Safe Haven Shines Light Brightly

Gold is regarded by many as a safe haven when the going in the world gets tough.  It can be a brightly shining lighthouse.  Let’s look at the chart:

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Gold is one of the few charts that show a bullish five wave pattern at the moment – with maybe 7% move up to the second wave five.

And if we look at the weekly we see the prospect of an even bigger move higher:

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This suggests the prospect of a rise of over 20% by end 2010!  Nice move if you can get it!

As much as I am a huge fan of Elliott I know not to get too attached to an outcome – and especially a second wave five!

But with the prospect of even a 10% move does that mean you should buy gold stocks when everything else is falling?  Not necessarily.  Just look at the NCM chart:

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NCM is like most equities – there is every chance it is also heading south!

When a market is falling it can be a tough game trying to pick contrarian sectors and I reckon one is better off getting behind the move down and go short!

Gold is on the rise again, and it is likely that its price action will test soon the previous highest levels, above $1,000. Currently Gold is trading just below this important level.

The price action has posted a high at $999, above the previous significant peak of last June (point E on the chart). This point E was posted on a resistance line that was the previous oblique support of the bullish move occurred between last October and last March. This ascending technical slope was built by higher lows where the price action was regularly bouncing back.

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When this support was cleared in April, Gold prices continued their correction before rebounding (from points D to E). The previous support that became a new resistance prevented then a further rise above $1,000.

From this high posted in early June, Gold prices consolidated in a range between $900 and $975. The recent spike has started at the very beginning of the current month and it is likely that the barrier of $1,000 will be cleared soon.

One key indicator is the On Balance Volume (OBV). It shows that the money flowing into Gold futures contracts has been increasing regularly and significantly since the month of May. The volume creates the price action and this rising OBV is a strong indication that a bullish trend has developed.

There is also a medium-term technical support line (in green) that has been backing the price action for the last 5 months. This support line goes through higher low points D, F and G.

The Chande Momentum Oscillator has surged. It has entered an overbought area, which however is not confirmed yet by the Relative Strength Index (RSI).

The immediate target is of course the historical closing price of $1,004 posted in March 2008 (point A). It’s probable that the price action will remain a bit choppy around the key level $1,000 (illustrating the struggle between bulls and bears), but a move significantly higher this resistance level could create a new momentum.

Gold prices sharply corrected after the peak of point A as they were coming from far (below $800). The momentum was exhausting and profit-taking was unavoidable. Rather that today, the price action n has remained above $900 for a long time and the recent rally (from point G) is only a 7.5%-up move. Further upside is therefore possible and would attract new trend following flows.

MORNING MARKET REPORT

Gold is the August contract on the NY Mercantile Exchange. Silver, copper and oil are the September contracts.)

NEW YORK - Wall Street shares drifted to a mostly higher close on Friday as investors mulled disappointing earnings reports.
The Dow Jones Industrial Average rose 23.95 points, 0.26 per cent, to finish at 9093.24.
The technology-heavy Nasdaq composite dropped 7.64 points, or 0.39 per cent, to 1965.96, snapping a 12-session winning streak.
The broad-market Standard & Poor’s 500 index added 2.97 points, or 0.3 per cent, to close at 979.26.

LONDON - European stock exchanges closed narrowly mixed on Friday as a near two-week rally ran into profit-taking ahead of the weekend.
In London, the FTSE 100 index of leading shares was up 16.81 points, or 0.4 per cent, at 4576.61 points.

FRANKFURT - The Dax fell 17.92 points, or 0.34 per cent, to 5229.36.

PARIS - The CAC 40 index slipped 7.27 points, or 0.22 per cent, to 3366.45 points.

TOKYO - Japanese shares rose for an eighth straight day, ending at the highest level in more than three weeks after Wall Street posted its best finish of 2009.
The benchmark Nikkei-225 index climbed 151.61 points, or 1.55 per cent, to 9944.55.

HONG KONG - The benchmark Hang Seng Index closed up 165.09 points, or 0.83 per cent, at 19,982.79.

WELLINGTON - The benchmark NZSX-50 index closed up 42.54 points, or 1.46 per cent, at 2961.17.

