Monday, January 11, 2010

A Resumption Of The Tide, Perhaps

The important US$1,150 barrier was broken to the upside last night; gold has held above that price all morning. As I write this post, spot gold's at $1,160.00 even.

Reports from both Wall Street Journal Online and Bloomberg attribute the rise to two factors: a dropping U.S. dollar, due to the disappointing jobs report, and better-than-expected Chinese exports. The latter factor also lit a fire under the price of industrial metals like copper.

This gold-price charts, courtesy of, shows the price of gold up to Friday:

The pattern shown by the rightmost side of the graph, corresponding to most recent prices, is a standard one in technical analysis: a "head and shoulders" pattern. The dip in the second week of December is one shoulder of the pattern. After an abortive rise, the head was traced out by the late-December-to-beginning-of-January double-dip plummet to well below $1100. The action of the last few days forms the other shoulder. In such a formation, the price corresponding to the "neckline" is important. Should the investment rise above the neckline price, so goes the theory, it's in for a bull run. This so-called head and shoulders pattern is really a busted downtrend.

As the price action from last night to today shows, that neckline - in this case, at about $1,140 - has been broken. A chart of the U.S. dollar index shows that its recent range has been broken on the downside. It's currently hovering around 77 after dipping below that level.

What does all this mean? That the much-feared resumption of the U.S. dollar bull has been put on hold, and perhaps derailed. Gold has benefitted accordingly. Also, the greenback market has already been pricing in a smooth and orderly rate hike within six months. When that plan has seemingly been disrupted, the greenback has sold off.

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