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Gold, Dollar and Euro: A Love Triangle into 2010

asiablues's picture





 

By Economic Forecasts & Opinions

Gold hit a 7-week low on Dec. 22 from recent optimistic data of the U.S. economy.  For example, U.S. existing housing sales jumped more than expected, and GDP grew at a 2.2% rate in the third quarter, the fastest pace in two years, amid a larger-than-expected downward revision.  The upbeat news lifted the dollar and pushed yellow metal prices to below the $1,100 benchmark. (Fig. 1)

Bullion has gained 23% this year on a strong inverse relationship to the Dollar as the longest recession since World War II eroded the confidence in dollar and boosted gold’s status as a safe haven.

Tide’s Turning

But the tide seems to be turning. Gold prices have steadily tumbled with high volatility since peaking on Dec. 3 at $1,218.30 per troy ounce with the dollar gaining 4.4% against a basket of six currencies.

The frenzy to cover dollar shorts seen over the last three weeks sent the greenback onto its first monthly increase since June; meanwhile, gold has fallen about 8.1% (a much needed technical correction, by the way, as indicated in my earlier article.)

The Same Old Dollar

The trade has also been supported by a steepening of the spread between the yield on the U.S. 10-yr note and the 2-yr note. The markets take this steepening as an indication that the economy will continue to recover.

However, it's difficult to make the case that the outlook has changed in such a way that warrants dollar strength. 

The United States is still $12 trillion in debt with a double-digit unemployment rate, more spending, higher taxes, while the monetary policy will likely remain loose in 2010.

The Obama administration has warned that if the debt ceiling is not raised, the government risks default as early as New Year’s Day.  Democrats have estimated that to get through the 2010 elections, Treasury needs to have the debt ceiling raised by as much as $1.8 trillion above today’s $12.1 trillion cap.

No, it is illogical to conclude that the buck's rise from near rubble is due to material improvement in the fiscal or monetary conditions in the U.S. Rather, it is the decline in the euro and some other key currencies has accelerated due to substantial weakness as compared to the Dollar.

New EU Sovereign Risk

The greenback has been the primary beneficiary of Fitch and Standard & Poor’s credit rating downgrades of E.U. member Greece and similar worries about Portugal, Spain and Ireland.

Capital is fleeing out of the euro due to possible sovereign risk in the E.U. states, which sent the euro plunging, and dollar (quite ironically) reclaiming its status as "the currency of choice” on the risk aversion side.

Gold’s Euro Affair

For this reason, gold's price movement this month has been largely dictated by the euro instead of the Dollar due to the capital shift triggered mostly by the E.U sovereign risk.  

This has prompted an almost record high short-term correlation between the EUR/USD currency pair and gold prices. At the same time, the inverse correlation seen between Dollar and alternative asset classes remains broken as both stocks and Dollar have advanced in previous trading sessions. (Fig. 2)

his fairly significant shift underlines important market themes and the likely direction of gold in the short to medium term.

Long-term Underpinned

Regardless of the new development with EUR/USD, gold’s long-term prospect remains underpinned mainly by the following factors: 

  • Strong continuing central bank demand - Central banks have now become net buyers of gold in the last half of 2009. A Chinese official recently was quoted saying China should increase gold reserve to 6,000 tons in 3~5 years, and 10,000 tons in 8~10 years from the current 1,054 tons (as of April this year.) Russia also has bulked up on its gold reserve by 20.1% since the beginning of this year to 612.74 metric tons, valued at almost $23 billion.
  • Rising inflation fear – Inflation is a by-product of reflationary monetary policies, low interest rates, and expanding government debt in virtually all of the major industrial nations.
  • Dollar in the midst of a multi-year decline - The Federal Reserve's announcement that it would keep interest rates low and money cheap for an extended period makes it almost inevitable that the Dollar will continue to weaken.
  • Growing investment demand – Gold investment demand has gone up by 25% to 220 tons this year.  Diversified stock funds have been buying gold bullion, piling into gold ETFs and stock of gold-mining companies as insurance against a worrisome monetary situation, possible inflation situation, and partly to juice their returns.  (Fig. 3)  
  • Supply constraint - World gold mine production will likely continue to decline for at least another five years.
Short-term Mixed

Bulls:  ICE commercials reportedly nearly doubled their net short positioning in the greenback. That could be suggesting that the dollar rally is at risk of a near-term top or reversal, which could give gold a boost.

