away from the top band and are trading over the 18-Week Moving Average of Closes. This is bullish.
Should prices fall, I would hope to see support develop at 1113.5 or higher. If prices don’t hold and penetrate $1094.8, I would become bearish.
The current pattern is one of having a lower low at 1094.8 and a higher high at 1169.8. The key for now if you’re bullish is for prices to develop another apex low that is higher than 1094.8. This could occur if prices were to take out 1169.8 this week or if prices next week take out this week’s high, whatever that turns out to be.
Below is a Daily Chart of June Gold. Each individual bar on the chart represents one day of trading. In “red” I have plotted the 18-Day Moving Average of Closing Prices, in “dark blue” the Swingline Study and the “black dashed line” is the Bollinger Band Study.
The Swingline Study is displaying a chart pattern of lower highs and lower lows. This is a bearish chart pattern.
Prices as of the writing of this report are trading over the 18-Day Moving Average of Closes, which is bullish and neutralizes the bearish Swingline chart pattern. However this does not setup a bullish pattern. It simply leaves the chart pattern neutral.
There is little given the current chart pattern that could immediately turn this chart pattern bullish other than prices getting over 1162.8. The Dollar risk in getting long if this should happen would be large.
If the closing price of gold was to get back under the 18-Day Moving Average of Closing Prices, the daily chart pattern would once again become bearish.
I have not shown this chart before. Given the importance of what is going on in Greece, I thought it important to display it since whatever happens to Greece will affect the Eurocurrency (Euro) and will be most likely become the driving factor, at least in the short term, for gold prices.
It has not been uncommon for the Eurocurrency and gold to track each other. In fact as this chart shows, this often occurs. At the same time there have also been times when the two trade inverse to each other. Right now the inversion is what is occurring, which makes sense as the drama of Greece’s rescue plan unfolds.
The longevity of what is going on, along with the uncertainty surrounding the terms imposed on Greece are combining to drive the Euro down and hold gold prices up. If Greece were to decline the terms and that decline were to result in Greece defaulting on its upcoming rollover of debt, that event could be the trigger to drive gold prices sharply higher and would result in the Dollar moving in unison with gold.
Settlement of the Greek debt issue could result in this inversion ending.
It remains to be seen what happens with Greece. Logic tells me that the EU and IMF will find a way for to rescue Greece. The problem is that the bailout may put the stronger countries that make up the European Union in harm’s way.
Assuming there is a bailout, I would expect an initial knee jerk positive reaction by the financial markets that result in a rise in the value of the Euro. Will gold rally off of that is hard to predict given that gold’s immediate safe haven status would be jolted.
In the end, the key seems to be gold closing over 1162.8 in order to confirm on the charts that the potential for a new bull market leg is at hand. Whether that occurs because of Greek default or because of a rise in the Eurocurrency I don't know.
In summary, throwing out the fundamentals, the chart action needs to see 1162.8 taken out to get bullish. A close back under the 18-Day Moving Average of Closes is bearish.
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-- Posted Wednesday, 21 April 2010 | Digg This Article
| Source: GoldSeek.com
