Is the Link between Gold and the U.S. Dollar in Question? Here's our Technical Setup

The $1800 per ounce level continues to be a major technical resistance area for gold. After hovering near $1800 recently, gold moved sharply away from that level last week to close at $1735 an ounce.

Despite that, more fund managers and analysts continue to point to a bright long term future for gold prices. John Hathaway of the Tocqueville Gold Fund says gold will reach new highs within a year. He based his forecast, like many others, on the fact that negative real interest rates look likely to persist as Ben Bernanke and the Federal Reserve continue to print money.

Believe it or not, some mainstream analysts are also touting gold’s potential. Merrill Lynch analysts point to the correlation (discussed in a previous article) between the price of gold and the expansion of the Federal Reserve’s balance sheet since the start of QE1 in early 2009.

Based on the current path of the Fed’s balance sheet expansion, Merrill Lynch came up with two longer term targets for the price of gold. They project gold to hit $2,000 an ounce next summer and to hit $2,400 an ounce by the end of 2014.

Another way to look at gold and the Fed is the so called gold coverage ratio. That is the amount of gold on deposit at the Federal Reserve versus the total money supply. According to Guggenheim Partners, the gold coverage ratio is at an all time low of 17%. The historical average is about 40%, meaning that gold would to more than double to reach the average.

Looking at the Fed’s balance sheet is a new and interesting way to look at and forecast gold prices. In the past, the conventional wisdom was that gold was merely an anti-dollar play: U.S. dollar down, gold up and vice versa. But that seems to be changing....

Reuters had some interesting data. The value of the U.S. dollar net short position fell to $6.43 billion for the week ended October 9. This is substantially down from the previous week’s net short position of $16.3 billion. At the same time, the “managed money” net long gold position in gold futures rose to its highest level since August 2011. That was the time when gold hit its record high of $1,920 an ounce.

So much for conventional wisdom. Both currency and gold traders are seeing this long-term relationship between gold and the U.S. dollar breaking down into a “new normal” of direct central bank intervention into financial markets. Gold seems increasingly to be turning into more of a safe haven play than an anti dollar one. It seems that more investors are worried about all fiat currencies that are burdened by huge debt loads.


The Technical Take.....

Below is a daily chart of gold futures. Looking at the price levels and analysis you can see that a bounce or bottom could form at any time now. Price of gold has pulled back in a mini five wave correction touching both our first Fibonacci retracement level of 38% and the 50 day simple moving average. This is the type of pullback that longer term investors like to add to their long gold position. While gold does have the potential to fall all the way down to $1625, in the long run it should continue to rise for the long term investor.

From a trader point of view, it may be worth a stab to get long gold with a very tight stop, but until we see a real panic selling day in gold where volume is high I don’t think the final bottom is in yet.




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Chris Vermeulen

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Gold Is Not Back In Favor Yet.....

Despite the decline this past week, gold seems to be regaining favor with global investors, as just a week earlier it had been flirting with the $1,800 an ounce mark. Quite a change from the sentiment in early summer when some investors were questioning whether the yellow metal’s decade long bull run was coming to a close.

The rebound in investor sentiment toward gold, of course, coincided with the launching of open ended QE3 (or QE infinity) by the Federal Reserve. Since then gold has “barely paused for breath. It has, as discussed previously, touched all time highs in terms of euros or Swiss francs.

QE3 certainly seemed to worry some investors. These people moving into gold are concerned about things such as competitive devaluations and the debasement of currencies in an attempt to pay back enormous debt loads with a cheaper currency. This road – currency debasement – eventually leads to inflation most believe.

So it is really is not surprising that, according to UBS, investors in exchange traded funds raised their holdings by 158 tons since the beginning of August to a record 2,681 tons of bullion recently.

Many of the world’s best investors are in agreement with the average person putting his or her money into gold. The list of names is impressive: George Soros, John Paulson, Ray Dalio and Bill Gross.

