Last week. Gold soared almost $US 50 straight up in the immediate aftermath of an FOMC meeting at which the Fed did what (almost) everybody expected them to do - precisely nothing. This week, Gold continued on the way back towards the $US 950 level, hitting a spot future intraday high of $Us 948.50 on July 1 and a closing high for the week of $Us 946.50 on July 2.
Then came July 3, the last trading day for the US before the long July 4 weekend. On that day, the European Central Bank (ECB)did what everyone had expected them to do. They raised official European rates by 0.25 to 4.25 percent. Official European rates are now more than doubld official US rates. Don't forget, as recently as last September when the Fed started to lower rates from 5.25 percent, US rates were actually higher than European rates. But as the Fed slashed rates all the way down to 2.00 percent, the Europeans stood pat throughout. Now, the Fed is standing pat, but the ECB has raised.
Did the US Dollar take a hit in the wake of the ECB announcement? Nope. Just the opposite. The US Dollar index USDX surged as the $US climbed sharply against the Euro. The "rationale"? Mr Trichet, head of the ECB, was "interpreted" at the press conference following the rate hike decision as saying that the ECB was going to stand pat on this rate rise. Hence, the betting commenced that the NEXT central bank to raise rates will be the Fed. The US Dollar rose and Gold, of course, fell - by $US 12.90 on July 3 to close the week out with a slight gain.
The mental gymnasitics of modern markets are truly awe inspiring.
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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Please note the performance of Gold in $US since March 2002 compared with the Dow. Yes, we know, Gold doesn't earn any interest. It has merely outperformed the Dow by a ratio of more than 25 to 1 on a percentage basis since early 2002.
The USDX has not closed above the vital 80.00 level since September 6 last year. It has continued to fall since then and accelerated down in the first half of March. On Monday, March 17, the USDX hit a nadir of 71.30. Then came the turnaround, almost two full points in three trading days. At the end of April, the Dollar hit a new record low against the Euro mid week but did not quite fall to its March lows on the USDX. At its present level of 73.07, the USDX has recovered slightly over the week just ended with all of the "bounce" taking place on July 3 in the wake of the ECB's rate hike.
Gold has now spent most of 2008 above its previous spot high of $US 850 and only dipped back down below the $US 900 level on two brief occasions between closing at $US 900 on January 14 and exceeding the $US 1000 level in mid March. Then came the big correction - down just over 15 percent to 850 by the end of April. On June 25, Gold hovered about $US 30 above that level. Less than two weeks later, it has recovered almost halfway to the $US 1000 level it set in March.
As you can see on the daily chart, the Gold price plummeted in mid March, falling well below both 10 and 20-day moving averages (MA). A little over a month ago, that fall had the inevitable consequence of pushing shorter-term 10 day moving average back below its longer-term 20 day counterpart. Then a rise to $US 945 actually pushed the 10 day MA back above its 20 day counterpart. Three weeks ago, the shorter-term MA once more dipped below its longer-term counterpart. Last week, the crossover occurred yet again with shorter-term MA back above its longer term counterpart and the Gold price comfortably above both. That remains the case this week.
On the weekly chart, the 10-week MA moved below its 20-week counterpart in mid May for the first time since the beginning of the "credit squeeze" last August. This week marks the second week in a row where the spot future God price has closed above both moving averages since Gold's precipitous retreat from the $US 1000 level in mid March.
On the point and figure chart, the very steep uptrend line was sliced clean through in late March. For a better view of this, please see this chart (link appears here in original analysis). Gold fell as low as $US 852 - on the chart - in late April. The first three weeks of May saw a recovery as Gold broke back well above the downtrend line established since the fall from the $US 1000 level in mid March. The price action is now outside the line. As you can see on the chart, Gold has broken above its recent $US 870-900 trading range over the past two weeks and got almost exactly half way back to the $US 1000 level this week before the downturn on July 3.
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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As always, we refer you to the strategic $US 5 x 3 point and figure Gold chart (link appears here in original analysis) for an overview on the situation.
This chart is a superb example of the value of point and figure charts for showing LONG TERM trends in a market. Please note the simple fact that the $US 20 fall in the spot future Gold price on August 16 brought the chart right back to the uptrend line which stretches right back to the beginning of the bull market. Gold turned right there, and rose almost $US 100 in a straight line with no corrections whatsoever.
Gold's big run up to $US 1000 started in September 2007 with the metal ending the year just below its all time highs in $US terms. It rose above the $US 800 level on November 2 and to all time highs above the $US 900 level on January 14. Then came mid March and $US 1000, and then came the correction.
Between late May and late June, Gold was tracing out a trading range between $US 870 and a bit above $US 900. You can see this on the chart and as the upturns and downturns came closer and closer together. Last week, the trading range was decisively penetrated on the upside with the $US 49 surge in Gold on June 26 and 27. This week, reached almost the halfway point on a climb back towards the $US 1000 level. A downturn on the chart would now require a spot closing price of $US 930 or lower.