For almost a month, between January 7 and February 2, Gold traced out and maintained a support level just below $US 420. That level held for Mr Bush's inaugural address. It held for the Iraqi elections on January 30. It held for the FOMC meeting and the Fed rate rise of February 2. But two events combined to knock it below that support point. The first was the announcement of a bill which, if passed, would give China six months to revalue its currency or face 27.5% tariffs slapped on all its US exports (see Gold This Week for more on this). The second was Mr Bush's State of the Union speech - a speech replete with promises but devoid of any specifics about how the promises would be PAID FOR.
Gold has now slipped below that $US 420 support point, with the spot future price closing at $US 416.60 on February 3 and ending the week at $US 414.00 on February 4. At that February 4 close, $US Gold is now once again back to a level just above its 40 week (200 day) moving average. The Gold "reverse barometer" is operating full blast.
The introduction to the floor of the US Senate on February 3 of the bill which sets a deadline on Chinese revaluation of its currency is especially significant. This bill was introduced in Washington the day before the first day of the G-7 meeting in London. China, which immediately repudiated the measure, is present at this G-7 meeting as an "observer". If passed, of course, the bill almost guarantees that the Chinese will, at a bare minimum, stop their buying of $US debt paper. This is akin to trying to stare down one's "enemy" by standing before him and threatening to shoot oneself in the head. Such things have been tried before - in history, truth is often stranger than fiction. They have seldom if ever succeeded.
Here are the relative performances of $US Gold, the $US Index, and the Dow since Gold broke above $US 300 to stay on March 27, 2002:
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If you doubt that Gold's breaking back above the $US 300 barrier to stay in March 2002 was a "sea change" for world markets, a glance at the percentages in this table should settle the matter beyond all reasonable doubt. Which of the three would you have preferred to own in the nearly three years since March 2002?
On the daily chart, Gold's solid support at or about the $US 420 level set over the past month has failed to hold. At its close of $US 414 on February 4, spot future Gold is now at its lowest level since October 13, 2004. The fall on Gold this week is especially "counter technical" given the support level and the fact that just last week, the shorter-term (10 day) moving average crossed above the longer-term (20 day) MA - always a first indication of renewed strength. The crossover won't last, of course, unless Gold gains at least $US 10 over the first two or three trading days of next week.
On the weekly Gold chart, Gold has now come back to its longer-term (40 week) moving average. This is something which Gold has done repeatedly ever since it began its $US bull market nearly four years ago. It has gone below the average twice, in early 2003 and again and more substantially in early 2004. The uptrend line on the weekly chart has not been challenged, however. It now stands right at the $US 400 level.
The point and figure chart shows clearly how Gold's downward momentum, after stopping dead for a month, has now been renewed. Again, the solid support at or about the $US 420 level has been breached and Gold is now falling towards the next uptrend on the chart.
Here's another perspective - a comparison between Gold's 2002 low and its present price and the $US index 2002 high and its present "price". All data is on CLOSING levels:
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I know we've been saying this ever since November, but it remains true. The chart to watch for the indeterminate future continues to be the $US 5 x 3 point and figure chart. The uptrend line established on this chart when Gold broke above the $US 440 level in November is the final and conclusive technical evidence that $US Gold is now in the second leg of its bull market. The trendline on the chart (see the link) is now a POWERFUL support for the bull.
The fall to $US 414 on February 4 has added one more "O" to this chart, that's all. As stated, on this most senior of charts, Gold can retreat all the way back to $US 400 without doing any technical damage whatsoever. It has now retreated from $US 456 to $US 414, that's a fair chunk of the way.
We will probably never know what the non US participants at the G-7 meeting REALLY think of the fiscal and financial shenanegans of the US, or what they think of the crowning folly of threatening to slap tariffs on China. Such things are not repeated in either polite company or polite communiques. It will be fascinating to see how long the threadbare facade of international "business as usual" can be maintained.