SYDNEY - The Australian sharemarket is likely to open higher after a mostly positive lead from the US and the commodity market.
At 0707 AEST on the Sydney Futures Exchange, the September share price index contract was 26 points higher at 4,091.
In company news on Monday, Australian Foundation Investment Co Ltd annual results and Australand Property Group first half results are due.
The case brought by the Australian Securities & Investments Commission (ASIC) against James Hardie Industries NV in the NSW Supreme Court resumes for a penalties hearing.
On Friday, big miners helped drive Australia’s stock market to its highest close since last November.
The benchmark S&P/ASX200 index closed up 25.7 points, or 0.63 per cent, at 4089.8, its highest close since November 10.
The broader All Ordinaries index gained 24.7 points, or 0.61 per cent, at 4097.3 points, its highest close since November 6.

NYMEX

Oil prices rose, powered higher by growing optimism that the US economy is on the mend.
New York’s main futures contract, light, sweet crude for September delivery, climbed 89 cents to close at $US68.05 a barrel.
In London, Brent North Sea crude for September delivery increased $US1.07 to settle at $US70.32 a barrel.

COMEX

Gold for August delivery fell $US1.70 to $US953.10 an ounce on the New York Mercantile Exchange.
September silver gained 10.5 cents to $US13.875 an ounce.
September copper fell 0.2 cent to $US2.522 a pound.

NEW YORK - Wall Street posted a third-successive day of gains as the market surged on surprisingly strong results from tech giant Intel and an improved economic outlook from the Federal Reserve.
The market opened higher following Intel reported earnings per share much higher than market expectations late on Tuesday.
Investors looked past data on consumer inflation which appeared to be skewed by a temporary surge in energy prices. The Labor Department said its consumer price index (CPI) rose 0.7 per cent in June.
The market’s rally gathered momentum after the Federal Reserve raised its growth outlook for the US economy and said this would likely lead to an easing of its stimulus efforts.
The Dow Jones Industrial Average leapt 256.72 points, or 3.07 per cent, to 8,616.21.
The technology-heavy Nasdaq climbed 63.17 points, or 3.51 per cent, to 1,862.9 and the broad Standard & Poor’s 500 index advanced 26.84 points, or 2.96 per cent, to 932.68.

LONDON - Europe’s leading stock markets surged, boosted by Wall Street, as investors eyed a global economic recovery following positive earnings and economic data.
Intel’s second quarter result boosted European markets.
London’s FTSE 100 gained 108.78 points, or 2.57 per cent, to close at 4,346.46 points.

FRANKFURT - The Dax soared 146.75 points, or 3.07 per cent, to close at 4,928.44 points.

PARIS - The CAC 40 index rose 89.4 points, or 2.9 per cent, to 3,171.27.

TOKYO - Many investors locked in profits following a sharp rally in the previous session, although chipmakers got a boost after US semiconductor maker Intel posted better-than-expected second-quarter results and offered a bright outlook.
The Nikkei-225 index climbed 7.44 points, or 0.08 per cent, to 9,269.25.

HONG KONG - The market was boosted by gains in property stocks ahead of the launch of a major residential project, dealers said.
The Hang Seng Index rose 372.93 points, or 2.09 per cent, at 18,258.66.

WELLINGTON - The New Zealand share market posted gains but they were modest compared to the Australian market.
The benchmark NZX-50 index closed up 15.58 points, or 0.57 per cent, at 2,764.08.
Turnover was $NZ94.96 million ($A76.73 million). There were 43 rises and 20 falls among the 111 stocks traded.

SYDNEY - The Australian sharemarket is expected to open significantly higher after a strong surge on Wall Street sparked by a brighter economic outlook from the Federal Reserve.
At 0730 AEST on the Sydney Futures Exchange, the September share price index contract was 72 points higher at 3,960.
In economic news on Thursday, the Australian Bureau of Statistics releases international merchandise imports data for June.
The Reserve Bank of Australia publishes its monthly bulletin.
The Australian Office of Financial Management will tender Treasury notes maturing October 23, 2009, and January 22, 2010.
In company news, Sino Gold releases quarterly results.
Olympia Resources Ltd and Territory Resources Ltd hold general meetings.
Household, Income and Labour Dynamics in Australia (HILDA) hosts a survey research conference in Melbourne.
The Queensland Coal & Energy conference concludes in Brisbane.
On Wednesday, resources and banking stocks drove the Australian share market to its highest close this financial year.
The benchmark S&P/ASX200 index closed up 57.4 points, or 1.48 per cent, at 3924.5 points, while the broader All Ordinaries index gained 58.7 points, or 1.52 per cent, to 3917.5 points.

