In a now-infamous 2002 speech, Ben Bernanke said:
(…) The U.S. government has a technology, called a printing press
(or, today, its electronic equivalent), that allows it to produce as many
U.S. dollars as it wishes at essentially no cost… Under a paper-money
system, a determined government can always generate higher spending and hence
This week in a dramatic effort to rev
up a "disappointingly slow" economic recovery, the Fed said it will
buy $600 billion of U.S. government bonds over the next eight months to drive
down interest rates and encourage more borrowing and growth. This is known as
QE2, the second round of quantitative easing.
A year and a half after the first
round of quantitative easing Ben Bernanke confronts an economy hampered by
high unemployment, a gridlocked political system and the threat of a
Japan-like period of deflation.
The big news Thursday after the Fed
declaration was the $40 price increase we saw for gold. The question is
whether this is a break- out or a fake rally. We will attempt to shed some
light on this question.
In this week’s very long-term
chart saying (charts courtesy of stockcharts.com), we first see that gold did not move above the
upper border of the very long-term (including the whole bull market) trading
channel. As we have discussed previously, some consolidation was expected. Has
this already been seen in its entirety or is more yet to come? There does not
appear to be enough information at this time to make this call. At least
three daily closes above the thick blue line in our chart or huge volume
corresponding to a rally from here would confirm that consolidation has
Focusing on the solid blue lines for a
moment, a breakout above this upper border would likely be followed by a move
to $1,500 or so in the following months. Until such a breakout is seen, gold
may simply not move significantly higher - in that case it would be likely to
correct once again.
The dotted lines in our chart have
been inserted as a result of Subscriber question regarding gold’s
recent trends being analogous to what was seen in 2007. This is not the case
in our view, for at that time, no important resistance lines were being
touched. Furthermore, the short-term trading channel was not close to
gold’s price level in 2007.
A consolidation had been seen for over
a year and was followed by a sharp rally. Gold would need to be close to
$1450 today and eventually move to $1600 if the 2007 trend were truly
repeated, that is, similar % price increases been applied today. This seems
to be an unlikely scenario (taking the previously mentioned $1,500 target
into account), and we do not feel comparisons to 2007 are meaningful. Simply
put, each year saw a rally and a meaningful correction but little else can be
said about striking similarities between ’07 and ‘10.
The short-term GLD chart this week
clearly shows that the upper border of the rising trend channel was not
pierced. Gold’s October rally was also stopped by this same resistance
line. Since a breakout has not yet been seen, a major decline could still
Summing up, at first glance, the gold’s
recent move appears very bullish. A second look and further use of analysis
tools provides much less optimism. A decisive move above the upper border of
the long-term trading channel seen in our very long-term chart is needed. At
the same time we should see the gold price moving above the short-term
trading channel. Until such a breakout is seen, the gold simply does not look
nearly as bullish as at the first glance.
Another thought worth deeper
consideration is that the gold did not manage to move above rising resistance
lines despite the Fed pumping $600B into economy.
The USD Index has broken below support
levels but verification is still needed (based on Friday's intra-day action
it seems that the breakdown here did not happen after all). In case of the
general stock market, the opposite is true.
The strong relationship between stocks
and precious metals as well as stocks and the USD Index will determine
whether breakouts or breakdowns will be seen. Some bullish signs have been
seen for gold, silver and mining stocks but several bearish indicators are present
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Thank you for
reading. Have a great and profitable week!