Gold price hits record high on report to ditch dollar

Gold news

The price of gold struck an all-time high Tuesday as the dollar fell on a news report of a plan by Gulf states to stop using the greenback for oil trading.

Gold hit 1,045.00 dollars per ounce on the New York Mercantile Exchange in late trades.

Hours earlier on the London Bullion Market, gold surged to 1,043.78 dollars beating the previous record high of 1,032.70 dollars an ounce struck in March, 2008.

Barclays Capital precious metals analyst Suki Cooper said dollar weakness appeared to be related to reported secret talks about oil being priced in a basket of currencies including gold rather than the dollar,

This “has added to concerns about the future role of the dollar in international financial markets,” Cooper said.

The dollar’s future as the world’s top currency was thrown into doubt on Tuesday as a report said Arab states had launched secret moves with China and Russia to stop using the greenback for oil trading.

Arab states have launched steps with China, Russia, Japan and France to stop using the dollar for oil trades, British daily The Independent reported on Tuesday, but the report was denied by Kuwait and Qatar and reportedly by other nations.

The Independent’s Middle East correspondent Robert Fisk wrote in his paper: “In the most profound financial change in recent Middle East history, Gulf Arabs are planning — along with China, Russia, Japan and France — to end dollar dealings for oil.”

They would instead switch “to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council (GCC), including Saudi Arabia, Abu Dhabi, Kuwait and Qatar,” added Fisk.

Gold, viewed as a safe-haven investment, has won back favour in recent months as the global economy struggles out of its worst slump in decades.

The run-up in gold has been largely driven by weakness in the dollar, which makes dollar-priced commodities cheaper for holders of stronger currencies, boosting demand.

Gold also wins support from fears about higher inflation because the metal is widely regarded by investors as a safe store of value.

Precious metals consultancy GFMS last month warned that the current upward trend in gold may not be sustainable should global stimulus packages fail to boost flagging demand in the battered world economy and inflation fall as a result.

The Group of 20 leaders of emerging and developed nations recently agreed at a summit in Pittsburgh not to roll back massive stimulus measures that helped contain a severe global recession.

Germans will soon be able to buy gold in vending machines across the country the same way most people purchase a chocolate bar or a soda. That’s not the sort of bullish development that’s conducive to new highs for the gold market – at least not for now.

Germans, however, don’t trust paper money, and they’ve got a long-term relationship with gold going back to the collapse of the economy under the Weimar Republic in the 1920s. During that decade, hyperinflation crippled the German economy – compounded by expensive and unrealistic war reparations dictated by the Treaty of Versailles.

In addition to plunging jewelry demand since last fall in India, the latest news out of Germany to install “Gold to Go” vending machines casts a dark cloud on the short-term trend for the yellow metal.

Though I remain an unfettered bull, too many people are coming aboard for the ride lately as inflation fears rise, government’s struggle to auction their debt financing and gold stocks skyrocket since October.

When too many investors join the same trade, the cliff isn’t far away. That’s exactly what’s happening now in the gold market as investors obsess with inflation fears.

Gold and the “D” Word

The transition from a protracted cycle of debt destruction (since late 2007) to a period of rapidly rising inflation won’t happen overnight…

Deflation has already engulfed the economy with most companies reducing pricing, cutting employment and domestic consumption still tepid at best. The big picture remains a banking system that’s largely insolvent and still unwilling to lend amid a glut of toxic assets still sitting on their balance sheets. It’s a big mistake to believe deflation has left town this quickly.

In Germany, “Gold to Go” is a new project whereby vending machines will be installed across 500 locations, including train stations. Investors can purchase small increments of gold the same way they purchase a CD or an iPod. In Frankfurt airport, a dispenser now sells 1 gram gold wafers starting at EUR 30 ($42).

I’ll be traveling through Frankfurt in two weeks and plan on buying a few grams along with my favorite German Ritter chocolate bar. Talk about convenient!

Gold, like most commodities, has already posted big gains since early March. Consequently, the dollar has been blasted and is now oversold. Combined with the traditional summer doldrums for commodities the odds favor a correction for raw materials, including gold. This view is consistent with deflation fears returning this summer following a big stock market rally off the March 9 lows and a bludgeoned Treasury bond market.

Gold May Face a Short-Term Correction…But the Big Picture is Clear:

A decline in gold prices should be viewed as another opportunity to accumulate the metal. This bull market is soon entering its final phase whereby the gains will be enormous – probably north of $2,000 an ounce. But for now, gold is too popular and needs to correct lower.

When entrepreneurs are selling gold in vending machines, it’s time for a pause.

Why You Shouldn’t Buy Gold Just Yet

Despite everyone thinking Gold is the ultimate safe haven during the times of crisis, the key level of $1,000 an ounce prevents investors and traders from massively jumping into this trade.

The current price action is a technical correction triggered by profit-taking after a nice bullish trend. This rally drove the price from a low of $687 posted in last October (point A on the chart) to the high posted on February 20 this year, at $1010 (point B).

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This 47% positive move ended around this famous key level of $1000 an ounce, which remains both a technical and a psychological resistance. There is a potential for a huge rally when the price action clears this resistance. As is often the case, everybody knows there is decent money beyond $1,000, but nobody wants to be the first to go there, because of the traps along the road.

However it is more than likely than many big players which use models and strategies are trend-following and will flow massively into this trade. The idea is of course to be there before them, before the big move is triggered.

This week’s Trade Idea is to buy Gold on the dips, to take advantage of a countertrend to enter “long” at lower prices. Those coming days and weeks could be one of those opportunities.

