Gold Prospers After Break From the U.S. Dollar

By: Seven_Days_Ahead

The Technical Trader’s view:

WEEKLY CONTINUATION  CHART The story of gold and the dollar is clearly a historical one of close association with only occasional divergence (for example in early 2009) but the divergence that began in February this year is dramatic and enduring. Basically the relationship of Dollar strength and  Gold weakness has fallen apart. Can this move be sustained – or more specifically, the concern of this note is whether Gold is vulnerable to continued Dollar strength?

WEEKLY CHART This market doesn’t look vulnerable. The market was already well set up before the February divergence with Gold. And the beginning of the divergence coincided with the completion of the bull falling wedge.

The Macro Trader’s view:
The Greek debt drama has continued to dominate most markets this week. Last Friday the Greek prime minister sought to activate the rescue package negotiated a couple of weeks earlier, only to find accessing the funds promised wasn’t that simple.

When the deal involving the EU, Euro zone and IMF was struck a couple of weeks earlier, the impression was given that the funds were readily available if Greece needed them.  As part of the negotiating process Greece had to agree to a tough austerity package, leading markets to assume that as soon as a request for help was made, the Funds would flow.

But that soon proved not to be the case, as Greece and the markets found out at the end of last week. Germany sought fresh tough measures and assurances. With the German Government needing to pass legislation through parliament to provide its share of the funds, they were aware that German public opinion wasn’t supportive of bailing Greece out.

Although the German Government understood that failing to fulfil the terms of the agreement would do the Euro serious damage. But still they needed to persuade the Public and opposition that the rescue wasn’t just for the benefit of Greece but also necessary for the credibility of the entire Euro zone and Euro.

It now appears the Germans will be able to pass a bill through Parliament next week enabling the funds to be released. But the delay has come with serious costs.

The Greek sovereign credit rating has been downgraded to Junk. Portugal has seen its Sovereign credit rating reduced by two notches and Spain by one. The Euro was sold off hard against the dollar and equity markets took a hammering.

The odd thing was that Gold rallied –unlike its reaction in other periods of risk aversion driven by Greece, Previously, Gold was driven lower as traders bought the Dollar and Yen as safe-haven trades. This time traders still bought sought those safe haven trades, but with markets fearing a contagion effect, Gold has emerged as a stronger safe haven trade.

The main reason for this new gold reaction is that the major developed economies are all running large budget deficits and high debt to GDP ratios. And although the assumption is the US and UK will to a degree generate enough economic growth to make these deficits manageable, there are still risks.

In the US the Obama administration still plans big government spending that some analysts fear will push the debt to GDP ratio through 90%, a level regarded by most US analysts as the point where growth and productivity begins to suffer.

In the UK a general election campaign is underway and the outcome is unclear with a hung Parliament looking likely. The policy result could be that the new government adopts a slow path to correcting the budget deficit and shrinking the debt, rather than the Conservative intention of tackling the problem more aggressively if they win an overall majority.

So while the situation in Greece is far worse than any of these other cases, traders are aware that sovereign debt is no longer the gilt- edged investment it used to be and gold stands out as the one store of wealth independent from any one nations policies, either economic or monetary.

The result is clear: gold is likely to rally further regardless of the direction of the Dollar.

Mark Sturdy
John Lewis

Seven Days Ahead
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Mark Sturdy, John Lewis & Philip Allwright, write exclusively for Seven Days Ahead a regulated financial advisor selling professional-level technical and macro analysis and high-performing trade recommendations with detailed risk control for banks, hedge funds, and expert private investors around the world. Check out our subscriptions.

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