Ray Dalio, founder and chief investment officer of Bridgewater Associates, the world’s largest macro hedge fund, told CNBC viewers recently: “Gold should be part of everybody’s portfolio. We have a situation now when you have too much debt. Too much debt leads to the printing of money to make it easier to service. All of those things mean that some portion [of a portfolio] should be in gold.”

Dalio’s conclusion? “Only gold and real assets would survive.”

All of this positive macro news about gold has managed to influence the gold chart too. According to asset manager Blackrock, “the gold chart has turned decidedly bullish.” Blackrock was speaking about the so called “golden cross”. That occurs when the 50 day moving average moves above the 200 day moving average.

Blackrock noted that the last time gold’s chart looked so good was shortly after the Federal Reserve announced QE1, the first round of money printing. It said that if gold does the same thing it did back then, the price of the precious metal will hit $2,400 an ounce by next summer. Of course, macro factors like Chinese and Indian demand for physical gold will play a major role in whether we reach those lofty levels.

While I am bullish on gold longer term the chart patterns, volume and sentiment for both gold and silver are overwhelmingly bearish looking for the next couple weeks. A sharp pullback is likely to unfold before they take another run at resistance and breakout to new highs.

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Bill Gross Says Gold Will Thrive in ‘Ring of Fire’

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Bill Gross is one of the most recognizable names in the investment world. He is the founder and co chief investment officer at bond fund giant PIMCO. His long term track record regarding bonds is among the best and he still runs the world’s biggest bond fund, the PIMCO Total Return Fund.

Gross is also known for speaking quite bluntly about the United States’ growing debt problem. His latest monthly market commentary came with a warning for the U.S. and investors alike. Gross stated that a number of recent studies have concluded that “The U.S. balance sheet, its deficit and its ‘fiscal gap’ is in flames and that its fire department is apparently asleep at the station house.”

The recent studies Gross pointed to came from the Congressional Budget Office, the International Monetary Fund and the Bank of International Settlements. The studies calculated that the United States needs to cut spending or raise taxes by 11% of GDP over the next 5-10 years. This translates to $1.6 trillion per year. That compares to the country’s 8% of GDP deficit in 2011. Those numbers put the U.S. in the ‘ring of fire’ with other countries with similar fiscal gap sizes. These countries include Greece, Spain, Japan, France and the U.K.

Gross warned that the U.S. debt problems have put the country in this “ring of fire” that will burn most investors. The only investors who will not get “burned”? He says the lucky few will be those that are protected by gold and other real assets, protected from a severe U.S. dollar depreciation caused by the Federal Reserve’s money printing.

In a white paper titled “GOLD – The Simple Facts” posted on PIMCO’s website, PIMCO analysts Nicholas J. Johnson and Mihir P. Worah also said some interesting things. Here is an excerpt, “Our bottom line: given current valuations and central bank policies, we see gold as a compelling inflation hedge and store of value that is potentially superior to fiat currencies.” They pointed out the positive supply/demand characteristics of gold as a big plus in their scenario. The PIMCO analysts went on to say, “We believe investors should consider allocating gold and other precious metals to a diversified investment portfolio.”

That is quite a statement coming from a “mainstream” investment firm. Wall Street’s usual reaction to gold is that it is a barbarous relic whose only use is in jewelry and that no sane investor should put any money into it, even paper gold instruments such as gold ETFs like the SPDR Gold Shares (NYSE: GLD) and others.

After Bill Gross’ bullish words, gold prices were trading a 7 month high on Thursday before falling Friday to finish the week at about $1776.00 an ounce.

From a technical analysis point of view gold, silver and gold miners have been holding value at key resistance levels. While we could see a 3-5% pullback before they breakout and start the next rally overall the outlook for precious metals remains very strong and I put a $2400 per ounce on gold for 2013.

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Chris Vermeulen

70 Second Market Outlook – Metals, Dollar, Bonds, Stocks, Energy

Over the past year we have had some really interesting things unfold in the market. Investing or even swing trading has been much more difficult because of all the wild economic data and daily headline news from all over the globe causing strong surges or sell offs almost every week.

