Gold Leaves the Major Currencies in the Dust

By John Lee, CFA

Dec/4/2006

Gold’s breakout in early November was significant, given:

1. It just endured a year-long consolidation pattern.
2. US$600 was gold’s 200 DMA. By staying above this level, gold has shown that its uptrend is intact. Oil on the other hand, has cooled significantly with limited upside.
3. Gold’s breakout was against all major currencies.

The two year crude oil chart indicates that oil will struggle in the $60-$70 range in the foreseeable future.

Gold in British Pounds. A breakout above 3.40 will add fuel to the bull.

Gold in Euros. A breakout above 5.00 will ignite the next rally surpassing 5.70.

Gold in Canadian Dollars. The loonie has been quite weak, partially reflecting the retreat in the oil price.

Gold in Swiss Francs. 8.00 is the critical level.

In our view, gold’s breakdown below $600 was a whipsaw that cleaned out the last weak hands. Gold has firm support at its 200 DMA of $615. Once gold takes out $650 and €5.00 at the very least it will go on to surpass its previous 2006 highs.

Now let’s turn our attention to the XAU index.

The XAU chart looks very bullish, with major support at its 200 DMA of 138. The range of movement for the XAU is very tight between 140 and 150. Our belief is that 150 will be overcome along with the $650 gold price in the next 30 to 60 days.

The XAU is also rebounding relative to gold. The question is should we invest in gold or the XAU?

A resumption of the gold bull means that the ratio of XAU over gold should approach 0.28 again. With our conservative short term target of $720 for gold and a ratio of 0.28, we come up with 201.6 as a short term target for the XAU (30%+ gain). Percentage wise at this time gold stocks clearly provide a better risk to reward ratio.

John Lee, CFA