Political and social unrest in the Middle East was the most discussed topic during the week. Restlessness and riots could inflate food prices in the region and worsen the economic balance further. As a result, equity, currency and commodity markets have experienced fluctuations. The political disturbances have impacted the crude oil trade significantly as Egypt is a crucial link for oil and gas headed to Europe, Asia and the United States. There are large black swans paddling in the Middle East pond that could have a significant effect on precious metals, oil and stock markets.
On the other side of the globe, the Chinese are celebrating their New Year, the Year of the Rabbit. This year China pulled a rabbit out of the hat; China’s gold imports are estimated to have more than doubled from a year ago in the run-up to Chinese New Year. This means that China is on track to overtake India as the world’s largest consumer of the yellow metal. Traders say China will overtake India as the largest consumer of gold this year. The Indian festival of Diwali was once the key driver of seasonal demand patterns because of the large number of weddings taking place during the holidays. But now the Chinese New Year is starting to have a bigger impact.
The growth in demand is being attributed in part to Chinese families giving each other gifts of gold instead of traditional red envelopes filled with cash. Fears of inflation have also driven demand for gold. So if you have a (very good) friend in China you might consider buying them a gift of a small 100 ounce bar elaborately engraved with auspicious rabbit idioms or scenes of rabbits at play, or perhaps a 20-ounce carved rabbit bar.
As per the current fundamentals influencing gold price movement, the long-term suggestion would be a definite ‘buy’. To get an insight on current market sentiment, it is a better practice to recount technical analysis separately. To see if we can pull a rabbit out of a hat and tell you how gold will perform in the near future, let's begin this week's technical part with the analysis of the Euro Index. We will start with the short-term chart (courtesy of Stockcharts.com)
In the short-term Euro Index chart this week, we see a number of bearish signals. These will likely lead to a bullish sentiment for the USD Index as will be seen on the chart that follows below. Here, we have originally seen that perhaps the right shoulder of the bearish head-and-shoulders formation was invalidated at the beginning of this week. However, the price moved quickly below the rising dashed line, thus invalidating the insignificant breakout. Consequently, the head-and-shoulders formation is still forming.
This is, of course, a bearish signal going forward for the euro. And this will likely lead to bullish sentiment for the USD Index as well as possibly for gold, silver and mining stocks. The general stock market may also influence the precious metals sector to a great extent.
Click to enlarge:
Our USD Index chart shows the close proximity at present to long-term support levels. This level has actually been touched and the index has once again begun to move higher. Based on this factor alone, a bounce would be likely. But we have another strong factor in favor of higher USD values: The cyclical turning points. The local bottom at the cyclical turning point is not likely to have any negative impact on gold, silver and mining stocks; there could, in fact, be a positive impact.
Although it is often believed that the rising dollar is bearish news for gold, silver, and mining stocks, that was not the case during the past several months. The USD Index was leading precious metals, and now appears to be trending in tune with them.
Details, along with the cyclical turning points for the dollar, are visible on the chart below.
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A closer look at the above chart shows that at least a local bottom has been reached precisely as indicated earlier – at the cyclical turning point. Please note that the RSI indicator is also suggesting higher values of the index in the short run, as it reached the 30 level, which we view as a buy signal.
The technical situation in these two currency indices is particularly interesting, as the USD Index is likely to rally. This would cause the head-and-shoulders formation in the euro to be completed, and would likely cause a decline in the Euro and further upswings in the USD Index.
Consequently, gold has been led by the price action of the dollar in recent weeks. But now gold appears to be moving in tune with the trends seen in the USD Index. Of course, all this bullish sentiment is paired with just the opposite, a strong bearish outlook for the euro.
However, the question remains, can the current rally can be anything more than just a quick move up? The chart below suggests that it’s not out of the question.
Click to enlarge:
We featured the SP Gold Bottom Indicator on as another measure for the technical analysis over a week ago, when we wrote the following:
Finally, we have just seen a long-term buy signal from our SP Gold Bottom Indicator.
Previously we [saw] it at the end of July 2010, right before the over-$200 rally, and before that we saw it on May 21st, 2010 (another local bottom) December 9th, 2009 (insignificant bottom, however, as prices still moved briefly above it before the decline was over), and April 9th, 2009 (almost precisely at the bottom).
As you may see, we don’t get this signal very often, but when we do, it’s worth taking it into account. The implications here are – of course – bullish.
The reason we mention this indicator today is that this signal means gains not only in the short run. Please take a look below for details (the blue line in the middle of the chart):
(Click to enlarge)
Taking other factors into account, it is doubtful that the rally will be a straight line up, but the point is that this signal surely supports a rally from the current levels.
Summing up, the sentiment for gold here is clearly bullish for the short-term and while the medium-term situation remains mixed, please note that – also based on the last two charts featured in this essay - at this point being out of the market with one’s long-term capital is not advised.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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