For a while there you could not hold a position for more than a week without some type of news event moving the market enough to either push you deep in the money or get stopped out for a loss. This has unfortunately caused a lot of individuals to give up on trading which is not a good sign for the financial market as a whole.

The key to navigating stocks which everyone thinks are overbought is to trade small position sizes and focus on the shorter time frames like the 4 hour charts. This chart is my secret weapon and giving you both large price swings which daily chart traders focus on while also showing clear intraday patterns to spot reversals or continuation patterns with precise entry/exit points.

While I could ramble on about why the stock market is primed for major long term growth from this point forward I will keep things short and simple with some 4 hour and daily charts for you to see what I see and what I am thinking should unfold moving forward.

Keep in mind, the most accurate trading opportunities that happen week after week are the quick shifts in sentiment which only last 2-5 days at most which is what most of my charts below are focusing on…..

Dollar Index – 4 Hour Chart

This chart shows a mini Head & Shoulders reversal pattern and likely target over the next five sessions. The dollar index has been driving the market for the past couple years so a lower dollar means higher stock and commodity prices.

Bond Futures – 4 Hour Chart

Money has been flowing into bonds for the past couple weeks with most traders and investors expecting a strong correction in stocks. As you can see the price of bonds hit resistance this week and as of Thursday has now started selling off. Money flowing out of this “Risk Off” asset means money will move to the “Risk On” investments like stocks and commodities.

Gold Futures – Daily Chart

Gold is stuck in both categories in my opinion. It is a “Risk Off” safe haven when people are scared of falling stock prices, and it is also a “Risk On” speculative investment when people are feeling good about the market. Gold has been trading at key resistance for a couple weeks and looks as though it’s starting its next rally.

Silver Futures – Daily Chart

Silver is in the same boat as gold though it carries much more volatility than gold. Expect 2-4% swings regularly and sloppy chart patterns in this metal.

SP500 Futures – Daily Chart

As much as everyone hates to buy stocks up at these lofty prices I hate to say it but I think they are going to keep going up and they could do this for a long time yet. If the dollar index continues to break down then I expect the SP500 to rally another 3% from here (1500) in the next 1-2 weeks.

Crude Oil Futures – 4 Hour Chart

Crude oil has not had much attention from me in the past few months. While it has had big price action many of those big days took place on news causing an instant price movement making this extra dangerous to trade. I continue to watch rather than get attached to it.

Natural Gas Futures – Daily Chart

Natural gas has been a great performer for us in the past 6 months as all the short positions slowly get covered. I just closed out my natural gas ETF trade this week with a 31.9% gain and plan on getting back in once the chart provides another low risk setup.

Trading Conclusion:

In short, I feel the dollar index along with bonds will correct over the next few weeks. That will trigger buying in stocks and commodities. Keep in mind natural gas dances to its own drum beat. The dollar does not have much affect on its price and most times natural gas is doing the opposite of the broad market.

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Gold Hits Record High in Euros and it’s Setting Up for Another Rally

The price of gold hit a record high this past week.....in euro terms (at about 1380 euros). The record came after a number of actions by central banks around the world, trying to stimulate their respective economies. The actions, usually centered around money printing, once again had investors looking for refuge in gold.

Since the beginning of September, investors have bought about 75 tons of gold through exchange traded funds. Reuters says that gold ETFs, such as the largest gold ETF – the SPDR Gold Shares (NYSE: GLD), are on track for their biggest quarterly inflows in over a year, of 3.285 million ounces. Finally, according to UBS, investors have also raised their bullish bets on gold futures to the highest level in more than a year.

All the world’s major central banks took action recently including the Bank of Japan which launched a fresh round of monetary stimulus. The main action though was centered in Europe and the United States. The European Central Bank has promised to buy an unlimited quantity of eurobonds going forward. And the Federal Reserve announced its third round of monetary stimulus, QE3, that promises to buy $40 billion of mortgage backed securities monthly on top of its ongoing Operation Twist program of buying long dated Treasuries.

