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The first half of 2011 is
over. With the summer solstice just behind us we would like to review the
first half of 2011 and look at what is ahead. Last year gold gained 26%, its
third double-digit gain of the last four years. So far this year has been
choppy. The yellow metal has risen 19.5 per cent this year to trade at about
$1,500 a troy ounce buoyed by the emergence of sovereign debt concerns in the
US as well as Eurozone debt woes. Since 2011 has begun, gold prices got hit
with double-digit selloffs and rallies. The common culprit is the so-called
“rebalancing", which is when traders who bought gold at the end of
the year to show they owned it, dumped it in 2011 to take a profit. The same
traders jumped back into the gold trade in February and March as violence
exploded throughout the Middle East and North Africa region and Japan
contended with its worst disaster since World War II.
Last year Eurozone concerns dominated the gold trade
in the first half of the year. All the factors that drove gold higher last
year – fear, uncertainties, lack of confidence in the dollar, gold as
the ultimate currency, buying by newly wealthy Chinese families, sovereign
troubles in the euro zone, central bank purchases, high unemployment in the
U.S. – are still in place. Has anything really changed?
The US dollar has slid 5 per cent so far this year
and is trading close to its lowest ever level against a basket of the
world’s major currencies. This is biting into its status as the global
reserve currency. Holders of large dollar reserves, notably China, have been
diversifying away from the dollar. In the first four months of this year,
three quarters of the $200 billion expansion in China’s foreign
exchange reserves was invested in non-US dollar assets.
We once wrote that if we got an ounce of gold for
every time we wrote the word “Greece” we would have a nice pile
by now and would seriously consider retiring (just kidding, we like what we
do too much). Greece dominated the financial news space these days as it
pulled back from the brink of default and averted a larger Eurozone crisis
after passing sweeping austerity measures. However, the possibility of a
default remains a fear that troubles the sleep of many investors (for sure,
those who don’t own gold.) Europe’s debt crisis, along with fear
of natural disasters and political uprisings and upheavals, are prompting
investors to seek out investments that promise to protect their portfolios in
the event of economic meltdown.
The one thing we can safely predict is that the rest
of 2011 will be as unpredictable as the first half. We will hope for the best
and at the same time be prepared for the worst by tracking the price of gold
and silver and making detailed analysis. So, let’s begin this week's
technical part with the analysis of the Euro Index. We will start with the
long-term chart (charts courtesy by http://stockcharts.com.)
 
Look at the chart; the euro has rallied and this can
most likely be attributed to the situation in Greece. The Greek Parliament
agreed to cut spending and take a measured approach towards the economy.
Investors cheered this news and appear to have bought euros which they had
previously sold during a time of uncertainty. Optimism has now increased
significantly and the result can be seen with the Euro Index recording more
than a 2% gain during last week of June. When the Greek Parliament accepted
the savings plan, the appetite for the euro and for stocks increased;
however, gold reacted mildly to the news. The medium-term picture for euro is
now slightly bullish.
What about the Dollar Index?
In the long-term USD Index chart, we see that there
was no breakout above the declining medium-term trading channel. Instead, we
have seen a move lower after the index touched the upper border, but this
decline was stopped by the short-term rising support line and the 2009 lows.
The situation here is mixed, and whichever way the
USD Index breaks is likely to determine the next big move for the dollar. The
implications for gold are not obvious at this time. The situation for gold,
however, is clearer than it is for the currencies at this time.
Overall, the situation for the Euro Index is more bullish
than it has been in recent past. The opposite is true for the USD Index.
There is little bullish news at this time for gold which simply is not
reacting to the euro strength.
Keeping the uncertainty associated with the
short-term moves in precious metals, let’s see what does Sunshine
Profits Gold Bottom Indicator suggest at this time?
The SP Gold Bottom Indicator has just flashed a
long-term buy signal. This indicates that gold is not at an exact top and
that being completely out of the precious metals market is not the best idea.
However, we don’t view this as invalidation of points made in our previous
gold-related essays and we don’t think it makes the temporary decline
in gold less probable. We’re neither at the top, nor at the final
bottom.
The reason for the above skepticism is the fact that
this indicator has been particularly reliable in situations that are not
similar to the one we have today. In case of the similar situations, signals
were quite imprecise. Here’s when we’ve seen previous long-term
buy signals from the above indicator:
· 1/24/2011 - close to the bottom, right before it was
seen – situation not too similar to the one we have today as price was
far from 50-day moving average and very close to the 150-day one,
· 7/6/2010 - after the first part of the decline,
followed by a similar decline. This situation is very similar to the one we
have now – the signal was preceded by a move below the 50-day moving
average,
· 5/21/2010 – important local bottom, but not
the final one – not too similar to today’s situation, as price
was above the 50-day moving average and it was right a spike high,
· 12/9/2009 - middle of the first part of the decline
– similar situation, gold
was close to its 50-day moving average.
Overall, the situation is still quite bearish and
taking the above indicator into account does not contradict the outlook for
lower gold prices.
Summing up, recent events in the capital markets appear to have been greatly
influenced by the developments in Greece. Considering both the currency
indices and the SP Gold Bottom Indicator, long-term trend appears positive at
this juncture, but a medium-term correction is still not over. Please be
particularly careful if you plan to add to your positions right now, as it
seems that waiting for lower prices is a good idea right now.
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Thank you for reading. Have a great and profitable week!
Przemyslaw
Radomski
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