Despite Setbacks, The Gold Rally Marches On
by: Daryl Montgomery
December 18, 2009
Gold had a horrendous day on Thursday, December 17th, with
the price dropping below $1100 for the first time in many weeks.
In mid-day trading in New York, there was a sudden vertical drop
that was bound to give most investors pause.
While gold went up almost every day in November, it has been mostly
on a downward path since the beginning of December.
Does this mean the gold rally is over?
No, not at all. It just means that gold doesn't go up every day.
The cause of the recent volatility is Friday, December 18th's
quadruple witching.
Stock index futures, stock index options, stock options and single
stock futures all expire on the same day in a quadruple witch
and this only happens once every three months.
The impact of the expiration can frequently be seen a day or two
before and that is what investors were witnessing on Thursday.
Prices will tend to move to minimize the value of
the outstanding options.
The big trading houses are major options sellers and they lose
a lot of money otherwise if this doesn't happen.
This has been an important factor lately in driving gold down
and the U.S. dollar up.
The bears, of course, have been claiming the gold rally is over.
They started doing so the first day gold dropped.
The price action we are seeing now is reminiscent of
the pull-back in December 2007.
GLD, the major gold ETF, broke the 50-day moving average line then,
just as it did now on December 17th.
Gold had trouble rallying for four weeks during the month,
but then the second phase of the rally followed.
This took GLD up to much higher highs before it peaked in March.
January and February are traditionally two of the strongest months for gold.
Spot gold hit key support which is around $1100 on the 17th.
The 61.8% Fibonacci retracement for the rally that started in
early October is in that area.
That rally is still in effect until there is a significant break
of that level.
Just as gold was overbought on the daily charts before the recent
sell off began, it is now oversold.
The U.S. trade-weighted dollar was oversold and it is now overbought.
Gold and the dollar usually move in opposite directions.
Oversold conditions in bull markets are more important than
overbought conditions and the opposite is true for bear markets.
Therefore a good possibility exists that there will be some price
reversal in both bullish gold and the bearish U.S. dollar soon.
Spot gold was around $1110 at the end of floor trading in New York
on Friday.
As long as it closes at or above $1100, especially at the end of
the week, claims that the current rally is over are premature.
Even if there is some pause to the rally, nothing has changed
in the longer term picture.
As long as there is easy money from the Fed -
and raising interest rates from zero to a half a point
or even a point or more -
is still easy money and the federal government continues its
spending spree, the backdrop for a gold rally is still in place.
Don't expect this to change any time soon.
Ben S. Bernanke doesn't know how lucky he is.
Tongue-lashings from Bernie Sanders, the populist senator
from Vermont, are one thing.
The hangman's noose is another.
Section 19 of this
country's founding monetary legislation,
the Coinage Act of 1792,
prescribed the death penalty for any official who fraudulently
debased the people's money
but he has the biggest gangsters-banksters
in the world who protect their puppy
and each members of their
666gangsters -
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many honest persons with economic knowledge tells you,
the banksters are the biggest criminals
of wrong-doings in the world -
ex....
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