Gold's consolidation continues?

by John Lee

02/07/2005

Gold $414 Silver $6.61

The Dollar



The Fed raised fed funds rate to 2.5% last Wednesday, while Euro short term rates stayed at 2%. The dollar index reacted positively on the news. The next upside target is 85. We see the dollar unlikely to overcome 200 DMA of 87.

Swiss Francs:

Sfrancs has corrected back to 82.5 support level.

COT commercials have increased their net long position of SFrancs to over 10k contracts, indicating the downside of SFrancs from here is limited to 81 in our opinion.

US Bonds:

US long bonds have broken to the upside along with a rising general equity market and a rising dollar. Those who hypothesized an inverse relationship between the dollar and long bonds (from foreign central bank buying) certainly got slapped in the face. No one we follow has figured out the bond market yet and we are not about to.

Gold

Gold paints a mixed picture. The important $420-$425 level was breached last week. The next level of support is 200 DMA of $415. 200 DMA has not acted as strong support in the past and we don't see how this time would be different. SFrancs however seems to be telling us the dry spell for gold could be over by February end. We will be very surprised if gold breaks beneath $400.

Silver

Silver breached $6.8 support in January. Silver is now resting on 200 DMA and important $6.6 support. Silver has not stayed below 200 DMA for long since its bull started in August 03. A test to $6 is possible but unlikely in our opinion.

Palladium
Palladium has been exceptionally weak amid strong base metal prices. Renewed strength is seen after it comes back above the $200 level.

Gold stocks

XAU is dangerously close to breaking down from its long term uptrend established since April of 2003. It is now below 200 DMA, which is not a good sign given XAU has come down another 5-10% after the 200 DMA is breached in the past.

US market

S&P 500 has been strong. Commercials have reduced their net short by 10k to 30k contracts. Important support level is 1120. We stay neutral on S&P500 for now.

Nikkei

Nikkei did break out out its year long consolidating trend in December. It is now testing 200 DMA. Nikkei continues to look solid.

Gold started the year on a whimper and continued to slump. The chart does not speak well for gold. If XAU does not rebound strongly off 90 this week, the chart says further downside coupled with multi-month consolidation is the cards. The dollar looks to rise further on rising interest rates. Gold at some point has to overcome the rising interest rate environment to challenge the $450 level. Recent news such as IMF selling gold for Africa debt relieve are mostly noise in our opinion. Barclays is launching its gold ETF in February. Our view is a true ETF is a very positive news for gold, it will be interesting to see how well received the new product is and whether the ETF truly has unencumbered gold backing the shares.