US hopes, European fears driving gold market
Gary Wagner & Robert DiLallo
Strong news has been driving the sharp, strong rise of gold, but some very positive technical information helped push the yellow metal higher.
In the US- Food For Thought, At A Price
The continued anticipation of a move by the Fed, a possibility made all the more trenchant because of the sluggardly growth in the second quarter in the American economy, has traders on pins and needles The consensus seems to be that when the stimulus by the US central bank arrives, it will be aimed at consumer spending growth, the area that appears to be the main drag on the world’s largest economy. Such a move would signal inflationary pressure, which traditionally bodes well for gold.
There is already a strong inflationary current beginning to course through the American economy due to the serious, extensive drought affecting feed crops. This will lead to higher prices for bread, cereals, pasta, meat and ethanol. A rise in ethanol will help drive oil/gasoline prices up. Although it is high summer here in the US, in about 70 days, homes in the northland will begin to require heating oil, which, after gasoline, is where the drought’s ripple effect will first be felt.
European Union In A Maelstrom
Also good for the inflationist school of thought is the reassurance of the head of the EUs central bank. The E.C.B.’s Mario Draghi said that the central bank would do everything in its power to see that the common currency remained strong, and that teetering economies, such as Spain’s and Italy’s, would be bolstered by, perhaps, sovereign bond purchases. But…
Today, as could have been predicted, the Bundesbank seemed to slap down Draghi, a sort of Punch and Judy routine the financial world has become all too familiar with. Draghi and the liberals pop up, the Germans take their big money stick and pop them over the head, wham, wham, wham.
“The Bundesbank has not changed its views on ECB bond market
interventions,” an unnamed German central bank spokesman said. “In the Bundesbank’s view, buying government bonds by the central bank is not the best tool to address the crisis.” (The glib question is: “Well what is?”)
Peaceful, Uneasy Feeling
So, on the easing front, it seems that in the United States the question is “when,” whereas in Europe the question is still “if.”
Citi has upped to 90% the odds of Greece leaving the euro, and that does not promise good things for the entire zone. If little Greece (GDP US dollar 298 BIL), standing on its sovereignty and dignity - as well as local sentiment based on severe economic conditions - it is almost idiotic to believe that Germany can hold Spain’s and Italy’s feet to the fire (Spain’s GDP = Dollar 1.4 TRIL, Italy’s = dollar 2.2 TRIL)
If Spain and Italy exit, that leaves only Germany and France as major economies within the economic union. That scenario would drive Spain, Italy, and heaven knows whom else, directly closer to the arms of the financial nexus of London and New York, with an assist from Hong Kong/Shanghai. We believe that during this stressful period that all EU member states are beginning to ask themselves what they are getting out of the union. Soul searching. Soul searching.
Meanwhile, credit rating agencies have warned that not only are individual countries’ sovereign bonds at risk of being downgraded, but, because of the left-right economic conflict described above, the ESM and EFSF funds, meant to provide low cost financing to economically straitened nations, might also be downgraded. This would generate a rise in borrowing costs, probably worldwide.
This all could constrict gold’s rise, but it won’t. Increased borrowing costs will cause more turmoil in Europe, not less, thereby making gold more attractive as a safe haven.
In Asia, there is conflicting information regarding physical demand. Our belief is that demand in China will continue to skyrocket, in spite of trading scandals, or perhaps because of them. Gold purchasing in China is expected to rise 13% in the next 12 months to 870 tons, although that is a downward revision from the once-expected 1000 tons.
India will continue to tread water on its purchasing of physical gold, although investors and dealers might consider what can happen should gold reach 1700 or even 1800. Physical buyers/sellers have to work some hedge into their activities - or else.
There is also a reasonably robust uptick in physical demand coming from Indonesia and Malaysia.
These developments all demand an answer to the question: Why is there not a bullion exchange in Asia on the level of Zurich’s, London’s or New York’s?
As of Friday, 27 July, the 1600 support threshold has held. (Gold looks to close around 1625 on Friday in the US) $1600 was an important step on the way to the next landing, 1630 to 1635, based on previous highs of the last rally. Breaking above 1635 could indicate a substantial breakout to the upside.
The excessively lengthy correction we have struggled through may very well be over if one looks closely at the wedge that had been forming since mid-April.
On a technical basis there can be no doubt that gold has been trading in a narrow range, forming a compression triangle, or what is commonly referred to as a wedge. In such a pattern the usual interpretation is that as prices move closer to the apex of the triangle there is a buildup of energy. Price range narrows until it breaks out decisively with tremendous force either to the upside or downside.
Buying outlook? Buy dips between 1604 and 1609; keep stops close to 1590.