Speaking about the monetary easing, Barclays precious metals analyst Suki Cooper put it this way to the Financial Times, “Gold finally found the catalyst it had been waiting for all year after the Fed announced open ended quantitative easing.”

Another reason for gold’s rise in euro terms, it must be noted, is the continuing fiscal turmoil in Europe itself, particularly in Spain. Spain’s largest autonomous region, Catalonia, manages an economy as big as Portugal’s. The problem is that it has debts of 42 billion euros which it is struggling to service. Catalonia has requested a 5 billion euro temporary bailout from Spain’s central government, adding to its debt burden. In a real show of defiance, Catalonia is also refusing to implement austerity measures. Add to that, bank stress tests in Spain showed that the country’s 14 largest lenders will need 60 billion euros in new capital.

No surprise then that physical demand for gold bars and coins in Europe rose 15 percent in the second quarter, according to the World Gold Council!

Another positive fundamental reason in the corner of gold bulls is the recent currency appreciation in the Indian rupee. India is traditionally the world’s largest consumer of gold. Sales have been slow there this year due to the government trying to slow down gold sales there through rises in a gold import tax. However, the recent rise in the rupee has made gold purchases more palatable and gold sales to India have hit their highest level in two months.

So for now, many of the fundamentals look to favor a move higher for gold, although there is technical resistance at its 2012 high of $1791.

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Chris Verneulen

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Investor Gold Buying to Resume & Fed Doubling Their Balance Sheet AGAIN!

A leading precious metals consultancy, Thomson Reuters GFMS, has forecast that investors will buy record amounts of gold in the remainder of 2012. GFMS produces the benchmark supply and demand statistics for the gold market. GFMS forecasts that investors will purchase 973 tons of gold in the second half of 2012, more than during the wild gold market of the summer of 2011. This surge in demand for the yellow metal, GFMS says, will move gold above the $1850 an ounce level, not far from the record high of $1920 hit in September 2011.

GFMS may be right. This past week, gold hit its high for this year at $1790 an ounce on the back of the various global stimulus plans launched by a number of countries around the globe. Primary among the recently announced stimulus plans was the Federal Reserve’s QE3 or as some in the market have called it, QE infinity. Philip Klapwijk of GFMS said that, for the gold market, “QE3 has become talismanic”.

The Federal Reserve said it would purchase $40 billion a month in mortgage-backed securities indefinitely. In addition, the Fed will continue Operation Twist – the buying of longer dated U.S. treasury notes and bonds. When all is totaled, the market is looking at about $85 billion a month in government bond purchases for an unlimited period of time.

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The main characteristic of QE3 that drives the gold market is the fact that the open ended purchases of all of these Treasuries will be financed by money that does not yet exist! And it’s not just about a fear of future inflation being ignited by all this money creation. It’s a very logical move higher by gold based on recent history of Fed actions and gold prices.

Even ignoring Operation Twist, the Fed will add $40 billion a month, or $480 billion a year, to its balance sheet. If one looks at the Fed’s own website, you will see that it shows current assets of $2.8 trillion. Add $480 billion annually to that and in about five years the Fed’s assets (the foundation of the money supply) will have nearly doubled.

That is exactly what happened in the last five years too…the Fed’s assets doubled. And in what should not be a surprise to gold investors, the price of gold also doubled! For the past decade or so, gold has tracked the increase in Federal Reserve’s assets. Do not be shocked if that pattern continues over the next five or ten years too.

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Has the Arab Spring Effected Crude Oil Prices?

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Crude oil prices hit a four month high this week on the back of rising tensions in the Middle East and North Africa and the unfortunate murder of the U.S. ambassador to Libya. Added impetus on the upside was given to oil by the announcement of more money printing (QE3) by the Federal Reserve which said it would launch an open ended commitment to purchase $40 billion of mortgage backed securities monthly. The global benchmark for oil, Brent crude oil, jumped to about $117 a barrel.

