Will Gold Break Out?

By Brad Zigler

According to Jamie Chisholm of the Financial Times, gold's now staging a breakout move. Traders, however, may find it difficult to take much comfort in that headline because Mr. Chisholm is hedging his bets.

Is gold headed higher or lower? Hard to tell from his perspective. Physical demand for jewelry is off and investor demand, expressed in share creations for gold grantor trusts, is flat or falling.

Inflation, expressed through the foreign exchange market, though, seems to be the factor that buoys Mr. Chisholm's bullish spirit. Interest rate moves signaled by the U.S. Federal Reserve, he says, hold the key to gold's destiny.

No surprise there, really.

Gold decided to go up yesterday without waiting for a Fed signal, but that other bellwether of inflation - oil - was pushed lower by the Chinese government's surprising decision to jack up fuel prices. These events might have cheered gold followers who've been watching the gold/oil ratio for signs of renewed vigor in the yellow metal. The ratio expresses how many ounces of gold a barrel of oil would buy at current market prices.

From the looks of things, gold hasn't quite been defibrillated yet.

A little bounce was seen on the ratio chart but, if it's a signal of the future, it's still rather weak. Gold found support at an 8x multiple to oil's price earlier this year, only to have the chair knocked out from under it in April when the metal swooned, exhausted from its run-up past the $1,000 mark. By any technical reckoning, 8x will be the resistance level gold now has to overcome. Meantime, there's the work required to get through shorter-term resistance at 7.2x.

Oil/Gold Ratio - Black vs. Yellow Gold

If there was a breakout foretold, it was really written in the oil chart, not in gold's. A pennant flag - a series of compressing daily trading ranges - had popped up on the NYMEX chart over the past two weeks, so technicians and options traders have been busy lining up volatility trades. Straddles have been the name of the game over the past few sessions.

After falling more than $4 a barrel yesterday, crude oil traded higher in the overnight markets and followed through in this morning's floor session. Technicals have taken on a bearish slant, indicating that somebody wants to put in a short-term top. The longer-term trend is still upward, but the low put in on Thursday indicates some weakness.

Still, oil's chart looks better than gold's. Gold was steady to slightly higher overnight and opened higher still in floor trading this morning. There are bullish indicators flashing now for the near term, but a lot of investors remain sidelined. Even if the gold's downtrend can be broken, a move to a range-bound market is possible.

And that won't make very interesting headlines for the Times' Mr. Chisholm or for me.

Comments

[CLH:]

Its difficult to see gold going up although it may have a blow off. Interest rates will go up soon--death for gold. The dollar will strengthen also bad for gold. Gold has gone up for 8 years and may rest now. Remember no one makes money on gold. When gold goes up the dollar goes down and the investor stays the same.

2008 Jun 23 06:46 AM

[Rene Cohrt:]

Tempted to say bullshittalk. Papermoney will collapse. Gold and silver will triumph.

2008 Jun 23 07:56 AM

[Peter Dykes:]

Gold has usually made its most massive moves with RISING interest rates as it did in 1978-1980 rising from $100 or so to $850 at 17% interest rates at that time.This is because long-term rates start rising with increasing inflation which is what is happening now, and as long as there is still a NEGATIVE real rate of return on money people will turn to gold. Only when the likes of Paul Volcker intervene and raise interest rates to create POSITIVE return can gold be threatened. In 1980 the positive return was more than 7%. To achieve this at the present time you would need to raise interest rates to 15% or more, as inflation is not 4% as reported but more like 10% and I am sure you don't need me to tell you this ( also see shadowstats.com ).

If rates were raised to 15% can you imagine what would happen to the stock market and the housing market? I think not somehow.

At present gold is being manipulated by the authorities through surrogates to make the picture look less terrible than it actually is and prop up the ludicrous dollar, and every time it falls those shorting it come in at lower levels, and well infromed cognoscenti come in to buy physical for long-term protection. This range trading is soldifying gold and it is poised to make an enormous run towards the end of summer.

Intervention will soon become futile as people want gold at any cost, as the banking and derivative crisis unfolds over ensuing months, and it becomes quite evident that nothing can be done to contain it.

2008 Jun 23 09:15 AM

[Dean Plassaras:]

Everyone speaks of potentially higher interest rates; I think the spectrum of still lower rates is still plausible.

2008 Jun 23 10:36 AM

[GMiki1:]

Not a good morning for gold and silver, but other signals are mixed. Ultimately, however, the precious metals are one of the few positive places to put your money.

2008 Jun 23 11:13 AM

[ritr54:]

A declining 50 day moving average penetrating a declining 200 day m.a. not a good sign for gold!

2008 Jun 23 11:47 AM

[sirqitous:]

Peter puts it aptly: "Intervention will soon become futile", and I'm in agreement with Dean as well: interest rates will go down, not up, in the next couple years.

And to GMiki: every morning when gold and silver are still a bargain, ain't that bad. (Just buy more...it won't stay this way!)