Continuing positive money flow into gold ETFs also suggests that investors are buying gold on the dip at below $1,100 levels lending support to gold.

Bears:  On the other hand, the global financial crisis from over a year ago has now morphed into a sovereign debt crisis. The fresh downgrade of Greece’s sovereign debt rating by Moody’s on Dec. 22 could trigger a renewed bout of flight to dollar, which could further hit gold prices as it did earlier in the month on similar fears.

Bloomberg reported that futures traders are now betting on a 48% chance that the U.S. Federal Reserve will increase the target rate for overnight lending between banks by June. This could suggest the dollar may extend this month’s biggest gain since February as the perception of a recovery in the U.S. economy pushes up yields, damping the dollar carry trades.

In addition, the hedge funds are now on the sell side of gold and until they switch to buy mode, the carry trade unwind is likely to continue.

Technically Speaking

Based on the latest CFTC commitment of trader report (as of December 15), the number of long speculators for gold was beginning to fall back to around 363,000 as some them may be beginning to sell with the recent weakness.

After the large drop of the past week, there are likely to be lots of margin calls which could force liquidate more long positions, potentially putting downward pressure in the coming days.

Almost all the short term gold technical indicators, such as MACD and StochRSI, are bearish.  Gold also has broken below its 50-day moving average, so further downward move could be in the cards.  (Fig. 1)

2010 - A Love Triangle

Although Euro has strengthened in the last couple sessions, it is more of a retracement rather than an ongoing trend.  If euro continues to weaken against the dollar, we may see even more short-term pressure on the gold.  But gold should find support around $1,075. A further pull-back to around $1,000 - $1,025 could be a buying opportunity depending on individual portfolio makeup and investment horizon.

Index-wise, if EUR/USD drops below 1.40 or the Dollar index (DXY) breaks above 80, we could see gold dip below $1, 000 mark.

Optional Plays

Gold is currently undergoing an important technical correction cycle. Year-end profit taking, new year portfolio re-balancing and various macroeconomic factors will likely make it a very testing few months for all markets, including gold, at least through mid 2010. During that time frame, it would not be a surprise to see gold sink below the 200-day moving average, currently around $988.

Investors interested in hitching on the gold train could consider buying options as an alternative way to play the gold market in addition to bullion, ETFs or futures contracts. For now, option expiration dates at least six months in the future (June 2010 onwards) seem to be the best bets at this time.

Bling Bling Gold Glitter

Gold is set to continue to glitter as an investment choice in 2010 due to its better long-term performance expectation relative to other investment vehicles, in the context of the profligate government spending, mountainous national debt, and the multi-nations calls to remove Dollar from the reserve currency status.

In that sense, the seemingly lofty $2,000 gold price could very well be reached, or even higher, albeit continued high volatility and sharp reversals along the way. On that note, gold is best suited for long-term investors with a well diversified portfolio.

"To have gold is to be in fear, and to want it to be sorrow."  ~ Johnson 
 


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Fri, 02/05/2010 - 01:38 | Link to Comment Anonymous
Sun, 12/27/2009 - 22:41 | Link to Comment eblair
eblair's picture

Moving to Europe where I'll be spending Euros obviously.  Have a small nest egg.  Should I keep in USD?  Put in Euros?  A buddy says buy gold?  Should the gold be in euros?  Or dollars?  Netanyahu seems to be trying to form a war government reaching out to Livni so I guess that means gold is good.   I'm no economist so any help would be really appreciated.

Mon, 12/28/2009 - 07:45 | Link to Comment Anton LaVey
Anton LaVey's picture

Gold. Physical gold. Buy bullions.

Disclaimer: as everything else that you can read over the Internet, use my advice at your own risk. I may know what I am doing. I may have no idea. Do your own research. Then decide accordingly.

