Friday, 21 October 2011

Qvo vadis, Gold ?

The precious metals have been under fire recently, with gold dropping from its all-time high of $1920 close to its 200 daily Exponential Moving Average which acted as support level for such movements since early 2008. It spiked downwards beneath the 200d EMA for a brief period to its recent low of $1533 after quickly recovering ground and consolidating in the $1610-$1690 interval.

A case for a gold bull

Even though the precious metal conundrum has been the worst to be hit by the recent developments on the financial markets and by the European economic turmoil, gold is still up 23,10% this year. Interesting enough is that every severe downward movement in gold has been accompanied by a margin-hike by the CME, requesting more collateral for the gold futures contract. The same happened with the April-May sell-off in silver which occurred after the CME group hiked the margins for 7 consecutive times

The fundamentals are still in position, as the inflation rate in the US can only go up with that much printing going on and as real interest rates have been negative for all major financial markets. In the USA the yield curve still is suppressed to low levels, and now with "Operation Twist" under place the long term yields will fall as well.  The yield curve is flat, and Helicopter Ben is twisting and turning to make it even flatter (Image courtesy of Bloomberg):

In the European Union yields on the peripheral countries may have been under a continuous rise, as described by a previous article, but at the core of the EU, yields in the German bonds (known as Bunds) are still lower than the expected inflation:

In the UK, with its high inflation rate of 5.1%, and more and more signs of an economic slowdown, the Bank of England has been having troubles with bond auctions. The Gilts have been falling in price, shifting the entire yield curve:

As a technical comment, the fact that it tested three times the long term support level (200d EMA) on high volume, thus forming a bullish triangle, is signalling a move towards the $1760-$1840 congestion zone. The trade is still risky, but a dollar-cost average entry could prove profitable.

A case for a gold bear

Gold is an ancient relic and its forming a dangerous bubble. Stay out of gold because it doesn't offer any type of returns and in times of crisis it correlates with the stock markets (thereby falling in value as well). The slowdown in Chinese growth will also affect the price of gold trigerring a massive sell-off.

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