Gold: Down Short/Medium Term; Higher Long Term?

The U.S. dollar is maintaining a timely advantage over major currencies, as the economic slowdown is expanding into those economies, such as Europe, that have failed to act promptly to the crisis. With the dollar in great demand, gold weakness should continue for the short/medium term. In effect, the proactive work done by the Federal Reserve and the Treasury department is beginning the produce some results.

Gold’s short term weakness might continue

Corporate profits are becoming more attractive and institutional investors are finding better opportunities in U.S than abroad. But,  how long will this ideal scenario last, considering that the dollar is rising from recent lows, the credit crunch is a global issue and the slowdown is expanding? The strength of the greenback could continue for a few more weeks/months, but gains will not come without some pain. The next target could be 1.44, eventually 1.39. Foreign trade revenues as an example, could decline. Last year, the international trade accounted for about 80% of the growth in real Gross Domestic Product [GDP] in the United States.

So, while the short/medium term scenario contemplates higher levels for the U.S. dollar, the longer term picture appears to anticipate more weakness ahead. History may sometimes repeat itself and numbers seem to favor the dollar bears and gold bulls. Why? Since 1972, the U.S. dollar suffered two major declines against the Euro (D-Mark) that lasted for about 8-10 years from highs to lows. During the same period, it has bottomed every fifteen year. The last one occurred in 1995.

For now, however, the trend is up for the U.S. dollar and down for gold. Demand has dried up at recent highs. The World Gold Council reported that request for the precious metal declined 19% year-over-year in the second quarter of 2008. Total jewelry consumption fell 24%, while industrial and investment demand declined almost 10%. In India alone, gold’s consumption slumped 45% in the second quarter, and only China showed an increase of 7%. Technically, the short/medium term trend remains on the downside. The important resistance line at 842 has held so far, and the market could again decline to 772, eventually 730, if 755 is broken. The long term picture stays, on the contrary, strongly bullish, albeit more consolidation seems to be needed before new highs will be discovered.

In the eye of the cyclone

In effect, the financial markets are experiencing an unusual calmness. Are we in the eye of the cyclone or out of it? Rates are on hold both in the U.S. and in Europe, and most of the bad news are discounted in current levels. The Federal Reserve should leave rates unchanged for most of 2008. Chairman Bernanke admitted that the financial crisis is hitting the economic growth. Inflation is a menace, but officials want to measure the state of the economy, since checks from the tax rebates are still in the mail and rates are low enough to stimulate growth. In reality, unemployment is increasing and might accelerate further in the last part of 2008. Jobless claims are high at 432,000 units. Americans continue to heavily relay on credit cards for day-to-day expenses and consumption is softening.

Personal spending moved up 0.6% in June (down 0.2% when adjusted for inflation), but total income increased only 0.1% and disposable personal income fell 1.9%. Only the service industries were mildly effected by the economic contraction. Manufacturing and good producing jobs are instead in red. The weakness of the manufacturing sector was confirmed by the latest ISM manufacturing data. In July, ISM was practically unchanged at 50 (48 expected) and above the low of 48.3 touched in February of this year. However, new orders fell to 45 from 49.6, while the employment index rose to 51.9 from June’s 43.7. Actually, the Conference Board’s consumer confidence index move up to 51.9 in July (50.2 expected) from June’s 51.0, but the index stays near the bottom of the past sixteen years. As a result, numbers must be checked again to confirm the validity.

Disclosure: none

Comments

[Marc Courtenay:]

Today's reaction in the US stock markets tells a different story than the artificially supported US dollar. But as you wrote Angelo, we can't deny the reality of what is occurring and it would be delusional to think we know when things will change. Thanks for what you wrote and contributed.

2008 Sep 04 02:02 PM

[Kunst:]

"Corporate profits are becoming more attractive"

Uh, did I pull a Rip Van Winkle? Is it 2012 already?

2008 Sep 08 02:05 AM