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Gold Bearish Short Term, Bullish Long Term?
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The U.S. dollar is maintaining a timely advantage over major currencies, as the economic slowdown is expending into those economies, like Europe, that have failed to act promptly to the crisis. With the dollar in great demand, gold weakness might continue for the short/medium term.
Gold’s short term weakness might continue
In fact, the proactive work done by the Federal Reserve and the Treasury department is beginning to produce some results. Corporate profits are becoming more attractive and institutional investors are finding better opportunities in U.S than abroad. But, for how long this ideal scenario will last, since dollar is rising from recent lows, the credit crunch is a global issues and the slowdown is expanding? The strength of the green back could continue for a few more weeks/months, but gains will not come without some pain. Foreign trade revenues as an example, could decline. Last year, the international trade accounted for about 80% of the growth in real Gross Domestic Product (GDP) in the United States. So, while the short/medium term scenario contemplates higher levels for the U.S. dollar, the longer term picture appears to anticipate more weakness ahead. History would sometime repeat itself and numbers favor dollar bears and gold bulls. Why? Since 1972, the U.S. dollar suffered two major declines against the Euro (D-Mark) that lasted for about 8/10 years from highs to lows. During the same period, it has bottomed every fifteen year. The last bottom occurred in 1995.
For now, however, the trend is up for the U.S. dollar and down for gold. Demand has dried up at recent highs. The World Gold Council reported that request for the precious metal declined 19% year-on-year in the second quarter of 2008. Total jewelry consumption fell 24%, while industrial and investment demand declined almost 10%. In India alone, gold’s consumption slumped 47% in the second quarter, while retail investment slid 41%. Technically, the short/medium term trend remains on the downside. The important support line at 770, which corresponds to the long term trendline of the past three years, has held so far and has inspired a rebound. Gold meets the first resistance at 834 and the second at 857, but only a swing above 868 would signal the end of current down move. In fact, a decline below 755 would possibly target 735, eventually 710. The long term picture stays, at the contrary, strongly bullish, albeit more consolidation seems to be needed before new highs will be discovered.
The eye of the cyclone
In effect, the financial markets are experiencing an unusual calmness. Are we standing in the eye of the cyclone or out of it? Rates are on hold both in the U.S. and in Europe and most of the bad news are discounted in current levels. The Federal Reserve should leave rates unchanged for most of 2008. Chairman Bernanke admitted that the financial crisis is hitting the economic growth. Inflation is a menace, but officials want to measure the state of the economy before committing again, since tax rebate checks are still getting into the mail and rates are low enough to stimulate growth. In reality, unemployment is increasing and might accelerate further in the last part of 2008. Jobless claims are high at 432,000 units. Americans continue to heavily relay on credit cards for the day-to-day expenses and consumption is softening.
Personal spending moved up 0.6% in June (down 0.2% when adjusted for inflation), but total income increased only 0.1% and disposable personal income fell 1.9%. Only the service industries were mildly effected by the economic contraction. Manufacturing and good producing jobs are instead in red. The weakness of the manufacturing sector was confirmed by latest ISM manufacturing data. In July, ISM was practically unchanged at 50 (48 expected) and above the low of 48.3 touched in February of this year. However, new orders fell to 45 from 49.6, while the employment index rose to 51.9 from June’s 43.7. Actually, the Conference Board’s consumer confidence index move up to 51.9 in July (50.2 expected) from June’s 51.0, but the index stays near the bottom of the past sixteen years. As a result, numbers must be checked again in the future to confirm the validity.
Angelo Airaghi
Profits On
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