NYMEX

Oil prices were lifted by a drop in US crude inventories that suggested stronger demand in the world’s largest energy consumer.
The market welcomed the US government’s weekly oil report and price gains accelerated in the second half of the session.
The Department of Energy said that American crude oil reserves sank more than expected, by 2.8 million barrels in the week ended July 10, as refineries stepped up production.
The data also showed that distillate inventories, including gasoline and diesel fuel, which had increased for months, rose less than expected.
New York’s main contract, light sweet crude for August delivery, leapt $US2.02 to close at $US61.54 a barrel.
In London, Brent North Sea crude for delivery in August jumped $US2.23 to settle at $US63.09.

COMEX

A government report showing a bigger-than-expected jump in wholesale inflation numbers in June helped support metals prices.
The increase was driven largely by a surge in energy prices last month, and renewed concerns about inflation. Investors often use gold as a hedge against inflation, and other precious metals sometimes benefit as well.
Some weakness in the US dollar also helped support prices for commodities.
Gold for August delivery gained $16.60 to $US939.40 an ounce on the New York Mercantile Exchange.
September silver rose 35.3 cents to $US13.208 an ounce, while July platinum gained $US17.30 to $US1,128.40 an ounce.
September copper futures rose 9.3 cents to $US2.392 a pound.

Gold Prices Move Modestly Lower To Test Two-Month Low

Gold finished lower again on Friday, following the lead of crude oil, and resumed its trend toward $900 an ounce. A weaker dollar diminished the precious metal’s hedge appeal.

August gold fell to $912.50, down $3.70 for the session. Prices hit as low as $906.60 in early trading.

Gold fell about $18.50 an ounce for the week as the dollar generally drifted higher against its European rivals. The metal hit a multi-month low of $904.80 on Wednesday.

The dollar moved back above 1.400 against the euro and also saw mild strength against the British pound as lower global equities pushed traders toward the lower-risk currencies. Most of the time, gold moves opposite the dollar because of the precious metal’s hedge appeal.

Crude oil surrendered another 52 cents to finish at $59.89 per barrel, its lowest close since May 18. Prices earlier hit as low as $58.72.

In economic news, a Labor Department report showed that import prices jumped 3.2 percent in June following a 1.4 percent increase in May. The increase was largely due to a 20.3 percent increase in the prices of petroleum imports, which rose 9.3 percent in the previous month.

A Commerce Department report showed that the trade deficit narrowed to $26.0 billion in May from a revised $28.8 billion in April. Economists had been expecting the deficit to widen to $30.0 billion from the $29.2 billion originally reported for the previous month.

A Reuters and the University of Michigan report showed that the preliminary reading on the consumer sentiment index for July came in at 64.6 compared the final reading of 70.8 for June. Economists had been expecting a more modest decrease to a reading of about 70.0.

Later, President Barack Obama said he feels it is premature to unwind economic stimulus plans as he spoke after a what was termed a “very productive” G8 Summit in L’Aquila, Italy on Friday.

Gold Rises Off Of Two-Month Low As Dollar Declines

Gold climbed slightly off a two-month low on Thursday, as the U.S. dollar gave back some of its recent gains against the euro and sterling, adding to the precious metal’s hedge appeal

August gold climbed to $916.20 an ounce, up $6.90 on the session. Prices reached as high as $918.90 an ounce after earlier hitting a low as $906.20 an ounce.

The dollar dropped to a weekly low against the euro after hitting a two-week high the day before. The greenback also moved into negative territory against the pound. Often, gold moves opposite the dollar because of the precious metal’s hedge appeal.

Despite rumors that the Group of Eight leaders meeting in Italy would discuss an alternative to the dollar as the world’s de facto reserve currency, there was no mention of the greenback in a draft declaration on the international monetary system released Thursday.

According to reports from L’Aquila, the Chinese called for a reformed reserve currency system but did not specifically mention the dollar.

