|
As financial crisis is expanding globally, the state of the U.S. economy might remain weak for most of 2009. Housing have not found a bottom yet and consumes could deteriorate further. The gold market, at the contrary, has shown a great resilience compared to other commodities, such as crude oil, despite losing more than 30% from the highs. Nonetheless, oversold conditions are now emerging for gold, while the U.S. dollar’s trend might turn supportive again.
New Leaders Wanted
The concentric work done by the U.S. Treasury and the Federal Reserve requires time to get fully into the economic system. In effect, households have to repay debts and the financial sector must increase reserves. So, with the unemployment rate rising and the inflation softening, the Federal Reserve is ready for another rate cut by the first part of 2009. In addition, a new fiscal stimulus package is a possible solution, albeit not probable, while the Fed might buy Treasury bonds in an effort to increase its balance sheet. Will it be enough? Yes and no. As opposed to the past, the current crisis is systemic. It includes both the real economy and the financial sector. As a result, a different paradigm, a new frame of reference from which the world is seen, might be necessary for policymakers to face the challenges of the new era. A creative set of values should be brought to the table by a fresh generation of leaders. This will be one of the most challenging and rewarding tasks for the elected president of the United States.
We are probably living one the most, if not the most, challenging periods of the past four decades. In September, the U.S. industrial production slumped 2.8% month on month, the worst monthly decline of the past thirty-four years, after sliding 1.0% in August. The down move was broad based with business equipment falling 7.0%, the largest drop in sixty-one years, and mining sliding almost 8.0%. The only bright spot was inflation, since capacity utilization moved to 76.4% from 78.7%. In reality, commodity prices will keep on falling over the short/medium term, along with a receding economic growth. In September, the Consumer Price Index (CPI) was unchanged month on month, but ticked down to 4.9% year on year from 5.4%. During the same period, the Producer Price Index (PPI) declined 0.4% on the top of the down move of August (-0.9%). Annually, the PPI is now at 8.7% from 9.6%. Nevertheless, the long term trend stays strongly bullish for all commodities and new highs will discovered, once the economic slowdown will subside.
USD is topping, while gold is bottoming?
How will gold perform in the current embryonic reality? While more consolidation is probable expected over the short-term, the long term trend remains strongly bullish for all the precious metals. Asian demand has begun to pick up again, albeit jewelry consumption might decrease in the near future. In addition, the new inflationary cycle, which started at the turn of the new century, has still long way to go before topping. In fact, the current economic policy, characterized by low interest rates and strong government interventions, will be extremely inflationary for the world economies. This will penalize the dollar and support gold into new highs. Let us see why.
Since 1972, the Euro currency (previously the D-Mark) showed two majors up move against the U.S. dollar. One began in 1972 and ended in 1980 (8 years). The other started in 1985 and finished in 1995 (10 years). Within the long term up trends, the Euro/Usd corrected about six times from the highs. The bearish corrections extended for about 15%-20% from top to bottoms. The declines lasted between 5 and 18 months (197308/197401, 197502/197512, 198712/198906, 199102/199107, 199209/199402) before the up trend resumed its course. What to expect for the coming months? The current long term trend initiated around 2001 and topped for the first time in 200412 and the second up leg ended in 200807 at around 1.60. As a result, we are entering into the crucial area around 1.28/1.26, which represents a 20% decline from the top, albeit still away from the 5/18 corrective months manifested during the previous two long term bullish cycles. How this will be reflected in gold prices? Technically, gold seems to be building a bottom at around 700. It corresponds to the trendline of the past two years. Consequently, a rebound to 850, 900 is possible over the short/medium term, considering the strong divergence between current prices and the Rsi indicator on the daily and weekly charts. However, only a swing above 980 will project the market to 1.220, 1.250. A declined below 640 would instead reinvigorate the medium term bearish trend and target 600, 550.
Angelo Airaghi
Profits On
****
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed, neither the information presented nor any opinion expressed constitute a solicitation of the purchase or sale of any forex, futures or commodity product. Those individuals acting on this information are responsible for their own actions. Forex, futures and commodity trading my not be suitable for all recipients of this report. The risk of loss in trading forex, futures and options can be substantial. Each investor must consider whether this is a suitable investment. All recommendations are subject to change at any time. past performance is not a guarantee of future results
|
