Gold: Still On The Launching Pad

I last wrote about gold on April 30, 2009. In that article, I stated that gold was on the launching pad. Something big was going to happen. Gold had consolidated into a range that would lead to a breakout or a breakdown. The only problem I had no idea what direction gold was going.

To my credit, I did suggest going long at that time as gold was at support and this represented a low risk buying opportunity. But truth be told, I really had no clue or inclination that gold would be up 5% over the next month.

So let's review the technical picture and discuss some possible factors that could propel gold higher.

Figure 1 is a monthly chart of a continuous gold futures contract. Gold still remains within a very narrow range between support at 884 and resistance at 945. It is currently at the upper end of that range. This consolidation is our launching pad. A monthly close above 945 is the "breakout" that would make gold bugs happy.

Figure 1. Gold/ monthly

Figure 2 is a monthly chart of the SPDR Gold Trust (symbol: GLD). Our levels are shown, and a monthly close over 92.63 would be considered bullish.

Figure 2. GLD/ monthly

Figure 3 is a weekly chart of the GLD, and the range is noted with the upper end being at $95. This coincides with a down sloping trend line as well. For you "head and shoulder" buffs, the inverse pattern is obvious, and a breakout of the neck line at $95 would likely propel prices to $120.

Figure 3. GLD/ weekly

But let me reiterate that gold still remains in a range, and this can be easily seen in the next graph (figure 4), which is a weekly chart of a continuous gold futures contract. The indicator in the lower panel compares gold's performance to a basket of 8 currencies. The currencies that I am looking at are: 1) Australian Dollar; 2) Canadian Dollar; 3) Swiss Franc; 4) Eurodollar; 5) British Pound; 6) Singaporean Dollar; 7) Japanese Yen; 8) US Dollar. The indicator, which should lead the price action, remains range bound - like the price of gold.

Figure 4. Gold v. Currencies/ weekly

The fundamentals for gold are easiest explained by the competing forces of inflation and deflation. The ultra easy monetary policies of central bankers are today's seeds that are sowing tomorrow's inflation. Stock market weakness, which I have been expecting for several weeks now, will likely bring about another round of "alphabet soup" programs from the Fed and Treasury. The expectation is that the government will do whatever it takes to prop up asset prices. Under such a scenario, gold will act as a safe haven during stock market weakness, and there is little doubt that stock market weakness and expected government interventions will fuel inflationary expectations. These are the tailwinds that might propel gold higher. On the other hand, the global recession isn't over, and deflation still remains a threat. Although the technical picture appears favorable, gold remains range bound, which I believe reflects the current fundamental dynamics.