Many traders have already taken advantage of this strategy when they positioned their “buy” orders on the 38.2% Fibonacci retracement level of the rally occurring between October and February (point C). They bought Gold below $900, and immediately the rebound drove the price back towards $970 - in only 3 days. Nice trade, don’t you think?

I think the next rebound won’t only last for a few days but will rather be the start of a new medium-term rally. I reckon the 2 last Fibonacci retracement levels (50% and 61.8%) are likely to be the inflection points that will create a new bullish momentum.

First, the 50% retracement ratio is often a key level as it’s a psychological figure. That’s why a correction of half a move is most of the time completed. Every trader is more or less driven with his emotions (this is not good at all) and being a contrarian trader is emotionally and psychologically the most difficult strategy. Buying on a decline and selling while the price action moves up is a difficult decision to take. That’s why we need mathematical and statistical tools to help us taking those decisions.

The 61.8% Fibonacci level, around $810, also corresponds to a previous low posted at mid-January (point D). Look at the weekly chart: this level is also a previous high posted in May 2006 (point X). As often, this previous high is likely to become a new low. The MACD and the RSI are both bearish: they argue for a continuation of the current correction towards the 50% Fibonacci level, around $850, and then potentially towards the 61.8% ratio, around $810.

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All those elements make me think Gold prices will strongly rebound between $810 and $850. Consequently the idea would be to place half of the amount you want to place on this trade at $850 (”buy” order) and the other half at $810 (another “buy” order). If they are both executed, it means you will be “long” Gold at $830. Place your stop-loss below $750 (”sell” order), say at $740. If for any reason the price plunges to this level, your loss would represent less than 11% of your total amount placed at risk.

And remember the main assumption of Fibonacci retracements’ theory: after a significant move (either up or down), prices will often rebound and retrace a significant portion (if not all) of the original move. As the price retraces, support and resistance levels will often occur at or near the Fibonacci Retracement levels.

Here the original move is a strong rally (between points A and B). It is possible this rally was only the first wave of long-term trend that will drive much higher than $1,000. In this scenario, the last two Fibonacci retracement levels are the most probable inflection points where the current correction will exhaust.

Gold is bouncing back. According to the World Gold Council, which has released its last statistics recently, the demand has surged on the third quarter: from the jewellery industry first, but also from investors through certificates and ETF’s.

The physical demand has surged in Europe and in the US, but despite those flows prices remained between $700 and $800 an ounce on the market during the last month. After several months of correction and sharp countertrends, the last 4/5 weeks have been a consolidation phase.

Despite the turmoil on the finance sector and the banking crisis, the equity markets’ plunge and the growing global recession, gold prices did not soar as it could have been expected. Indeed, the deleveraging of the hedge funds that have been facing large redemptions has capped prices on the upside.

Last but not least, the US Dollar strengthening and the lower concerns about inflation (as commodity prices all fell sharply) have weighed on Gold prices.

Technically, the price action found some support just below $700 (point D on the chart), which is a previous low level tested several times in 2007 (points A, B and C). The main support level, around $635, has not been tested. This level is a previous high posted in late 2005 and that became a new low several times in 2006. On the downside, gold prices are therefore well supported by those two levels ($700 and $635).

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This morning Gold is trading around $820, which is more than 16% higher than 12 days ago. A further rebound is expected. On the upside, the main resistance is the line that goes through the lower highs posted since the historical peak of March 2008 (points E, F and G). The target for the price action is consequently just below $900.

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On the short-term chart, the indicators argue indeed for a further rebound. First, the Bollinger Bands are bullish as sharp price changes tend to occur after the bands tighten, as volatility lessens, which is the case here (the bands therefore volatility tightened in November during the consolidation phase). Second, when prices move outside the bands, a continuation of the trend is implied. This is also the case here.

The MACD has also triggered a positive signal two weeks ago, and its rise shows that some bullish momentum is building up.

In this scenario, the level of $890 may be the target and the first significant resistance on the medium-term.

Since July 15 gold prices have fallen by 20% and then have slightly bounced back. What should we expect now?

All of the intermediary technical supports have been cleared recently, and that’s why a further move on the downside to test the long-term and main support is probable.

First the price action broke down below the 200-day moving average, which had been a previous support in May and June (points A and B on the chart). It has also cleared the 50% Fibonacci retracement level of the bullish trend developed between October 2006 and March 2008 (points C and D). Recently the price action tested the last significant intermediary support which is the 61.8% Fibonacci ratio then rebounded there towards the 50% level. It appears that this 50% level acts now as a resistance (point E).

Indeed, the price failed to jump above $845 last week and since has been slowly sliding back. The fact that the price already declined below $800 is psychologically important.

Before a potential new fall towards the long-term support, there is likely to be a near-term bullish momentum. The MACD just triggered a bullish signal, and the oscillators that determine the overbought/oversold configurations. The RSI is well-oriented such as the Commodity Channel Index (CCI). The CCI is useful to identify potential peaks and valleys in stocks prices and thus to estimate changes in the direction of price movement.

The CCI has posted a new low, a valley point, and has curved upward and crossed above the -100 level, which means that the oversold configuration is over. A further rebound is therefore expected, probably towards the 200-day moving average, currently set around $885.

The medium-term bearish sentiment would be definitely erased if the price succeeds to climb back above $900.

The global picture, however, seems to be an uncompleted bearish medium-term retracement. Clearly, the main objective on the downside has not been reached yet. This target is the long-term support line set at $750. It is a previous resistance line that had been tested several times in 2006 and 2007.

Still bullish on the short-term, the price action may eventually fall back to this support line if the positive momentum fails to build up.

It would be there a good opportunity for investors that are currently uncertain to buy back gold.