Late last week, the European Central Bank RAISED their official rates by 0.25 percent to 4.25 percent, more than double the Fed's official (Fed Funds) rate of 2.00 percent. The immediate reaction was suitably perverse to the times we live in. The US Dollar soared and Gold slumped - all on the expectation that the Fed would be the next major bank to raise rates.
That was last week. Then came the week just ended and with it, the growing realisation that Fannie Mae and Freddie Mac, the "big two" GSEs (Government Sponsored Enterprises) were in deadly danger of keeling over without direct help from the US Government. The tone of US (and world) financial markets was best captured in this quote from Mr Glen Capilo, a Treasury debt trader at one ofthe primary 20 dealers with a direct "pipeline" to the Federal Reserve. "We're talking about a near cataclysmic and end of the earth situation", Mr Capilo said.
In the first two days of this week, the oil price plunged amost $US 9.00. In the last two days of the week, it rebounded $US 9.00. Gold trod water - until the last two days of this week - and then leaped, rising $US 32.00 to close the week at $US 960.60 on a spot future basis. That's the highest spot future close for Gold since it hit its all time high of $US 1004.30 on March 18 - and then plunged by $US 59.00 the next day.
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 33 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 72.34, the USDX is just over one point above its all time March low. Please note that in after-hours trading on July 11, the USDX fell below the 72.00 level.
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. By July 11, Gold had gained another $US 80. At $US 960, Gold has now recovered just over 70 percent of its March/May correction.
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). By late May, that fall had the inevitable consequence of pushing shorter-term 10 day moving average back below its longer-term 20 day counterpart. We have had several crossovers since then, the most recent of which took place two weeks ago with the shorter-term MA once again above its longer-term counterpart. With Gold now at its highest level since it closed above $US 1000 in mid March, this chart is once again a "railroad track" - pointing straight up.
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 third 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. And the shorter-term MA is not rapidly closing the "gap" on its longer-term counterpart. Expect a crossover in the next two weeks barring another dive in the Gold price.
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 appars 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 three weeks and is now more than halfway back to the $US 1000 level.
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 appars 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. Two weeks ago, the trading range was decisively penetrated on the upside with the $US 49 surge in Gold on June 26 and 27. This week, we got the downturn early in the week and then the upturn over the last two days of the week. We now have a "breakaway gap" on this chart.