On the economic front, a Labor Department report showed that jobless claims fell to 565,000 from the previous week’s revised figure of 617,000. Economists had been expecting a more modest decrease to 603,000 from the 614,000 originally reported for the previous week.

With the bigger than expected decrease, weekly jobless claims fell below the 600,000 level for the first time since January.

Later, the Commerce Department said wholesale inventories fell 0.8 percent in May following a revised 1.3 percent decrease in April. Economists had expected inventories to fall by 1.0 percent compared to the 1.4 drop originally reported for the previous month.

In other metal trading, silver for September delivery climbed 8.3 cents to $12.935 an ounce and copper jumped 7.85 cents to $2.159 per pound

On Wednesday, gold dropped $19.80 an ounce on the session. The metal fell as low as $904.80 an ounce and moved below a support level.

Gold is on the rise again, and it is likely that its price action will test soon the previous highest levels, above $1,000. Currently Gold is trading around $955 an ounce.

On the weekly chart, the “V” pattern suggests that the price action should reach the historical high (point A) level. This means that the current momentum, generated on the inflection point of late October, has almost entirely retraced the decline occurred between March and October last year (between points A and B).

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The weekly momentum indicators are well oriented. They argue for a further momentum on the medium-term, and the current values do not indicate an overbought configuration. The MACD has just crossed above its signal line, and has some upside ahead before reaching extreme high values. The 30-week momentum indicator has been soaring since mid-April when it found some support on its 100-line.

The daily tools are quite similar, as the current bullish trend seems to be solid and not about to exhaust. The price action has already jumped by 48% between last October and last February (between points B and C on the daily chart). Recently it has been rising by 10% from the intermediary low of April (point D).

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But the key point that argues for a continuation of the uptrend is the volume. We plotted, on the same chart, both the daily MACD and the On-Balance Volume. They have started spiking exactly on the same time (see in blue ellipse), which confirms that both price and volume are rising in parallel. This is a strong bullish indication.

Remember, the basic assumption regarding OBV analysis is that OBV changes precede price changes. The theory is that smart money can be seen flowing into the security by a rising OBV. When other investors then move into the security, both the security and the OBV surge ahead. This is exactly the case therefore we expect a move towards the previous highs posted in February 2009 and March last year.

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.

Is it the right time to buy Gold again?

Well, let’s take a look at an index that should give you the answer. It is the S&P/ASX All Ordinaries Gold Index. Between October 2008 and February 2009 it has jumped 2,908 points to a high of 5,677 points (points A and B on the chart). That equals a 105% rise. Since then the price action has been volatile. First it retraced about 35% of the rise, before rebounding to the current price of 5,192 points.

But volatility shouldn’t always be viewed as bad. In technical analysis the volatility benefits the identification of my indicators. For instance, the high posted above 5,500 points will be a strong resistance point for the index to clear.

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There are two reasons for this. First, it corresponds to the level of USD$1,000 for an ounce of Gold. Second, there is a diagonal resistance line that comes from August 2007 (point C). This line was a previous support tested several times last year (point D, E and F) that has now become a new high.

Knowing this is important for a simple reason. Highly correlated with Gold prices on the futures market, the index includes a wide range of companies, and therefore serves as an ideal broad market indicator for the Gold industry. Rather than tracking Gold prices, it’s more efficient to track the XGD when you want to enter into Gold stocks. And today may be not the best timing to buy Aussie gold producers.

Here’s why…

When the price hit the high level on February 19, the index was clearly overbought. So were the Gold futures. This means a trend reversal was expected, and that is exactly what happened.

This swing drove the index 17% lower, from a high (point B) of 5,572 points to a low of 4,618 points.

This move was a typical correction within a bullish market.

A bounce followed, and that drove the index back to 5,360 points last Friday (point G). It has failed to rise further. That’s why the correction still has further to run, and why a “long” trade at this point would be unwise.

The time to enter a “long” trade in this market is when the correction has ended. At the moment, the MACD has just posted a lower high and has already curved downward. That tells you it is about to cross below its trigger line - and that’s bearish.

I expect it to play out like this. The index will take a further correction towards the 50% Fibonacci level and remain above the upper band of the bearish trading channel (in red) cleared in last December. Further support for this level is that it also corresponds to a previous low (point H). So some strong support should be found there.
In summary, the objective is for the index to fall to 4,200 points, 17% lower than the current level. Only then would it become a great opportunity to jump back on local Gold stocks.

