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Gold - Enough Vigor to Delay the Inevitable?

|Includes: DGP, DGZ, DIA, DZZ, GDX, GDXJ, SPDR Gold Trust ETF (GLD), IAU, JJM, JJN, PTD, PTM, SLV, SPY, UBG, UBM, UDN, USV, UUP

Gold - Enough Vigor to Delay the Inevitable?

 

 

This essay is based on the Premium Update posted on October 15th, 2010

 

The Mid term elections are upon us and we thought to consider what impact, if any, they may have on the stock market and precious metals.

 

Whether you call it a recession, or depression, or deflation, or recovery, for tens of millions of Americans there’s little difference. Americans point to the troubled economy as their most burning issue this year when deciding how to vote for 435 House seats and 37 out of 100 Senate seats, according to a nationwide CNN poll.

 

No big surprise.

 

There is good reason to believe that voters will push the new Congress to the conservative side of the pendulum. What would that mean?

 

Generally, it is believed that a more conservative government might lean towards self-control in spending (yeah, right), restraint in Keynesian stimulus policies, which means moderating the quantitative easing.

 

In the short term that could be good for the dollar and a near-term risk for gold. As the inflation worries could cease for some time, which would help the dollar and at the same time it could cause gold's gleam to fade temporarily as some people would believe that the inflationary period is over.

 

Last week we discussed the currency war and why it is good for the price of gold. We read an interesting article in the London Financial Times by Martin Wolf that explains why he believes America is going to “win” this particular war. We like his explanation, so here it is:

 

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

 

In short, what Wolf is saying is that US policymakers will do whatever necessary to avoid deflation. This will cause the prices of long-term assets to rise and encourage capital to flow into countries with less expansionary monetary policies, Switzerland for example, or higher returns such as the emerging economies. We believe it will also cause the price of gold to soar. We certainly agree here.

 

In the very long-term chart gold this week, (charts courtesy by http://stockcharts.com.) we see similar trends to what has been the norm since early August, nearly ten weeks ago.

 

 

In last week’s Premium Update we stated that “we see that gold moved up to the upper border of the very long-term trading channel.” Once again this week, this same trading channel has held and evidence continues to mount for a likely corrective phase to begin very soon. Gold appears unable to break out above the resistance line and although its price did rise significantly in the past few weeks, there does not appear to be enough strength left in this rally to delay the inevitable correction much longer.

 

 

This week, the RSI for GLD SPDR is still showing a level corresponding to an “extremely overbought” status (conversely, the USD Index' RSI is extremely oversold.) The current rally has brought gold’s price to a level, which is indeed two times higher than the prior move below the June local top. This is an important development for setting short-term targets for gold and it further supports the theory that a consolidation is likely to begin very soon.

 

The volume levels that accompanied recent daily upswings were much higher than the volume we've seen when metals declined heavily last week. This is a pattern, which has been seen in the past and is often followed by a period of consolidation and price correction, so we might expect this situation to be repeated also this time.

 

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Thank you for reading. Have a great and profitable week!

 

P. Radomski

Editor

www.SunshineProfits.com

 

 

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