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|Includes: FXE, SPDR Gold Trust ETF (GLD)

Yesterday I got asked a GREAT question: Is it true that if Greece fails, GOLD will move higher?

Without any technical analysis, my reply was no this is not true. The reason is, the bailouts are not for Greece, they are for the BANKS; this is important to understand. If Greece defaults, the "derivative contracts" are due and payable to the counter parties that purchased this "insurance" against a Greek default.

Because banks are leveraged, meaning loans extended, verses cash on hand, over 60 to 1 in many cases, the Banks simply do not have the money to pay. What that means is, the BANKS, of which US Banks own 97% of the worlds derivative contracts, would be immediately insolvent.

Margin calls would be issued, and I surmise the Banks would be forced to SELL THEIR GOLD. (All of this assuming Greece defaults, and it is ruled a default by the ISDA)

Today from CNBC we get:
Gold Demand Hits New Records as Europeans Stockpile. Demand for gold hit an all-time high in 2011 as European, Indian and Chinese demand soared. Total demand around the world rose to 4,067 tonnes, worth around $206 billion - the first time annual demand for gold has risen above $200 billion.

Lets get technical:
First thing I tried to do is establish a time line. I have explained before about Fib Time Frames, the universal law of numbers in relation to each other. If we over lay a Fib Time sequence on a yearly chart, GOLD in a yearly cycle, starting at zero in Feb 2011, the numbers line up PERFECTLY.

The expectation is to look for direction out of each Fib time frame. Notice GLD went up into FIB 5, down into 8, up into 13, consolidated into 21, which is THIS WEEK ending. Remember for the SPY, we have FIB 13 week ending next week, 24th. Which way will GOLD go?
I do not know. But, having this time frame we can propose, which ever way it breaks, up or down, the trend will extend out for 34 WEEKS.

Here wave GLD daily. I have elected to use ICHIMOKU CLOUDS as our technical indicator. Reason is they offer a wider range of resistance and support calculations and GOLD is very volatile; many fast trends within the big trend.

The daily for now shows NO OBVIOUS SIGN of weakness in Gold. We are above the support cloud, consolidating/distributing from Fib 13 into Feb 21.

This could very well be nothing more then a 2nd wave or 4th wave EW pullback in a larger uptrend. I will say 21 weeks is a very extended time frame for any 2nd or 4th wave EW consolidation.

21 WEEKS suggest a DISTRIBUTION TOP pattern; but I can't say for sure.

So, next step in our quest to answer the GOLD riddle is to compare it to something else; then look for CORRELATION. Try to find another tradable asset that seems to move lock step with GOLD.

I ran gold up against, Wal-Mart, big global player, IBM, Inverted GOLD Short etf and the EURO-BINGO!

GOLD/EURO correlate over the last 3 years almost perfectly. It seems the fortunes of the Europeans, has a direct correlation to GOLD. (Which goes back to my reply yesterday, so goes Greece, so goes GOLD)

Notice the 1st indicator is the correlation %. Stays above zero line, and many months above 50% line. The only below zero, was when the EURO and GOLD were in a correction, but the EURO corrected longer. Either way, both were correcting and both moved higher out of the correction.

Currently both are in a correction and the correlation is very high.

Having established the relationship between the EURO/GOLD; lets drill down and take a look at the EURO.

To compare apples to apples, I overlay the EURO with the same ICHIMOKU CLOUD. This time the picture is the opposite of the GOLD daily picture.

EURO for now, is not consolidating, but in a confirmed downtrend; noted by being BELOW THE CLOUD combined with several other sell signals.


Gold chart is still bullish, above the cloud, and doesn't provide any conclusive evidence of a trend change.

The amount of time spent consolidating, 21 weeks, is much longer then a typical wave 2 or 4 pullback, suggesting distribution, not consolidation.

Euro and Gold are confirmed to move lock step with each other over the length of my chart sample, 3 years.

The EURO for now is in a confirmed downtrend. No time analysis was offered for this, but I have to assume since its been going up for years, we are possibly in the EARLY stages of this trend.

I expect GOLD to move decisively in a direction within the next 5-10 days; this direction to be maintained for 34 weeks.

Tim Kathlina