gold is still good (ig)

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In association with

Market Update 11th November 2010

Gold is still good

The Macro Trader’s view:

The Gold price continues to rally making new highs on the way, but what drives this marketand can the rally continue or is the end in sight?

We judge Gold is driven by several factors:

Uncertainty about the global/US economic recovery,

The weakness of the US Dollar and the true intent of US policy makers towards it,

Growing global trade imbalances, especially the US trade deficit with China,

Unease about the US Fed’s QE2 policy,

The willingness of the G20 to agree a strategy aimed at reducing trade imbalancesand stabilize currencies, and

The lingering Euro zone Sovereign debt crisis.

Quite a list, but some are more important than others. We judge the US/China trade

relationship lies at the heart of gold’s recent move higher. The US authorities have been urging

China to allow its currency to float higher to help rebalance trade flows between the two

countries and to better reflect Chinas emergence as the World’s second larges t and fastest

growing economy.

The US sees China’s intransigence not just as currency manipulation, but an outright

unwillingness to play by the rules of the game that has helped China emerge as an economic

super power.

Where once western countries acclaimed the benefits of cheap consumer goods from China,

claiming the resultant loss of jobs a manageable side effect that the advanced economies

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In association with

could make good by concentrating on value added products and services, they now see anemerging giant taking both their jobs and economic power.

After years of running Current account deficits, the US is the world’s largest debtor nation. This

is made worse by the large fiscal deficits also being accumulated. The financial crisis forced

the US and many other western governments to loosen fiscal controls in order to cushion

against what threatened to be a deep slump. Many developed countries have begun a fiscal

retrenchment, the US has not.

China is unhappy with what she now sees as an attempt by the US to escape her slow

economic recovery by devaluing the Dollar through the back door, using quantum easing.

Never mind that the US does need to give further support to its economy, the Chinese are

unhappy because they have over the years built up a massive holding in US Dollar assets.

This suited both countries, China needed a market to sell her goods and the US needed a

financier for her own twin deficits. Now something has to give, but China still regards herself as

an emerging economy and fears a stronger Rinimbi will choke off the fast growth she needs to

keep her vast population employed and uninterested in politics.

The US can no longer simply allow China to continue producing cheap goods that she cannot

compete with based on labour cost and exacerbated by an artificially low exchange rate.

Neither side seems to have sufficient room to manoeuvre making this week’s G20 meeting

look like a failure waiting to happen.

Recent World Bank suggestions of a return to some form of Gold standard seem unworkable

in the globalised economic world but gives gold support. That being the case, Gold will

continue to rally as the Dollar weakens further.


















In association with

The Technical Trader’s view:

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 01010 11 12 13

500

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1500

0.0%

100.0%

161.8%100.0%

Prior High$873

1033.90 High

Gold 100 Troy Oz. COMEX Continuous

MONTHLY CHART

Although the roots of the

present bull run began

much earlier when a

Triangle completed in

2002, the pause and break

up through the Prior High

of 1980 has been vital insustaining the rally - in the

way that most rallies are

sustained by establishing

former highs as good

support and levering

themselves higher on the

back of that.

2007 A M J J A S O N D 2008 A M J J A S O N D 2009 A M J J A S O N D 2010 M A M J J A S O N D 20

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$873 Prior High in 1980

Prior High support $732

1033.90 High

1227.50

Minimum moves measured from succes sive patterns

Gold 100 Troy Oz. COMEX Continuous

WEEKLY CHART

The bulls – if they could wait

long enough - had the clear

opportunity to go long again

when the market established

a Continuation head and

Shoulders on top of that 872

high from 1980.

We can see that the market has

met the minimum move impliesby that pattern.

But because more continuation

patterns have been established

since – the biggest of which is a

rising triangle - there is a fresh

stimulus for bull moves in play

at least as far as the minimum

measured move 1490 or so.


















In association with

5

April

12 19 26 3

May

10 1 7 24 1 7

June

14 21 28 6

July

12 19 26 2 9

August

16 2 3 30 6 13

September

20 27 4 11

October

18 25 2 9 15

November

22

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1255.10 High1270.60 High

1172.20 High

Continuation Triangle

1388.10 High

Gold 100 Troy Oz. COMEXDec 10

DAILY CHART

The price action on the

completion of the Triangle

has been ragged and rather

unstructured - but the 1388

High may be good support

(as happened on a bigger

scale before) allowing the

market to lever itself better.

The short-term diagonal

support may have been

helpful too.

In short all is well with the

market and plenty of bull

energy remains in play.

Mark Sturdy

John Lewis

Seven Days Ahead














gold is still good (ig)

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