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.

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.

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!

Maybe gold is a ‘Noah’ white dove

am sure most of you will recall how Noah let out a white dove from his ark after he thought the great floods were over. And when the dove came back that was a sign that there was life out there.

I wonder could the same be the case for gold in some small way. The forward signs for gold could be the white dove for investment land that there is life still out there.

Now there are all sorts of views about how gold is a safe haven but I am not sure that I entirely subscribe to that and a weekly chart would show how gold is still in a downward channel. We of course know that gold is tied very much to the US dollar and now that is a tangled web so I won’t even start on that subject.

There is some life in gold but I am not sure how much. There is a fair chance we could see gold rally short term:

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The above chart is a classical pullback with the oscillator pulling back to zero. If it falls much below zero then all bets are off. And in any case I could also show many charts that suggests gold may well drift for some time yet.

But it will rise again:

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I would expect we will see a strong gold trajectory in the second half of 2009 after maybe a lack lustre first half. And yes to over $US1000 – an all time high.

So dust off those old gold stock favourites and get ready to make some money!

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.”