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Gold Bearish Correction to Continue?
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Dissatisfaction is mounting in Europe, as the European Central Bank (ECB) is still favouring inflation over growth, despite clear signals of economic contraction. The Federal Reserve, at the contrary, is willing to do whatever is necessary to bring the economy back on track, and some help could emerge from crude oil prices receding from recent stellar levels. The U.S. dollar, in the mean time, appears to be preparing a rebound, supported by technical and cyclical components. Against the Euro currency, in particular, the greenback seems to the designing a large double top formation, which should be confirmed by a move below 1.5240 to become effective. In that case, the next objectives could be 1.51. 1.46, 1.38. In addition, since 1972, the U.S dollar has shown the tendency to bottom, within a long term bear market, every 2/3 years: 1974, 1978. 1988, 1991, 1992, 1995, 2004, 2007(?). Subsequent rebounds extended for about 15%/20% from the lows.
A dollar’s breakout would bring metals prices to lower levels. In fact, gold has failed to move above the important resistance at about 990 and might decline further in the coming days/weeks without a swing above 998. A dollar’s rise would intensify current gold’s short term downtrend. The important support at 900 is already on target, but the decline might extend further to 875/855, if 890 is overcome. Gold’s demand is drying up at current prices, especially in India, and people are delaying buying hoping for better deals. In addition, crude oil appears to be correcting further, especially if the support at 119.20 on the September futures contract is broken, and U.S. stock indexes are looking for a bottom. Nevertheless, the long term trend for the precious metal stays strongly bullish and new highs will be discovered in the next weeks/months.
In effect, there are no miraculous solutions for the U.S. economy, although some light is passing through a cloudy sky. In June, as an example, new home sales fell 0.6%. Inventories declined to 10.0 months of supply from 10.4 months and median prices increased 1.4% month on month, but still 2.0% below the level of one year ago. In addition, the final University of Michigan consumer sentiment index printed 61.2 in July from 56.6. Current and future conditions both rose. The first to 73.1 from 69.5 and the second to 53.5 from 48.3. Lastly, durable good new orders moved up 0.8% in June (-0.3% expected).
Despite some positive numbers, the worst is not over yet. Downside risk to growth remains elevated, unemployment is increasing and household wealth is shrinking in the U.S. Credit cards have helped consumers to find liquidity (credit card usage is about 8% from 2%-3%) thus far, but the trend could not last for long with banks becoming more demanding on credit card standards. In addition, home vacancies touched a record high in the first part of 2008, while foreclosures doubled year on year. Housing numbers are swinging from month to month and this pattern should continue until a concrete rebound will take place. Nonetheless, housing down trend is entering into a crucial period, since many levels of support are converging and they could all meet between the end of this year and the first months of 2009.
Angelo Airaghi
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