I have been bearish gold for ages now, since late last year when it was well above $1600 an ounce. I’m not a gold bug or a gold hater, it’s just another market for me and like Apple at around the same time last year Gold simply looked very bubblicious on the monthly charts which suggested to me that a big fall was in the offing.
Over the past six months we have seen that big fall with the gradually weekly decline giving way to something more like a waterfall which gold cascaded over followed by a period of consolidation and then another big fall last week when gold traded below $1200.
My view was largely technical back in November and December last year so I am not going to try get all fundamental on you. I will leave the gold bulls and bears to battle out the notions of supply and demand, of inventories, of inflation as a driver and the “unsurpassed physical demand” that was supposed to have rescued gold before last weeks move below $1200 and of the hypothesis that gold is a proxy for risk in the most recent environment.
But there is one chart I do want to show you which is fundamental to the price of gold. That chart is about the relationship between Gold and US dollar.
When I became Australia’s first currency strategist at Westpac back in 1998 the idea that I would try to forecast the US dollar or even have it in my AUDUSD model seemed anathema to the beings of the economists. But the USD is the other side of the Aussie, euro, pound, kiwi, loonie, copper, silverand of course gold.
So can you really have a view about gold without having a view about the US dollar? Me thinks not.
What I have done here is plotted the gold price daily since August 07 in USD terms against the Global FX USD Index.
The GFX USD Index is indexed to 100 at the first of January 1980 and is weighted this way because I am trying to capture sentiment across the board and in “traded pairs” rather than in any specific bilateral cross. In this way I avoid the pollution of the USD Index that is caused by almost 60% being euro driven and I don’t need to constantly reweight for trade flows. Should the top six traded currencies change then I may look at changing the index but I am comfortable with the current allocation at 1 sixth each for each of the above currencies.
For all the hoo haa about gold being this and gold being that it looks to me like in trend terms at least gold is just a USD trade. Risk on, risk off, deflation, inflation, hyperinflation, euro crisis, QE – whatever the claimed driver over the past 5 years – the primary catalyst behind the big moves in gold is the US dollar.
So if you are like me and think the US dollar is going to strengthen over the course of the next six months then gold is going to struggle to rally sustainably.
To the technical outlook:
We are less than $50 off the major Fibonnaci support in the $1140-50 region. My approach is to expect these levels to support to trade off them but if they break to flip the other way.
But a word of caution my very long term trend indicator is just about to go negative on the monthlies and gold is hardly oversold, so this bears watching.
What is oversold is the weekly price which reinforces the support below $1200 and I could see a move back as high as $1395 as still consistent with the overall down trend and maybe even $1456. Unless gold gets up and through this latter level it is just a bear market retracement.
The dailies too suggest it is time for a bounce toward $1328.
Consolidation time
All in all it looks to me on the technicals that gold is in a consolidation zone, perhaps as wide as $200-$250 dollars. Traders can think of it as one of Nicolas Darvas’ boxes and investors or gold bulls are likely to want to buy down at these level to accumulate positions.
Gold is and remains just another market to me and I will trade it as per the above. My sense is though that after this consolidation and as the US dollar strengthens in the months ahead gold is going to test support in the mid $1100’s. If my support zone breaks then look out for a move to and under $700 with a few stops along the way.