It maintained its roughly $18 premium to U.S. based WTI crude oil which was trading at $100 a barrel on a couple days ago. Non futures investors can easily participate in the oil market through the use of exchange traded funds. The ETF which tracks Brent crude oil futures is the United States Brent Oil Fund (NYSE: BNO) and the ETF which tracks WTI crude oil futures is the United States Oil Fund (NYSE: USO). The real story behind the story in the oil market, however, is the ongoing Arab Spring which is sweeping throughout the Middle East and North Africa, pushing aside some regimes and threatening others.

The countries whose governments, such as Saudi Arabia and the other Gulf states, feel threatened by popular uprisings are where investors should put their focus. Saudi Arabia in particular is key because it accounts for more three quarters of the world’s spare oil production capacity. So it is very important to note that the kingdom is no longer a price ‘dove’ in OPEC as it has been for decades. It has joined Iran, Venezuela and others in being a price ‘hawk’. The reason behind the change in attitude is simple…Arab Spring. Like its neighbors in the Gulf region, Saudi Arabia has gone on a public spending spree to appease its restless citizens.

It has sharply increased outlays on subsidies for items like food, fuel and housing in an attempt to appease its citizens. In 2011, the kingdom raised its domestic spending by $129 billion – the equivalent of more than half its oil revenues. Much of this increased spending will go toward upgrading the country’s infrastructure. Take electricity, for example. Saudi Arabia has revealed plans to spend more than $100 billion dollars on power plants and distribution networks by 2020. The kingdom has also set a goal to electrify 500,000 new homes that are being built in an attempt to mollify political unrest among its population of 27 million people.

This spending spree led the International Monetary Fund and other analysts to estimate that the kingdom and other Gulf countries need oil to be selling between $80 and $85 a barrel in order for the governments to balance their budgets. This is up, in Saudi Arabia’s case, from a mere $25 a barrel a few short years ago! Unfortunately for oil consumers, this trend looks set to continue in years ahead.

According to the Institute of International Finance, by 2015 the Saudi government will only be able to balance its budget if oil prices are at $115 a barrel if current spending trends remain in place. So in effect, with the Arab Spring forcing governments to spend more on their citizens, it has put a floor under the price of oil. OPEC will do everything in its power to keep the price above the budget breakeven points for governments in the Gulf region.

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Chris Vermeulen

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Volatility is back, but on the upside...is it time to buy silver?

The price of silver reached a 5 month high this past week as investor interest seems to have been rekindled in both gold and silver as belief in financial markets increases that the latest round of monetary easing from the Federal Reserve, QE3 , will soon be on its way. Many investors had largely stayed away from silver in recent months after some had got caught up in its volatility. Silver had touched a 30 year high in April 2011 before plunging 35 percent in a few short weeks.

Now the volatility is back, but on the upside, as prices have climbed more than 20 percent in less than a month. The gains have outpaced that of gold which rose roughly 10 percent during the same time frame. Importantly for investors, the ratio between the two precious metals has moved about 10 percent in silver’s favor since mid August. This is the first time silver has outperformed gold since the start of 2012.

For non futures investors, the two precious metals can easily be tracked through the use of exchange traded funds (ETFs). The most liquid ETFs for the two precious metals are the iShares Silver Trust (SLV) and the SPDR Gold Shares (GLD) respectively.

You can take a look at my long term outlook analysis from last week here "Gold Standard to be Reinstated Through the Back Door"

Some may wonder why has silver outperformed gold in the past several weeks? The answer goes deeper than just confidence that QE3 is coming soon, but it is still rather a simple one. The sharp rally in silver was fueled largely by short covering. That is, some investors (hedge funds, etc.) had made rather large bets that silver would continue falling and were caught off guard by its recent rise. According to data from the Commodities Futures Trading Commission, the silver market during the week of August 27-31 saw the largest amount of short covering since May 2011. At the same time. Bloomberg reported that hedge funds were the least bullish on silver in almost four years.