2008 Jun 23 12:26 PM

[gebby:]

just when it breaks dow it turns around. how many times has that happened?

2008 Jun 23 01:11 PM

[User 30121:]

To CLH: R U Serious? You better re-read History (Financial) 101. I don't think Ben B is THAT stupid, but if he does raise interest rates, the value of my silver and gold holdings will SKYROCKET! Interestingly, if Ben does NOTHING, my PM holdings will STILL SKYROCKET! That, is because, our (US GOVT) has DESTROYED our economy because they are basically inept and dishonest.

To Gmiki: Just keep BUYING, baby!

2008 Jun 23 05:26 PM

[GMiki1:]

Guys, I ran out of money. :) Though I am tempted by an offer David Morgan spoke about today, suggesting people buy packs of 500 silver eagles at a reasonable rate. Yum.

2008 Jun 23 06:35 PM

[User 30121:]

To Gmiki: What is Morgan's website....and a fair price is??

2008 Jun 23 06:48 PM

[GMiki1:]

Let me correct that--it wasn't David Morgan's offer, but the offer of a dealer, Miles Franklin. I presume you can find him with a search. But anyway, since David Morgan passed on the info, I accept that Franklin is quite trustworthy. The price for 500 silver eagles is about $10,250, but that depends on the spot price when you call or contact him. Because silver eagles have been a bit hard to get, I consider that a fair price. I bought some recently for around $20 each, when the spot price was about $17 plus. Silver eagle premiums are a bit higher than usual these days because they have been harder to obtain. I had to wait several weeks to get my silver eagles in my recent order.

I like silver eagles better than regular silver rounds or bars because they're so highly recognizable and negotiable. Not only is silver going to go up, but if it comes to a currency crisis or collapse, the eagles will be good for obtaining services and such.

Although bad money drives out good money in ordinary times, the reverse can be true as well in a crisis. People prefer good money to bad and you're more likely to get what you need if you have good money in competing for goods and services in a currency collapse.

I don't know that the currency will collapse. I hope it doesn't. But silver can serve the purpose of insurance against that as well as being an excellent investment.

2008 Jun 23 07:11 PM

[User 30121:]

Gmiki: Appreciate the info. Thanks.

2008 Jun 23 07:52 PM

[Indeendent:]

Two major factors impacting the value of a currency are the debt and the interest rates. US debt keeps increasing. US interest rates will have to stay low, unless the Fed wants our economy to collapse. That will keep the dollar weak. If the ECB will keep the Euro strong, gold might give up, and Euro might become a better hedge against the falling dollar. However, I suspect that there is a powerful effort by the governments to keep the gold from becoming a storage of value. Hard opponents to play against. And they have not tried hard yet. If the oil price is indeed driven at least significantly by speculators, a significant fall in oil prices will lift the dollar. What are your thoughts?

2008 Jun 23 07:55 PM

[montross515:]

This is simple: the dollar can only go down as long as the USA spends an extra trillion dollars a year from its printing press. As the dollar has to go down the price of gold has to go up. The relationship is not a straight line and the dollars fall is exponential in nature. Consider, Medicare, Social Security, the Pentagon's ability to get what it thinks it needs...People seeing the trend try to get ahead of the curve, hence, gold will go up faster than the dollars dead drop decline.

2008 Jun 23 09:38 PM

[GMiki1:]

The Euro isn't that great, with the European Union at odds over the strong Euro policy and some countries wanting out because their economies are struggling. People (analysts)still expect more of a pop from the dollar, but that's in terms of the dollar index, not purchasing power. If that deludes investors out of buying gold, well, we'll simply have to wait a little longer. I put a bunch of money into silver at exactly $14 in Feb. 2007, so I'm not unhappy, but the situation with the juniors isn't exactly all that great. However, eventually all will be revealed even to the more naive and trusting.

2008 Jun 23 11:38 PM

[rigel:]

Iowa515, to my knowledge, the government is actually not greatly increasing the dollar supply right now. However, you are right, the government is issuing debt, which is just as bad as issuing dollars to pay for things.
The monetary policy of the fed is almost irrelevant without any fiscal restraint in the legislative and executive branches. I wonder if the taxpayers would be willing to pay extra taxes this year to fund accounting classes for the government?

2008 Jun 24 01:40 AM

[montross515:]

Rigel: M3 is estimated to be increasing at around 14% this year. When Henry Paulson buys a trillion dollars worth of "stuff" from the Too Big to Fail banks, he uses a trillion dollars of real money which he gives these banks for their non-performing paper holdings---like sub-prime mortgage pools, or even prime mortgage pools which are also failing.

Dow Chemical raised all prices 20% four weeks ago and another 25% today: that's a 50% overall increase. Like almost everything else that is real, its price for goods has gone up 50%. Looked at more realistically, the US dollar was just devalued 50% against "things real." Revolutions start from massive price increases....

2008 Jun 24 11:15 PM