-- Published: Thursday, 31 July 2014 | Print | Disqus
In my last Gold Report, dated July 9th, I stated that the next catalyst for a move in gold would likely be a rising US Dollar, accompanied by higher US interest rates.
The higher trend in the Dollar is at hand, even with US interest rates staying flat. A number of key foreign currency support levels versus the Dollar have been broken. The Eurocurrency has broken the 1.34 level. The Yen has broken to the lower end of its trading band, the .9700 level. The British Pound has lost its way and is no longer in the bull camp. The New Zealand Dollar moved from a low of .8393 in June up to .8784 this month. Prices are now backing down to the .8400 price level.
I’m mentioning currency weakness because in terms of foreign currency values gold has held its own. Keep in mind that as foreign currency values fall, if you own gold, gold prices are helping to hold your investment as you’ve eliminated the loss of currency value against the US Dollar. The problem with this is that when gold falls in Dollar terms, you still lose.
Increased sanctions against Russia, wars in Gaza and the Ukraine, an improving US economy and default in Argentina have not been able to drive gold up in terms of Dollars.
This leads me back to interest rates. What hasn’t occurred in the US in the past five years has been higher trending US interest rates. I’m not yet declaring that that’s begun, but I do think we’re getting very close to that point in the short-term end of the curve yield, the two year notes. Longer term rates will likely stay flat through year end. The surprise would be if they don’t and move higher, sooner.
When US interest rates kick into a long term higher rate mode, I expect gold to trend down. My initial downside target is the $1200 level, close to where 2014 started out.
Look at the chart below of the Dollar Index with Gold prices overlaid on it.
A rising Dollar doesn’t automatically mean falling gold prices. While I have not done extensive research on the subject, having traded gold futures for decades I know that figuring out where prices are in a “cycle” has a lot to do with cross relationships. For example, the Dollar Index bottomed in April 2011 yet gold rallied as the Dollar Index rose. Therefore, don’t assume that a rising Dollar means lower gold prices. It doesn’t.
Events that typically impact the price of gold are composed of competing stock market values, currency values, interest rates, geopolitical events and inflation.
Current events have caused US Dollar appreciation against a whole basket of currencies. Unless the Dollar Index gets back under the 78.40 level, it’s in a longer term uptrend with the most recent high of the 84.00 level as a nearby target. A rising Dollar along with a strong stock market and growing economy shouldn’t provide gold a bid right now.
Stock indices have broken over the past two days due to improving US economic data. US stock indices may finally be getting near the point where the phenomenal 5-year run is going to end the process of making newer highs on a regular basis. Whether I’m right on this won’t be known until the next 5-8% break occurs and we see how stocks rebound.
In my last report I said, “If the Dollar rally, my guess is that gold will follow the 11-year bear pattern, the red line seen on the lower portion of the above chart. Without a Dollar rally, the odds strongly favor more upside as the July-August time frame in bullish years is often where gold prices on an overall basis tend to firm.”
The Dollar has rallied and gold has broken. While we’re yet in August, it’s looking more and more as though August will prove difficult for gold as events that you’d expect to provide gold with a price lift, haven’t done so.
When bullish events don’t prop up prices, bearish events tend to have much more impact.
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As you can see on the Monthly Chart, the first leg down began on September 11, 2011. The first leg was completed when prices recently dropped to 1241.7, the first downside target. It remains to be seen if other legs will be met, but given that this study resembles Swingline’s, until 1392.6 on this chart is taken out, the remaining Price Counts remain active.
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Disclaimer: This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is taken from sources believed to be reliable, but is in no way guaranteed. Chart data is courtesy of LGP-IraCharts. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures and Options on Futures trading involve risk. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from The Ira Epstein Division of The Linn Group, Inc. or The Linn Group, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are not indicative of future performance.
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-- Published: Thursday, 31 July 2014 | E-Mail | Print | Source: GoldSeek.com