It seems you have JavaScript disabled.

Ummm.. Yeah... I'm going to have to ask you to turn Javascript back on... Yeah... Thanks.

A Major Non-Confirmation In Gold at Trader’s Narrative

A Major Non-Confirmation In Gold

Last week I wondered if the strength in gold was due to the implicit strength of the precious metal itself or whether it was merely a by product of the weakness in the US dollar: US Dollar’s Weakness or Gold’s Strength?.

It is obvious now that the US dollar is being thrown to the carry trade wolves in order to save the economy. This is the same play that central banks made several years ago with the exception that back then it was the Yen that was sacrificed.

In any case, gold continues to walk higher on the chart - it reached $1,064.20 today at COMEX. The distinction may be a moot one because as long as it continues, those on the right side of the trade will profit. But since there was some questions regarding the way I tried to strip out the US Dollar effect on gold price, here’s another chart which uses a slightly different method:

gold new high non confirmation denominated currencies Oct 2009
Source: Elliott Wave Intl

The song remains the same. Gold hasn’t reached a new high when we strip away the effect of the dollar. The second chart above looks at gold relative to a basket of other currencies (Yen, Euro, Swiss Franc, Australian Dollar, Canadian Dollar and the Pound).

Also, as noted previously, large speculators have crowded into the long gold trade. The most recent COT shows them to have 50% of open interest. But in general sentiment towards gold is relatively muted - especially considering the many times it was unable to climb above $1000.

From a purely technical point of view, this is a gold bull market. But I’m trying to deal with some nagging questions. For example, if there is inflation on the horizon, why hasn’t it registered on the CRB? After all the commodity index is rading below its 30 year average and it is flat since June 2009.

Honestly, I can’t see any signs of inflation anywhere. In fact, you don’t have to look hard to see deflation almost everywhere. So the gold story is one written on the back of the US dollar. And with the US dollar sentiment so incredibly negative, it makes me cautious on gold - bull market conditions notwithstanding.

Enjoyed this? Don't miss the next one, grab the feed  or 

                               subscribe through email:  

9 Responses to “A Major Non-Confirmation In Gold”  

  1. 1 The Recusant

    The value of gold doesn’t change, it is the value of the currency that changes. The less confidence (value) in the dollar, the more dollars it takes to purchase gold. That is why the foreign currencies do not correspond lock step with the dollar in relation to the price of gold. Try comparing the dollar versus a foreign currency and see if that spread is the same as the spread of the price of gold in the foreign currency versus the spread of the price of gold to the dollar. Gold has a tendency to remain as the world de facto currency standard, even if, Nixon released it from the dollar way-back-when.

  2. 2 Babak

    Recursant, do you mean to say that gold isn’t just another commodity? that we haven’t had manias and panics in gold? because the chart tells another tale

  3. 3 Jimmy

    in the 2nd to last paragraph, i guess you meant ‘inflation’ instead of ‘deflation.’

    “For example, if there is deflation on the horizon, why hasn’t it registered on the CRB?”

  4. 4 Babak

    thanks Jimmy - fixed

  5. 5 Mak

    agree on the fact that gold isn’t at new highs ex-USD, but you should probably update your chart. last few weeks have seen another push and breakout through resist at april/june/sep relative highs… def a bullish chart for intermediate term at least.

  6. 6 Babak

    Mak, you’re right, the chart doesn’t show October but I don’t think it changes the thesis it presents

  7. 7 dacian

    Babak, an explanation might be that gold doesn’t measure inflation but stress (it does well whene there is stress); I agree my argument doesn’t explain the last months move (as there is no stress as in 2008); lately everything moves up (and the last months might be indeed related to dollar drop). I’m not sure one needs to think too much here; gold is in a bull market and bull markets go up; secular bull markets last 20 years; gold has 5-10 more years to go up (a real possibility imo). I also think gold will continue its bull market no matter what the $ does.

  8. 8 Babak

    dacian, if gold measures stress then why did it fall along with the equity market as credit markets froze in late 2008? and why is it rising now in tendem with the equity market? I agree gold is in a bull mkt now, I’m wondering what’s behind it.

  9. 9 dacian

    Babak, gold fell in the first half of 2008, but the fall stopped in 2008; it fell because of the high leverage of hedge funds in this market; it recovered quite fast after that (actually I guess it made a low in October). It goes up because of the reflation trade (”all goes up but the dollar”); this is pretty weird situation, as we don’t have leaders for today’s bull (as I said, every single asset goes up, except the dollar).

    Gold doesn’t measure correctly inflation imo; it does well in depression or hyperinflation. By many standards (stock market crash in 2008, unemployment numbers, credit implosion, industrial output, etc.) this recession is closer to a depression than a recession; it was the same for gold in 30s, first half of depression it went down then up; an argument can be made for the 30s in favor of gold that back then we had a gold standard. It’s not the case today, but gold is trading like a form of (safe) money; the speculation is rampant as well.

    I understand both arguments of deflationists: in deflation, money does well and gold is a form of money (I tend to agree with that); in deflation, everything goes down, except cash and today gold is not money anymore.

    Today we experience a reflation, no doubt about it, and the dollar is crashed again; I don’t know how much it will last (maybe it’s over for the $ right now, I don’t know; on the LT, paper currencies are dead anyway). Maybe this is the message of gold; another reality is we have today competitive devaluation to boost exports (mathematically impossible to achieve). So there are many arguments, but one to look for is a parabolic move in gold; when it will arrive, one need to get the hell out of there.

Leave a Reply