Every investor has been tracking Gold price for several weeks now. The Bullion is the only asset that appears to be a safe haven in those trouble times, but what about the two other main precious metals, Platinum and Silver? Prices for those two metals have jumped back since the lows posted in last October, but at a much slower pace than Gold. This is something that smart investors know: Gold is always the driver. It means that mechanically Platinum and Silver prices should replicate the recent surge on Gold prices.

Between March and October 2008, Silver prices (blue line) declined by 55% but bounced back by 47%. The bearish configuration seems to be over and the medium-term price action may be a continuation of the rebound. Right now the overbought market triggers technical sell orders that pushed prices lower. From a high of $14.60 on February 20, the current price is now at $12.71and should correct further down towards $11.50. It’s a previous high posted twice (points A and B on the chart) that is likely to become a new low because considered as a new entry point for investors.

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The rebound has been even slower for platinum prices (black bars) as they fail to breakout above the first Fibonacci retracement level of the broad decline occurred between June and October 2008 (points C and D). Despite the momentum is positive (MACD, moving averages crossovers, Momentum technical indicator…), the market was overbought (ellipses on the RSI) and the presence of the first Fibonacci resistance has impeached a further momentum. The recent momentum is supported by the 25-day moving average.

The next few days may be a continuation of the downward correction for both precious metals. However the medium-term remains positive. The replication of the Gold price action with a time interval is more than probable. The key factor for this scenario?

If Gold breaches above $1,000! In this case Silver should jump the previous low price of $17.00 and Platinum towards $1,500, which is the 50% Fibonacci level.

What is the influence of the AUDUSD fluctuations on Gold for Aussie investors?

Gold on the commodities markets is traded in USD. With a constant Gold price in USD, a rise of the Australian Dollar against the US Dollar (AUDUSD) makes Gold cheaper for Aussie investors. Symmetrically, a decline of the AUDUSD makes Gold more expensive for them. This FX effect (currency risk) is a real matter for local investors as FX markets in general and the Australian Dollar in particular had an impressive volatility in 2008. Especially during the second half of the year.

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On the chart, the black line represents Gold in Australian Dollars (we called this composite “Aussie Gold”) while the green bars represent the currency pair AUDUSD. There are three different phases that are distinct.

1) Phase 1 from August 2007 to March 2008 where the “Aussie Gold” climbed sharply despite the AUDUSD was rising too. It means that at the same time, Gold prices in USD were rising faster than the AUDUSD.

In details, it means that:

- The AUDUSD (therefore how many US Dollars for ONE Australian Dollar) rose by 11% roughly between September 2007 and March 2008
- For the same period, Gold (therefore how many US Dollars for ONE ounce of Gold) rose by 31%

As a result, both the AUD and Gold appreciated against the USD, but Gold appreciated much faster. That’s why the Aussie Gold (how many Australian Dollars for ONE ounce of Gold) climbed also sharply. Therefore it means that Gold appreciated against AUD!

The Aussie Gold price is just a just a function of the velocity of the AUDUSD compared to the velocity of Gold. If AUDUSD appreciates faster than Gold, then the Aussie Gold price declines. If Gold appreciates faster than AUDUSD, then the Aussie gold price rises.

2) Phase 2 from March 2008 to September 2008 where the “Aussie Gold” was cheaper as Gold in USD was correcting while the local currency jumped to historical highs until July, then crashed.

3) Phase 3 from September until now where Gold prices on the international markets are consolidating and rising again whereas the AUDUSD has been falling to low levels not seen since 2003. As a result, the “Aussie Gold” is soaring. This phase is trendy (bullish for Aussie Gold) but also very volatile.

Roughly, since last October, we can see that the “Aussie Gold” has never been so high. Because of the crash of their currency on the FX markets, a local must pay today 1,433 AUD to buy an ounce of Gold. At mid-August last year, the cost for the same ounce was only 917 AUD. It’s a 56% increase in 6 months!

