What Made Gold Break Out?

Tue, Jan 31, 2012 - 12:00am

Last week, gold broke through heavy overhead resistance, as did silver, to look very positive for the days ahead. Many technical analysts didn’t feel that gold had that kind of momentum but then came the break. It wasn’t a struggling break; it was robust sweeping resistance aside as though it wasn’t even there.

Fed’s Announcement Last Week

You’re probably saying now that it was the announcement from the Fed that interest rates would be held at current levels for another year more, through to the end of 2014. The superficial assumption is that this means that the dollar will earn nothing, so risk assets should outperform dollar deposits. That’s true, but a great deal more was implied in their statement (as we detailed in the latest issues of the Gold Forecaster & Silver Forecaster). The Fed pointed to long rates rising to above 4% over time, while inflation remained at 2% –and could fall further. Why?

If long-term rates are going to rise while inflation is dropping and short-term rates are flat, it’s more than likely that there will be a robust recovery. In those conditions it is more than likely that it is the dollar that will become suspect with dollar investors moving out of Treasuries. This could cause long-term rates to rise as they sell. The dollar would suffer in the process. What’s of considerable importance is that a rise in long-term rates means that the Treasury markets will fall to reflect interest rate rises. Currently, long-term bonds are at very high prices, so a fall could prove particularly harmful to those markets as well as the broad economy –including housing at a time when that will hurt that struggling market even more.

It is difficult not to see a sad picture for both the dollar and other facets of the developed world economies going forward, despite the noble efforts of the Fed.

What Made Gold, Silver Rise Beyond the Announcement

Investors who are aware that the U.S. gold market is not the hub of the gold market, must be asking why did the price jump in U.S. time? The sophisticated nature of the developed world market allows the U.S. trading markets to act like the waves on the sea shore and move prices quickly and dramatically. It takes the 24-hour market to smooth out the moves to reflect the true demand and supply picture. That’s why London pulled back the gold price on Monday this week. But the jump of $65 after the announcement reflected short covering and new long positions being established in those markets. The jump through $1,700 has been held in position and looks like staying there now.

The gold market did feel that Chinese buying would stop when the Lunar New Year holiday started there, but this was not the case. Buying jumped heavily in China. The picture coming is that gold sales in the retail sector are more than 50% higher than last year confirming the tidal nature of this essentially one-way market. Now combine this with a stronger Indian Rupee, which has resuscitated Indian demand, and Asia demand greatly contributed to the leap in gold and silver prices.

What’s also frequently overlooked is that both Chines and Indian demand is oblivious to the trials and tribulations of the U.S. dollar. The Chinese see Yuan prices, Yuan inflation and the excellent performance of the gold price over the last few years in the Yuan, which Asia now firmly believes will continue on into the future. They’re investing in a safe, proven investment, which is doing what savings should do. Deposits at banks are not. Stock Exchanges are too volatile and take too much knowledge for the unsophisticated Asian investor. And why should they go to all that trouble when they don’t have to. Gold is doing the job they want, so why look elsewhere?

In the developed world where the Technical picture exerts such an influence, many investors are still sitting open-mouthed at the ease with which the gold price brushed aside resistance, which is now support. The Technical picture has become very positive. Of itself this will influence developed world investors contemplating precious metal. On the broad front, the developed world will not supplements global demand and selling will retreat. With demand and supply being as it is, this change of attitude could have a disproportionate effect. So we ask, “here will the gold price move to now?”

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