We’re getting whiplash from all the political
changes in Europe, neo-Nazis in an unstable government in Greece and a
changing of the guard in France-- "adieu" to Nicolas Sarkozy. We
see plenty of reasons for holding on to our long-term gold positions despite
the clobbering the yellow metal got on Wednesday down to a four-month low.
The euro tumbled this week against the dollar in the worst run since 2008.
There is an intense resurgence of political risk in Europe and a couple of
months of weak jobs numbers in the U.S. All that has put stimulus back on the
table. Another item on the table is the risk of a Greek euro exit, which has
risen to as high as 75 percent; according to Citigroup Inc. We also see a
rising anti-austerity tide gaining ground in Europe and the abolishing of a
gold excise duty in India, all favorable for gold.
Francoise Hollande has
been elected France’s president, the first socialist president in
almost two decades, on the promise that he would deliver an alternative to
the austerity diet. The French have been wondering who had moved their
high-calorie cheese. They have become tired of the message reiterated by
Nicolas Sarkozy that painful choices and belt tightening will bring jobs and
growth. Hollande takes power at a critical juncture
for both France and Europe and he will have to deliver fast --no honeymoon
vacation. France has a ten per cent unemployment rate and its labor costs are
among the highest in the OECD. With a budget deficit for almost 40 years,
France lost its triple A credit rating this year. The day after Hollande takes power next Tuesday, France must raise
€12 billion on the markets. He then will have to convince German
chancellor, Angela Merkel, who was cozy with Sarkozy, to renegotiate the
European budget austerity pact to add measures on growth. Investors are
worried about potential tension between Germany and France, the two eurozone heavyweights.
It is not likely that Germany will be willing to
foot the bill for Hollande’s campaign
Having discussed the political factors driving the
price of gold, let us now see how the markets can influence the yellow
metal’s behavior in the days to come. We will start today’s
technical part with analysis of the S&P 500 Index and begin with the
long-term chart (charts courtesy by http://stockcharts.com.)
In the chart, we see that prices have moved below
the support line created by the 2011 highs, which looks bearish. Taking a
relative comparison to the similar rally that we saw in the second half of
2010 (more on that topic can be found in last week’s commentary) with
the current price patterns, it seems quite possible that we could have simply
seen a correction with a rally now to follow.
Let us now take a look at the financial sector.
In the Broker Dealer Index chart (a proxy for the
financial sector), we do not have any clear “buy now” signals
(based on this chart alone) but may have some confirmation here that a bottom
has formed in the general stock market. This index bottomed at the 50%
retracement level of its previous rally, something that could be expected
during a correction (just like a bottom being formed with financial at other
Fibonacci retracement levels, so, again, this is not a crystal clear buy
Let us now move on to the crude oil market and try
to find out whether the black gold will have an impact on the real
one’s future price.
Looking at the chart we see that prices have moved
lower after trying to break out above the declining resistance line. Since
that attempt, prices have declined and are now actually close to the
long-term support line. RSI levels suggest that a rally is likely to begin
sooner rather than later. Another small move to the downside may be seen, and
a powerful upturn could follow. The situation will become clearer once oil
price finally confirms either a breakout or a breakdown.
Overall, the signs here are blurry but favorable for
gold in the short term, as the gold market has been generally aligned with
the crude oil market this year. This is not necessarily true for the very
short term, but the two markets were generally positive correlated lately and
their overall directions are similar. The implications from the crude oil
price chart are a bit more bullish for gold than not as the support line is
closer than the resistance line and the RSI says “buy”.
To finish off today’s essay let’s have a
glance at our in-house developed tool that traces the intermarket
Matrix is a tool, which we have
developed to analyze the impact of the currency markets and the general stock
market upon the precious metals sector. This week we see that precious metals
are negatively correlated with the USD Index and positively correlated with
the general stock market. The outlook for the general stock market is more
bullish than not, and the implications for precious metals are therefore more
bullish than not as well.
Summing up, the situation in the general stock market is mixed
for the long term and a bullish scenario seems a bit more likely than the
bearish one for crude oil. The implications for gold based on the outlook for
crude oil and the general stock market seem to be a bit more bullish than not
at this time.
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Thank you for reading. Have a great and profitable week!