Thomas
DeChastelain
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Bullion Charts and Commentary for May 30
posted May 30, 2004 at 06:27PM

Gold charts are at a circumstance where the information they are giving can satisfy almost any scenario you wish to paint:

1) First impulse of a new major leg up within an onging bull market

2) Countertrend rally within a larger correction within a secular bull market

3) Relief rally after a first impulsive leg down.

In the short term the situation is this. (Complete commentary following charts)

Price Action



Fib Study



Daily Chart



Weekly Chart



Monthly Chart



Commentary

In the short term the situation is this.

Reaching long-term weekly trend-line support in an extremely oversold state and with positive divergences developing on many momentum indicators, gold proceeded to rebound with a vengeance. Going up in a near straight line it paused on Friday, being at this time, repelled by 38.2% Fib resistance and the all important 200 day moving average.

Oversold readings have been unwound, but for the most part have plenty of fuel to support bullish action. One has to think that bulls will make a stab at the $400 level, although given the psychological importance, one can expect the bear forces to make a fight of it.

As the axiom goes, nothing goes up in a straight line and at some point there will have to be some retracement. The nature of that first retracement will be of great interest. Does gold give ground grudgingly, or does selling recommence with vigour?

Some healthy backing and filling should be a welcome sign to bulls. Why? A straight-line trajectory becomes a momentum trade, and attracts the usual suspects who pile on, but with ultra-tight stops. Recent history shows what can happen there. Backing and filling bucks off the momentum players and lets fresh troops into the mix.

Now short-term prognostication is a bit of a fool's game at this juncture ("it can keep going up..or it can go down" is not much help.)

Given the overall demand figures quoted in earlier commentaries, we know that gold right now is a very psychological animal, and its price on the COMEX depends almost totally on what the speculators and the commericals will do.

What are they keying on? Erik Gebhard has a saying that if you want to know what gold is going to do - look at the dollar.

Charts of the USD (Clik here for complete set of USD charts) are definitely supportive of higher gold prices in the short term as are those of the Euro and Yen.

Another key feature, perhaps the key feature, is the market zeitgeist on interest rates.

Some very nice historical work has been done by Guy Lerner and which can be found by reading Gold the Technical Take Part II. In a nutshell gold performs best in an environment of lowering interest rates and a contracting economy, and performs worst in an environment of rising interest rates and an expanding economy. (The dollar would tend to do the opposite but not necessarily in symmetrical magnitude..depending on the exact numbers)

One can argue that much of the recent decline in the gold sector was on the back of anticipating rates hikes this June by the Fed. Recent gold strenth was greatly helped by Greenspans re-appointment which the market interpreted as a continuation of the re-inflation trade.

So will he raise rates or not? I reccomend that you read John Mauldin't latest commentary "It's Time for the Fed to Reload" for his more expert thoughts on the subject.

The one thing I would add is the impact of high oil prices. Given that the words "conserve" and "fuel efficiency" are not on anyone's radar screen, the only way to bring down oil prices is to increase the purchasing power of the dollar.

Greenspan is in a bit of pickle. Unlike under Clinton who built a protective wall around the Fed with strict instructions to not interfere, Greenspan is currently under considerable pressure to keep the taps flowing. Of couse he also knows that high oil prices are all but guaranteed to kill the global economy.

Perhaps this explains some of the perverse intermarket relationships that have been going on.

Higher oil prices garantee higher rates ergo the dollar goes up. Lower oil prices reduces pressure to raise rates and is good for gold and bad for the dollar. I am not saying this is what is going on..only that it may explain why gold was plumetting even as oil was making new highs...and gold gets wind in her sails when oil looks to be topping?

I must admit it is not intuitive at all, and certainly not as a trend that will last indefinitely.

Other notes:

Read a story on how two major Japanese banks are greatly reducing their budgets to buy foreign bonds...good for yen bad for USD

Read a story on how delivered soybeans to China is not being paid for...Asian financial crisis?...good for USD according to Morgan Stanley

US housing bubble ready to burst...bad for USD

China real estate bubble ready to burst...good for USD

Read a story on how the Fed is pumping money supply at levels usually seen in the after math of 9-11 or market crashes.

Market crash? Good for bullion..bad for shares

Needless to say, this is not a good time to be asleep at the switch.

Good trading

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