Gold can rally further though markets seldom rally in straight lines. The main reason for Gold’s underlying strength is the weakness of the Dollar. Why does that matter?

The Technical Trader’s view


The market surpassed the minimum target for the large Head and Shoulders pattern established throughout 2008 and 2009, and doesn’t look like stopping anytime soon.

The minimum target for the small continuation Triangle that has formed above that H&S pattern is higher still around 1470 or so.


The drive up hard from the completion of the Triangle has been impressive.

The first pause at the Fibonacci cluster of resistance 1369-79 was swiftly reversed and the 1351 High overcome.

But that cluster may yet cause problems….a clear break above would be very encouraging… and for those already low stops beneath 1351 look sensible

The Macro Trader’s view:

Readers of our market updates will be well aware of our long term bullishness for this market. Indeed In the Macro Traders Guide we have been recommending a long position. But this market has rallied hard over recent days making new all time highs. Can Gold continue to rally and what drives it?

In a nutshell yes, it can rally further though markets seldom rally in straight lines.

The main reason for Gold’s underlying strength is the weakness of the Dollar. Why does that matter?

The US is still the world’s largest economy and the Dollar its sole reserve currency. That means that export led economies such as China, Japan and the Middle East oil exporters to name but a few have massive foreign exchange reserves and they are overwhelmingly denominated in US Dollar assets, so they are anxious that the Dollar remains reasonably stable.

But because the US economic recovery remains locked in a fragile recovery, the Dollar is burdened by very low interest rates. Moreover the Fed is concerned that the outlook for US inflation is probably lower than that level it considers to be consistent with a growth rate that both contains inflation but creates sufficient new jobs.

Their response to this increasingly looks like a resumption of QE dubbed by market analysts as “QE2”.

This involves the Fed printing money, or to give it its polite term; creating new Central Bank reserves, but they are in effect printing money. This is a perfectly reasonable policy response in the current environment:

·Low inflation,

·Weak growth,

·Weak Labour market,

·Weak housing market, (home foreclosures in the US hit 100,000 in September for the first time ever).

And is designed to inflate the money supply, raise asset prices and create ‘a little’ inflation. It also has the effect of devaluing the value of the Dollar against foreign currencies.

This is a subtle response to Japan’s attempt to weaken the Yen through foreign exchange market intervention and it also acts against Chinese recalcitrance over allowing their own currency to revalue. While the Rinimbi is pegged to the Dollar, a weaker Dollar drags the Chinese unit with it, but it devalues China’s massive foreign currency holdings which are in excess of US$2.0T.

One way or another, if the Fed restarts QE, the Dollar will weaken and there is little the export driven economies can do to prevent it, so in this environment which increasingly resembles competitive devaluation, Gold looks set to continue its long Bull trend until the market feels the US economy has stabilized sufficiently to allow the Fed to ease off the monetary policy throttle and actually consider a tighter policy stance; that day is a long way off.

Mark Sturdy

John Lewis

Seven Days Ahead

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