What is the conclusion of that? Well, we have calculated the correlation between Gold and the Australian currency, therefore the strength of their relationship and the degree of their relationship. From 1991 to date, this correlation is equal to 81%. Gold and the Aussie are positively correlated as they typically move in the same direction because they are both traded against the US Dollar. But they don’t move at the same pace. And this is that difference of pace or velocity that drives the Aussie Gold.

On historical basis, despite the fact that a strong Australian Dollar is NOT a 100% guarantee of a cheaper Gold for local investors, it is the often the case.

Today the Australian Dollar remains weak and Gold prices are soaring: as a result the Aussie Gold is climbing too!

The gold price has outperformed all other commodities and markets during the last twelve months. It’s not surprising when you look at the uncertainty in stock markets and commodities markets. In contrast gold is giving investors plenty of certainty.

Last August Bill Bonner wrote in the Daily Reckoning:

“On Friday, the meltdown of gold and commodities continued. Oil slipped $1.35. The commodities index, the CRB, fell below 500. The dollar rose to $1.46 per euro. The pound is losing value faster than at any time in 37 years. And get this - gold dropped $21 to close below $800, at $792.”

In all honesty he could have been describing any day between then and now. So has gold, commodities and the markets travelled since then?

Well, gold is now at USD$856 an ounce. That’s an 8% rise in the price of gold since August 19th. And in Aussie dollar terms it has done even better, rising from $920 an ounce to over $1,300 today. That’s a rise of over 40%.

The stock markets, as you are no doubt aware, have not performed quite as well. The S&P/ASX200 is now down about 30% during the same timeframe.

And if you look at the chart below you can see he CRB futures index has more than halved…

While the pound sterling has almost collapsed and the Euro is significantly weaker against the US dollar. Pound sterling has been hurt especially hard due to the hopeless state of its economy and the flight from any risky looking currencies into the US dollar and the Japanese Yen.

It is hard to know when the current downturn in the market will end. Global indices are within touching distance of the November lows. The key events will be whether companies release earnings results that are better or worse than the market expects. And how much further damage will be done to the global banking sector.

As we mentioned during the week, Australian banks are not as safe and sound as we are being led to believe. So don’t be surprised to see some nasty stories during their earnings announcements.

Why isn’t Gold Rallying Right Now?

Gold bugs call your office!” says Currency Expert and Editor of Exotic FX Alert Jack Crooks.

“As gold goes so goes the dollar in the opposite direction? That is what we’ve been seeing lately. Today, gold is sharply lower at the moment and trading below its 200-day and 28-day moving averages. Notice the classic lower highs and lower lows on the chart…”

Gold Sputters to a Stop…

“I continue to believe the markdown in growth out of China is key to the future path of gold. One thing to know about me: I have a basic agnostic gaze towards gold. I view gold primarily as a liquidity-driven risk appetite asset.”

“Whenever I write that, the gold-bugs tell me that gold is so much more. They tell me it’s a safe haven and a substitute for the ugly fiat currencies. And while I agree paper currencies are very ugly, I have to wonder:

“How much more stimulus can governments possibly pump out and cheapen paper currency the world over? How much closer can we get to all out war in the Middle East? How much more dangerous can the Pakistan-India on-going quagmire become? How much have the probabilities increased for social unrest in China and the potential it has to destabilize all kinds of stuff?”

“I’m guessing things could get much worse, no doubt. But yikes! This is nasty stuff on the horizon that I can see taking shape. Yet the supposed supreme safe haven — gold — continues to fade while all this is happening.”

“Aren’t asset markets supposed to price in these expectations? Is anyone expecting these areas to improve anytime soon? Not that we’ve seen. Gold-bugs have gotten exactly what they have wanted and the yellow metal keeps fading.”

Relative to other assets in 2008, gold prices have declined far less. The ongoing liquidity squeeze has forced investors to dump assets, including gold to raise dollars. I suspect this short-term phenomenon will end in 2009 once the ongoing panic subsides and credit markets become largely functional again.

Gold should be accumulated now ahead of market stabilization. As the financial system gradually comes back to life over the next several months or sooner, the dollar should commence another period of weakness; there will be little incentive to hold dollars with short-term rates at or close to zero percent. The Fed will be in no hurry to raise lending rates.

Still, the Japanese experience in the 1990s warns investors of the travails of long-term deflation.

