After Dip, Gold Climbs Back Above $1100

Yesterday, gold made what chartists call a "double bottom." A spike downwards just after 10 AM ET ended almost exactly at US$1,085/oz. Right after reaching that level, it reversed and settled into a trading range just above $1,090. That range was climbed up from last night and early this morning; gold made it above $1,100 at about 2 AM ET. As of the time of this post, spot gold's at $1,102.00


This Wall Street Journal Online article credits the rise to a somewhat weaker U.S. dollar and rising crude oil prices; gold tends to be positively correlated with the latter. A Bloomberg story webbed today looks at gold's rise over the entire year: the metal's clocked in a greater than 25% annual gain, a period that includes this month's plummet. This is the ninth straight year that gold's had an annual gain. The three experts all quoted in the article, unusually for now, were all strongly bullish for 2010.




"Whither the greenback?" That is the question, in the minds of bears as well as bulls; in the minds of the nervous as well as the enthusiastic. In essence, chart-watching is a search for regularities and precedents. The reason why chart-reading fails from time to time is that new conditions intrude. Look at this weekly chart for the U.S. dollar index:

A basic reading of the thing reveals a five-week uptrend from a bottom that was higher than the early-2008 low. Despite the plummet in early December '08, the greenback made a higher high at the beginning of March '09 than at mid-November '08. The moving averages - the red and blue lines - are not acting consistently with a new bull market, 'tis true, but the red and black lines in the graph below the price chart (the MACD lines) are. The RSI line above the price chart is in the middle range, suggesting that the greenback is not overbought at this time.

I'll admit that the above chart is ambiguous, as is the daily chart, but, prima facie, the trend looks bullish for the greenback. In and of itself, that trend doesn't imply a bear market for gold even if followed through upon. Gold was at least 10% lower when the U.S. dollar hits its lower bottom in March of '08; the difference resulted from gold rising in terms of other currencies too. However, a rising U.S. dollar does hobble any resumption of a gold uptrend: the '08 greenback spurt-up accompanied a near-30% decline in the U.S. dollar price of the metal. (Gold bottomed at slightly over $700/oz in November of 2008.)

I'm not predicting a similar move, which would take gold down to the $900 region. The last plunge was in the face of panic buying of the greenback due to the financial crisis. Unless another one's in the offing - a deflationary financial crisis - the U.S. dollar won't act in the same way as it did in '08, and gold won't suffer as it did in '08. The current upturn in the greenback is predicated on recovery, which will not induce panic buying except for a once-only unwinding of the U.S. dollar carry trade. That unwinding may have already taken place.

I merely make these points to suggest that it's not very likely that gold will rocket upwards in early '10. The reasons given by gold bulls take some time to have their impact.