Thomas
DeChastelain
Memorial Archives

Bullion Charts and Commentary for June 14
posted Jun 11, 2004 at 05:43PM

Introduction

A bomb blast in Germany, militant rate talk by the Fed, as well as France declaring thier intention to sell gold - all worked together to lower gold prices over the week. As such many of the charts have taken on a more definite bearish "tone".

And yet, on the surface, nothing so dramatic happened that would force anyone to give up any convictions which were held at the beginning of the week.

As well as a detailed look at the gold charts, I want to display a number of charts looking at outside elements; elements that can have an influence on gold prices. Many of these elements are at critical junctures and should be on the radar screens of gold traders and investors both...lest you miss out on opportunities..or get run over by the perverbial truck.

There is quite a bit of material to cover, but I assure you that by the end, one should have a more comprehensive feel for the forces swirling around gold and some of the critical price points one should be aware of.

GOLD CHARTS

Price Action



Daily Chart



Weekly Chart



COMMENTARY

In bull markets supports hold and resistances are overcome. The reverse holds true for bear markets.

The 65 week moving average continues to hold and keep the bull case alive. However until bullion can get a few consecutive closes over the 200 day and 40 week moving averages, (now resistance) the charts maintain a bearish bias. Momentum indicators are meeting resistance lines and are starting to roll over.

Nothing here that a fresh burst of buying can't fix but it needs to come soon, lest gold prices get pulled back down to lower channel supports. In this case though getting to the lower trend-line entails even more technical long-term damage.

From a conservative trading perpective I would look for a break of the trend-line resistance, or better yet a close above afore mentioned averages before going long in a big way.

If this is a standard wave 2 a-b-c correction then that is what should happen. Further weakness next week would put that scenario in grave danger

Knife-catching and bottom picking are best done when there are clear signs of capitulation...and those are not present.
As such I would be much more comfortable with bullish break-outs and other such set-ups.

Yield Spreads





Despite oversold technical indicators the yield spreads continue to drop, and this has a bearish impact on gold prices. When you look at the charts above you can see in a market that is trending strongly, extreme readings on momentum indicators don't count for that much as contrarian indicators; indeed they are an indication of trend.

Price action trumps all. A reversal will eventually come. If we only get a shallow cosolidation then one can expect the pressure on gold prices to continue.

Could the market be overreacting in their anticipation of Fed action? Could very well be...but it might not be until the Fed meets that we get any confirmation that the reinflation game can come back to play.

For right now, the chart is clearly showing a major reversal in trend through its sequence of lower lows, and lower highs. When a market that has been trending this strongly for years suddenly gets this oversold, it is often a sign of a longer term market turn.

Historical Example of "Initiation Thrust"



Gold/USD Ratio Chart



Another element which is effecting the gold price is its relationship with the USD, which has deterioriated since the start of the year.

Gold will still go up if the dollar sinks, but not with its usual vigour. If the dollar holds still, gold has downwards bias, and if the dollar shows strength gold tends to get beaten down hard

The chart shows the ratio price action currently confirming the 200dma as resistance, but is close enough to hint that the issue is still in doubt. The momentum indicators are at key resistance levels and look ready to support any move downwards.

It is difficult to see gold at the start of a major new advance without this ratio getting back above its 200dma.

Gold/Euro Ratio Chart



Gold remains within a well established range when priced in Euro's - in a consolidation which strikes my eye as being bullish in nature.

Gold/Rand



The Rand gold price finds itself at a critical juncture with only one definable support line keeping it from retesting lows.

The chart itself is a cautionary tale for chart analysts showing one of the cruelest false break-outs ever. The Rand broke up above trend-line resistance of a descending triangle, easily clearing its 200dma. It came back to confirm the 200dma as support and went on to make new highs. It then promptly rolled over and died.

(So the lesson here is to incorporate techncial analysis as a tool into your trading system - but do not incorporate your trading system totally around technical analysis.)

The China Connection

A reader suggested that I take a look at the correlation between the XAU and the Chinese equities market. Charts are posted below and in this case I use CHN as a proxy for Chinese equities.





One can see that there is a correlation. This certainly makes sense as the "China growth story" was an instrumental plank in the rise of all componenets in the CRB, including gold; and to a degree, all things equity.

The most ominous characteristic is the clear head and shoulders topping formation. The chart is currently rebounding and testing neckline resistance.

There are a few things at work here. First Chinese officials' actions to cool things down. The other is the unwinding of the carry trade, which saw a lot of "hot" money going in...and now it is getting out.

Given that a lot of that hot money came from ths US, it safe to assume that is where it will go on the return trip. A look at the yield spreads suggests that a lot of that money may be getting parked in short term maturities - but that is just conjecture on my part.

Of course all of this is still under the market zeitgeist that the Chinese officals (ex-Communist officials) can engineer a "soft landing". What if they fail?

Conditions are certainly becoming ripe for a potential rout. If it fails to get back above the neck-line level at 30, then measured move calculations for the head and shoulders pattern gives a target of 15. Some might argue that we are forming another right shoulder with a neckline in the 24 area. If so, and we break that...we are looking at nothing short of a Prechtorian implosion for China.

Remember Chinese banks are not Swiss banks. They are not Canadian banks. They are not even American banks.

Below is an up-close look to give a clearer picture of the lines in the sand.



Currency Check





Both are at thier respective 200dma, coming from different directions. Obviously which way they bounce will have an impact on gold prices.

The USD has more technical "fuel" in the tank, but again price action trumps all.

DIGESTING THE CHARTS

As stated earlier, when you look at the gold charts themselves, there is nothing there that would make anyone change thier view of the gold market.

My own view remains the same - that we are in high degree correction of the entire bull move to date, and that lower prices lay ahead.

Is the bull case dead? No, but obviously some things have to change. The Gold/USD ratio is formost in that regard - otherwise we have a situation where for every step forward the gold market takes two backwards.

Showing some consolidation above 200 and 40 week averages is to me an essential requirement before even thinking of making big bets.

For the bull to reassert itself, in my opinion, will take a change to the environment, the "zeitgeist" of the market. It needs a story to hang its hat on. An announcement that China will stop slowing things down? (unlikely), something from the G8 summit? (maybe) or perhaps a market surprise from the Fed in that they will leave rates alone?

It is this latter that perhaps holds the best promise, as actually raising rates, instead of just talking them up, may have severe repercussions.

When you look at the edges of the gold market one starts to get a very ominous picture, a picture that envelops all equity markets. It is a picture of deflation. It has not taken that step yet..but the downside potential is immense and greatly adds to the risk of any long position in any kind of equity, including gold.

Gold plumetting ahead of equities, money leaving China in droves, money rolling into short term maturities for safety, and fairly complacent equity markets with wildly raging internals. Can it be that the Prechtorians will finally have thier moment in the sun?

Complacency? Not a good thing. Paranoia? Never good and it is not my nature to get into scare-mongering. The path the future takes will be one most people don't expect. It is important to plan carefully, trying to think out what you want to do in case one scenario or the other comes to pass.


Good Trading

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