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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:
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.
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