The Japanese, unlike the United States, only started to seriously attack falling prices in the economy in 1998 through massive fiscal spending. In contrast, the U.S. is already throwing everything at the crisis after just 17 months.

I expect the United States to print its way out of misery and, over time, and conquer deflation. But the cost will be humungous and at the expense of the dollar, U.S. financial hegemony and calls for a new monetary system anchored by gold.

It’s literally “inflate or die” for global central banks. Inflation will win.

You probably know that silver prices usually track and follow gold prices but often amplify them during declines. Silver is both a precious metal used as a value reserve, but it’s also an industrial metal well known for its physical qualities, and used in numerous technical applications. Those two features make silver very attractive not only for industrial players but also for financial investors.

Silver prices are therefore driven by real factors like mining extractions or industrial demand, but also by speculation and other financial factors. Some of them become more significant over the time, depending on the economic and financial context. It appears that the leading factor recently has been the financial deleveraging. Indeed, the massive liquidations of positions from hedge funds which chase cash to face redemptions and therefore reduce drastically their risk exposure have been the key factor of the recent sell-off.

After oil and gold, silver is the third most accessible commodity in the world thanks to numerous financial contracts, futures, ETF’s, options, certificates etc…

The price action posted a low recently in parallel with the low posted by gold prices, in late October. Silver prices touched a low at $US 8.40, and have now bounced back at $US 10.35. It may confirm that the bearish trend started in March 2008 (point A on the chart) is likely to have ended last month (point B). This bearish trend has generated a loss in value of roughly 60% in silver prices.

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The chart shows the strong positive correlation between gold (red line) and silver prices (black bars). Since the beginning of 2008, this correlation was almost perfect. However, since mid-August, silver prices have been failing to keep up the pace and are much more “heavy” than gold prices. As mentioned in our last update, silver prices have been manipulated in July and August as 2 US banks accumulated massive short positions that created a panic movement on the downside. Now that the sell-off may be over on the near-term, a further rebound is probable. The technical momentum and MACD indicators signal that some positive trend is building up. In this scenario, the retracement levels of the bear trend occurred this year (between points A and B) may act as targets and resistance levels for the current price action.

The first resistance might be the 23.6% Fibonacci ratio at $US 11.50. However the main target will be the 38.2% ratio (around $US 13.50), which is a more significant level in technical analysis. Furthermore it’s a previous high that the price action already failed to clear in last September.

For all of history through the 1800s, goldsmiths were the world’s primary bankers. It made sense in those hard money days to keep your gold with the fellow who molded it into coins and acted as the community’s central cash register.

So here we have the goldsmiths…guardians of bullion and protectors of everyone’s wealth. I’ve personally always seen this as the primary function of a bank.

But just guarding money and issuing certificates for it…I suppose it just didn’t pay as well as it could. That and you always end up with a huge pile of cash (gold) that’s just sitting around and not really doing anything other than backing promissory notes. So the goldsmiths got crafty, and at this point they became the bankers we know today.

They started issuing more certificates than they could back in gold, allowing them to collect interest on the physical gold collecting dust in their shop…gold that already belonged to someone else. But weren’t there already certificates attached to that gold? Of course. But the bankers believed those certificates wouldn’t all be cashed in at the exact same time, so they could get by and no one would ever be the wiser.

This is the critical point in our story, and at few points in history has the difference between right and wrong been so very clear.

The value of goldsmith’s notes was in the gold behind them. So when they issue a new note backed by…well backed by nothing other than the supposition that they’d have enough inventory to pay it off if it fell through…they were engaging in wishful thinking, at best. Ladies and gentlemen, I give you irrational exuberance. At the very core of our banking system.

But how could the goldsmiths get away with such blatant counterfeiting? Didn’t anyone realize that they were pulling wealth from thin air, that they were trading worthless notes for valuable goods? Well, the governments knew. Why didn’t they do anything to stop the goldsmiths?

Put clearly; it wasn’t in the interest of the world’s ruling monarchs to stop them. King Charles II of England had his own con game going with the bankers…one where they traded him physical gold for sticks of wood (I’m not kidding at all…we’ll be covering government debt next week.)

So by complying with the government’s con games and ponzi schemes, the goldsmiths earned themselves a back-scratching from the world’s monarchs, received in the form of Fractional Reserve Banking.