It is unknown for how long silver will outperform gold. But even some long term fundamental investors such as legendary commodities investor Jim Rogers has said that he believes silver right now is a better investment than gold. He points to the fact that historically gold has been worth about 12 to 15 times what silver is worth, but that recently it has been worth roughly 50 times silver’s value. Silver is also the only major commodity not to have reached a new all time high in the decade long commodity bull market and is still cheaper than it was 32 years ago.

So it may be worth a look. But since silver is so volatile, wait for a downward spike before initiating or adding to a long position.

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Can it be true...is it even possible? Gold Standard To Be Reinstated Through The Back Door

With political season upon there is plenty of talk about the U.S. going back to the gold standard. Most people think it's just a play by the right to appease Ron Paul and his supporters. But really, is it even possible at this point to go back to the gold standard. One of my business partners Chris Vermeulen just sent over a great article he just wrote.......

For the first time in over 30 years, talk of a return to the gold standard has become part of mainstream politics in the United States. Part of the official Republican policy adopted it at the recent Republican Convention and called for the commission to look at reestablishing the link between gold and the U.S. dollar. No doubt that plank was added to soothe supporters of Texas Congressman Ron Paul.

However, gold bugs holding gold bullion or even those holding gold ETFs such as the SPDR Gold Shares (NYSE: GLD) shouldn’t hold their breath in anticipation of the gold standard returning. There was a similar commission – the Gold Commission – set up in 1981 by President Ronald Reagan. After a lot of ‘commissioning’, the decision was made to go with the status quo of using fiat Federal Reserve dollars.

Any commission set up under the current president would likely come to the same conclusion. There are simply too many practical obstacles to return to a full fledged gold standard. Even pro-gold advocates including the World Gold Council and the Gold Anti-Trust Action Committee (GATA) don’t see a gold standard returning.

The key problem would be at what price of gold would the United States peg its currency. Great Britain returned to the gold standard in 1925, after going off it in 1914, at the 1914 peg price. This was a mistake made by Winston Churchill (he called it the biggest he ever made) since it basically ignored the vast inflation in the British pound in those intervening years. The result was a vast overvaluation of the pound and deflation and high unemployment soon followed.

What price would a new Gold Commission set as the “correct” price of the U.S. dollar versus gold? $1,000? $2,000? $5,000? The answer is that there is no “correct” price. Whatever price is set will eventually be tested by the financial markets and fail much as the pegged currencies system failed. So there will be no return to the gold standard.

But that does not mean there will not be a ‘back-door’ gold standard. The move to such as a system is already underway as central banks all over the world are rebuilding their stockpiles of gold. After two decades of heavy selling, central banks became net buyers of gold in 2010 and the momentum has built since. Gold will likely end up being used as ‘good’ collateral by global central banks, as opposed to the shaky collateral sovereign bonds are turning into.

Central bank purchases, led by the emerging markets, are on track this year to hit a record high according to the World Gold Council. China alone in 2011 bought around 490 tons of gold. Other countries including Russia, Turkey and South Korea have added gold to their official holdings in recent months. This buying showed up as central bank purchases in the second quarter of 2012 were more than double the level reported a year earlier at 157.5 metric tons. If the buying continues at current levels, central banks gold purchases would total around 500 tons this year, easily surpassing last year’s 458 tons.

The bottom line for investors from the global central banks’ buying of gold? The gold standard is working its way back into the international monetary system through the back door. This should, in the long term, put a floor under gold and help maintain it on its steady upward path.

 Just last week we started to see gold bullion, silver bullion and gold miner share prices start to breakout to the upside of a 12 month consolidation pattern. This could be the start of the next major rally in precious metals as future uncertainty fears continue to rise. The large bullish technical pattern we see on the gold chart points to much higher prices over the coming 24 months. But keep in mind this is a monthly chart and it could still take months to truly breakout to new highs and start another rally.

Gold Bullion Trading

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