What Drives Gold On


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What Drives Gold On

  1. 1. With gold sitting very close to all-time nominal highs, we thought you might like the following points on what drives golds movement. "What drives gold?" Among the factors: Real interest rates, central bank balance sheets, Indian wedding season, and the Aussie dollar.Has Gold Unwound its Overbought Status?One of the biggest questions being written about which is on traders and analysts minds iswhether Gold has moved into bubble territory and is about to start a major reversal, or is goingto keep on truckin’ Blind Boy Fuller style. While my fundamental hat suggests it’s likely tocontinue its trend (as a hedge against bad govt’s), being a quantitative price action and ichimokutrader, I have to see what the technical picture is communicating.For looking at whether a market is in an extreme phase and is set to reverse, we often looktowards our weekly 20EMA spread. This model plots the distance from the weekly closing priceto the 20EMA as a gauge of market extremes or whether the trend is likely to continue. If amarket is at an extreme level, it usually has a very large spread from the 20EMA. Any abnormalspread from the 20EMA is likely to return to the 20EMA.Looking at the chart below, you are seeing the weekly chart on Gold over the last 6 years. In thischart, you can see price’s movement and its relationship to the 20EMA, along with the lowerindicator/model representing the spread between the week’s closing price and the 20EMA.We have highlighted the key peaks which generally occurred around a 1258 reading, or pricehaving $125.8 price spread from the weekly closing price to the 20EMA. This generally led to a
  2. 2. pullback minimally to the 20EMA within an average of 4 weeks and a maximum of 10. Wewould like to note that historically, since April of 2005, Gold has spent only 43 weeks below the20EMA (closing basis) out of 541 for a total of 8% of the time, statistically displaying its tendencyto trend upward. It also means should Gold break below the 20EMA, the chances of pricestaying below it for extended periods of time are unlikely.What we do have to note is the most recent parabolic run away from the 20EMA created anabnormal spike never before seen in history with a reading of 2718 or price closing $271.8 awayfrom the 20EMA. So the next logical question becomes what do we make of this and is it theend of this massive uptrend?Our view is this is unlikely, considering the historical relationship to the 20EMA as noted before(8% of time below). In fact, we may consider a pullback to the 20EMA to be a healthy thing as itwill put Gold through a re-distribution phase and allow the order flows behind it to start anotherrun higher.But, the extreme nature of this suggests price is likely to pullback to the 20ema within the next2mos or by year end. Across most instruments, price rarely has this kind of extreme or unstablerelationship to the 20EMA and usually means the orders behind such movements have tonormalize a bit before starting another run. Keep in mind, this does not have to happen with aviolent sell-off and could be the result of price hanging around the $1700-$1900 range whilethe 20EMA catches up to current price levels.In fact, to add any new positions, we’d rather wait to let the spread normalize and move backinto the prior range which suggested a very healthy trend.We also do have to add to the bullish prospects how price had one of its biggest weekly dropsfrom an open of $1860.92, to an all-time high of $1911.89, then shedding $209 to the weekly$1702 low to do what??? Bounce strongly and end the week at $1827. This is highlysuggestive of how the buyers were ready to stand up to one of the most violent and largest %based weekly sell-offs and send the metal within roughly $40 or 2% of where it opened theweek.Thus, although the short-term price structure may suggest consolidation or mild pullback to the20EMA, our medium and long term technical view is still strongly bullishThe higher they go the harder theyll crash: when gold goes hyperbolic as now, its a bubble.Issue is at which level it crashes? 3K, 4K...? A Tale of Two Bubbles: attached a Gold vs NasdaqChart, time adjusted. Courtesy of Reuters
  3. 3. Question for gold bugs: How much of gold long positions are financed now, as Nasdaq was inlate 90s, with leverage? Do CME data show that? Of course a bubble doesnt mean you shouldstop buying. Roubini said earlier this week that rising uncertainty supports gold: “That’s thementality that leads gold to be at $1,800 (an ounce) or above. So gold, because of that, can gohigher."Yesterday Wells Fargo compared gold to past bubbles and came up with a different conclusion:"In the five years prior to their respective peaks, the NASDAQ rose 500 percent and oil rose 340percent. Over the last five years, gold has not seen nearly the trajectory of increase, rising onlyabout 200 percent. Thus, based on this metric, gold does not yet appear to be in a bubble à lathe NASDAQ in 2000 or oil in 2008. However, the 200 percent five-year increase has risen from150 percent in our April report“Real Gold Price Still Below Record, but Just BarelyThe real gold price has not yet reached the high of about $1,952/ounce at today’s prices seen inJanuary 1980, but it is very close. In addition, prices have gone “parabolic,” meaning they haverisen by an extraordinary amount in a very short period of time. When asset prices go parabolic,they usually do not stay at those levels very long and often see a quick reversal. Thus, it ispossible we could see a near-term pullback in gold based on this technical pattern. However,based on the aforementioned factors driving gold’s meteoric rise, the pullback may not be verylarge and will probably not last very long before gold prices start to rise again.Gold Still Hasn’t Risen as Much or as Fast as NASDAQ or OilIn the five years prior to their respective peaks, the NASDAQ rose 500 percent and oil rose 340percent. Over the last five years, gold has not seen nearly the trajectory of increase, rising onlyabout 200 percent. Thus, based on this metric, gold does not yet appear to be in a bubble à la
  4. 4. the NASDAQ in 2000 or oil in 2008. However, the 200 percent five-year increase has risen from150 percent in our April report.Gold-Oil Price Ratio Above Average, but Not UnprecedentedWhile gold has soared, oil has dropped to around $84/barrel amid growing concerns aboutslowing global growth. As such, the gold-oil ratio has jumped to 22.4, well above the historicalaverage of 15.5 but certainly not unprecedented. Furthermore, just because the ratio is above-average does not necessarily mean gold is overvalued or oil is undervalued. At this time, boththe jump in gold prices and the plunge in oil prices appear to be justified by fundamentals. Thisratio may decline a bit in the coming weeks, but we do not foresee an outright crash in goldpricesI want to say that should the SNB choose to set up a Peg it will not work. It will end with astaggering explosion. I can’t see a “solution” in Europe. Germany will not “Federalize” the debtsof the peripheral states. Therefore the problems will not go away. The risks to Italy and Francewill grow as a result. As that happens, capital will have to move in the direction of Switzerland.That is always how this has worked in Europe. The SNB may buy some time with their Peg andforce scared money into gold. But sooner or later the money will flow to Switzerland. This isespecially true given that the SNB will be subsidizing the price of the Franc for that hot money.Should we go down that road the SNB could be forced to absorb 300 billion Euros. The losses onthose holding could be staggering for a small economy like Switzerland What happens if therewere to be a peg? Two shorter-term outcomes that I can think of:The CHF is the “go to” safehave. But not if they peg themselves to the Euro. Some of the money that is currently parkedLONG TERM in Switzerland will leave. (I think a lot of the short term hot money has found theexit by now). Where will those long term seekers of of a safe haven go, now that it ain’t so safe?There is only one option, gold. That is especially true for those who have Swiss Francs in thefirst place. They all love gold. Now they will have to love it more.The next time there is a crisis on the table where will the money go? Not the Swissie. Thatwould be a dead end. So the rest of the hot money will have less of a place to go. Once again itpoints to gold.ShamikBhose@yahoo.com