Gold

Bullion Report 13th October 2011 By Paul Gallacher

Good evening / morning traders & Investors alike! I hope you had a profitable day! Apologies for the lack of posting today, I succumbed to a bout of man-illness, which as you all know can be ultra debilitating!! That said, I have battled through the ills of the man bug and are again back at the screens, enthusiastic to tackle the weeks end. I have been thinking about Gold a lot in the past few weeks, and as a consequence what better way to continue those thoughts than by sharing them with you guys So, buckle up, here we go............ Lets start with a summary of today, and then go onto what the future may well hold for the precious metal.

Weak Chinese data, US earnings worries curb gold buying Resurgent dollar could trigger correction; BNP cuts view Bearish double-top pattern triggers technical sales Coming up: US retail sales, consumer sentiment Friday

Gold fell in tandem with riskier assets today, spurred by disappointing Chinese economic data, & weaker US equities, with bank concerns potentially curbing some of the recent positive sentiment seen in these markets over the past couple of weeks. JP Morgan didnt help matters today with a bit of a miss on its QE3 earnings data, registering lower than expected numbers. How dare you JP! Uncle Sam will be overjoyed today, with USD strength coming back into play, sending Gold downwards in line with other risk assets. From a technical angle, Gold is once again trading below its 20 day moving average having breached that resistance to the upside the previous day. It is not out of the question that a degree technical selling came into play in the Gold market after briefly hitting the $1,900 per troy level twice in August & September, and is certainly not out of the question for this trend to continue in the short term. You can see price action settling below the 20 day moving average in the chart below, and the bottom end of the recent pennant being pierced to the downside. Id like a subsequent close below the pennant before considering short opportunities.

What caused the recent drop in the price of Gold? A number of arguments can be put forth to attempt to ascertain why we have seen the recent declines in the price of bullion through August & September. I have my own opinions, and have read numerous articles, views, & opinion over the past few weeks. The best combination of the reasons I would agree with are those from a document obtained from a fellow trader, Alejandro, back in late September, compliments of Julius Baer. I have detailed the main highlights of this below, coupled with a little elaboration from my own perspective. All sounds reasonable though ! USD Strength Markets in August & September have been particularly bearish, with Investor sentiment exceptionally negative. In a normal environment Gold is seen as the safe haven play, however what we have actually seen is USD strength with the Greenback being the safe haven of choice. All should keep in mind that the liquidity offered by the Greenback is an extremely attractive pull in times of financial market stress. Margin It is not out of the question that investors may have been forced to liquidate some Gold positions to cover margin calls in respect of long positions in other riskier markets, given the recent downturn across risk assets Inflation The FED has suggested that it is in actual fact concerned with possible DEFLATION! Wow! One of Golds main uses is as a hedge against inflation Overbought Lets consider the technical side of trading here. Golds recent surge was somewhat dramatic, and clearly would have suffered, to a degree, from a huge influx of speculators. I would argue that part of the correction is a natural, technical retracement off these new highs / this latest monster surge, possibly flushing out some of that speculative angle, which may ultimately be a good thing for Gold in terms of bring some stability back to the price in the more medium term. Gold has become fairly volatile of late with trading ranges on Daily charts of more than $50 per troy ounce. Such volatility is not a usual characteristic of a Safe Haven !

The above cocktail may go some way to explain the recent downside in Gold, although personally I still feel the fundamentals remain to see us back upwards to the $2,000 per troy ounce level in 2012. I dont see the current price action ($1,600 - $1,700 range) as a level to be going long, Id be more comfortable around the $1,530 level, which is the approximate area of the recent lows. That would be a 20% dip from the highs approximately. If you consider bearish territory is generally classed as in excess of a 20% drop from a recent high, then that level is worth a watch! As mentioned above, fundamentally we have the Euro-zone sovereign debt crisis to factor in, slowing Global growth, & of course the situation in the US with their substantial debt burden & political circus!. My view over the next 12 months is that we will see USD weakness resulting from enforced monetary policy steps that will be taken by the Fed. Ultimately the Fed will almost certainly provide some degree of additional stimulus, further weakening the $$. Additionally, the situation in Europe in respect of Sovereign Debts & European bank capital issues (which tends to be forgotten) is not something that is going away any time soon. Almost certainly Greece will default on its obligations by the year end, with as much as a 60% haircut being suffered by Bond holders. I have added a chart showing some correlations between Gold & other risk currencies below. A couple from Alejandros document & a couple that are of more interest to me personally ! I have taken EURUSD, AUDUSD, The Polish Zloty & the Brazilian Real to illustrate.

Chart Gold , EURUSD, AUDUSD, PLN, BRL 13/10/2011

Some Technicals
See on the chart below the Bearish Double top at the highs triggering technical selling, and Gold now trading under the 20 day moving average

Platinum / Gold courtesy of Thomson Reuters

Where now for Gold

My long term view is bullish. I still feel we will see USD weakness as a result of the ongoing Sovereign debt crisis in the Euro-zone, anaemic growth in the US, and an overall slowdown in global economic growth as a whole. All of the fundamentals that pushed Gold to its recent highs around $1,900 remain and for that reason I have a target of $2,000 for 2012. So, what is my trading strategy here. Basically my key levels are noted below, with the chart to illustrate how I will trade the pervious metal! Entry $1,531 Recent low from 26 September Stop - $1,377 15 March low A little wider than Id like however I like the potential risk reward with a target at $2,000, given recent volatility Id be frustrated getting taken up by any whip so I have applied a little more risk to this trade. Target 1 - $1,700 Psychological level & 25 August low region Target 2 - $1,814 11 August & 21 September Resistance, also a good area of support on 31 st August & 1 September Target 3 - $2,000 New High, Psychological level
th st st th th th

Confirmation of the trade going in the correct direction will be moving up above the 20ma short term, the 50ma longer term, & moving up through other key support & resistance levels, including the Fib retracement from the High of the year to the $1,530 area lows recently. Id re-consider the position if we break below the $1,460 area on a confirmed basis, factoring in the fundamentals as to why we are th trading there. The $1,460 area coincides with a potential 5 Wave (idea on the chart below). Beyond, should this trade activate at my entry, I will be keeping an eye on USD strength, other risk assets, & the key fundamentals that deserve attention, including (but not limited to of course!!) the European Debt crisis, US Economic data, The Fed, & Global data as a whole will be key. One final Idea as I mentioned above on Gold is Wave Structure. Golds fall from the highs in September quickly brought the 200 daily moving average into play, with this working as good support initially, however after 6 clean tests this level broke strongly to the downside firing us all the way to the recent lows around 1,530. I have suggested potential Wave areas as illustrated on the chart below, with Wave 5 potentially testing the 1,460 area, hence the stop I have detailed above. Current price th action is definitely in a tight range, slowly grinding along within this range. Typical of a 4 Wave. As the range tightens it is quite clear that a BEARISH FLAG pattern has developed and is almost at the point where a break to the downside is highly likely, from a technical perspective. Such a break could easily get me to my entry point, however if the Wave structure is to unfold then the trade may well go offside for a period before moving back upwards. Given this in terms of size I will only being entering th small size initially around 1,530, then reviewing depending on whether we see the 5 Wave unfold or not!

Over, & Out! Happy Trading ! Paul Gallacher