August 02, 2006
Currency pressures pushing gold up, Wed., August 2, 2006, 5:45 AM
There are extreme pressures pushing the U.S. Dollar down and gold up.
Yesterday, an important inflation index, the U.S. Personal Consumption Expenditure (PCE) deflator, rose in June from 3.4 pct to 3.5 pct overall, and from 2.2 pct to 2.4 pct at the core rate which is the highest core rate since Sept 2002. That data weakened the USD despite market talk that the Fed might raise rates based on this data.
Today the Bank of Japan (BoJ) indicated that interest rates would move higher this year. Their first rate increase in six years happened July 14. The Yen has strengthened since then, and is likely to continue to strengthen.
Tomorrow the European Central Bank (ECB) is almost certainly going to hike rates from 2.75 pct to 3.00 pct. The Euro will likely continue strong against the USD.
Precious metals prices are rising as a consequence of the $USD falling. The next test of support for the $USD (presently below 85) is at the recent cycle lows (84.77, 83.72 and 83.60).
Spot gold is up about $14 over the past 24 hours, trading at about $651 between 3:30am-4:30am ET. A sharp sell-off occurred just prior to 5:00am to 647 (spot), but there is no reason to believe that the price will not strengthen as the day moves forward.
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The chart at StockCharts.com clearly shows the cycle peak May 12 at $730.40, followed by a low of $542.27 a month later (June 14), and a subsequent cycle high of $676.41 a month after that (July 17). Following a pull-back a week later to $602.61 (July 24), gold has been on the rise again.
Presently the gold market is at a crucial point for a possible break-out. If you go to the chart above and draw a line from the recent cycle highs (730.40 and 676.41), you will see an intersection this week at about 660. I expect that price to be tested today or tomorrow.
If the gold price (spot is close to the near futures) rallies above 660, I believe, based on the downward currency pressures on the USD, gold futures ($GOLD) will quickly test the 676.41 prior cycle high.
Then, should the FOMC decision on August 8 (next Tuesday) be to pause for one meeting (til Sept 20), I believe that gold will immediately rally to a test of the cycle peak of 730.40.
Trading is extremely volatile. As currencies in China and India rally against the USD, there is a huge increase in gold demand (for jewellery and investment). The central banks (not just the Fed but likely the Bank of England and others) will then sell gold holdings in order to protect the decline of their currencies.
Consequently, gold trading is erratic. Just looking (StockCharts.com chart above) at the percentage trading moves from the mid-March low of $534.20 to today shows a zig-zag pattern not seen for many years.
So, for trading to move from the present level (648) to a test of 676.41 or even 730.40 in the next few weeks leading to mid-September is entirely possible. The point, however, is that because of pressures that are pushing the USD down the move in this direction is entirely probable.
In a bullish phase for gold, the entire precious metals complex is pushed higher. Moreover, the common stock of the miners and prospectors is almost certain to out-perform on a relative basis, and at this point in the cycle, the junior and mid-size names are the best candidates for additional purchases.
billcara.com |