Sun, 12/27/2009 - 22:25 | Link to Comment Anonymous
Sun, 12/27/2009 - 11:00 | Link to Comment Anonymous
Sun, 12/27/2009 - 10:42 | Link to Comment Anonymous
Sun, 12/27/2009 - 04:25 | Link to Comment order6102
order6102's picture

amazing part is. EUR is same piece of sh*t as USD, JPY is junk backed up by insolvent govmnt. GBP - ccy of govt that has no money left... So, long AXJ... short everything else... this where 1/2 of planet ppl are from anyway, and if you in love with G7, then AUD, CAD and CHF...

And gold? WTF is gold... go for PT, PD, RH. if gold goes up - they will, but if gold doesn't they will anyway... And btw you can make AU from PT, try to make PT from AU...

Sat, 12/26/2009 - 20:34 | Link to Comment DosZap
DosZap's picture

Really, when we see the NEW open ended, OPEN CHECKBOOK policy to FM/FM, the exponential off the charts growth, QE is a joke, and when it get's down to it, does it really matter if you pay a hundred bucks or two more NOW, or wait for something that may never happen.

 And, even if it does, what makes us think it will be physicaly available then?. The rest of the world, is starting to wake up to the END GAME. The USD as a safe haven, is a freakin joke,long term.(really NOW), it's just a BAD habit.

No matter what happens to the U.K., or any other country... This dog is not going to hunt much longer.

Sat, 12/26/2009 - 15:36 | Link to Comment Emmanuel Goldstein
Emmanuel Goldstein's picture

It's a fairy tale told by the GS Fed that the GDP grew over that quarter.

The calculations leave out the rise on food and fuel costs. Had these been included there would have been negative growth.

Sat, 12/26/2009 - 14:45 | Link to Comment Anonymous
Sat, 12/26/2009 - 12:35 | Link to Comment Crime of the Century
Crime of the Century's picture

"To have gold is to be in fear, and to want it to be sorrow."  ~ Johnson

I don't listen to johnsons


Sat, 12/26/2009 - 15:42 | Link to Comment Crisismode
Crisismode's picture

You will be listening when your digital assets are worthless, and your neighbor is feeding his family because he can barter silver and gold coins.

Sun, 12/27/2009 - 12:59 | Link to Comment Crime of the Century
Crime of the Century's picture

I reject the first part of that statement, and was being sarcastic in that I don't know the attribution. Simon Johnson? I say, have faith, and buy gold (PMs) as insurance. You don't insure your home because you are in fear. Why is wealth any different for one who isn't consumed by greed?

Sat, 12/26/2009 - 11:51 | Link to Comment Anonymous
Sat, 12/26/2009 - 09:18 | Link to Comment Kreditanstalt
Kreditanstalt's picture

I don't expect this highly artificial dollar rally to go past about 80-82 on the DX.  Why? 

a)fundamentals just too too awful,

b)ISSUANCE!

c)Funds under management are just DESPERATE for returns exceeding the miserable offerings on "safe" government debt.  They're forced into the casino of the U.S. stock markets, as are we all.  And so far the casino is paying more than 0.25%p.a.

d)foreign holders are likely less leveraged and in better shape and are busy DIVESTING themselves of dollars on an ongoing, longer-term basis.

You don't have to be a goldbug to see why the metal will be last man standing.

Sat, 12/26/2009 - 05:12 | Link to Comment Anonymous
Sat, 12/26/2009 - 00:28 | Link to Comment Grand Supercycle
Grand Supercycle's picture

 

 

The dollar rally I forecast some months ago continues to trend UP.

The weekly and monthly dollar chart suggests this may be a MULTI YEAR rally.

U.S. TREASURY 10 YR daily trend is bearish - suggesting higher interest rates.

http://www.zerohedge.com/forum/market-outlook-0

Sat, 12/26/2009 - 16:03 | Link to Comment Anton LaVey
Anton LaVey's picture

Short-term rally... Perhaps.

Multi-year rally? Everything is possible, but that probability is so far off into "improbable" territory it's not even worth considering.

Food for thought: http://www.fairfieldweekly.com/article.cfm?aid=16014

Sat, 12/26/2009 - 12:38 | Link to Comment Crime of the Century
Crime of the Century's picture

The weekly and monthly dollar chart suggests this may be a MULTI YEAR rally.

All aboard the Fiatsco Express™ (hope that's a coal fired locomotive!). I guess if that's the case, Ben & Timmy should turn it up to 11.

Sat, 12/26/2009 - 00:31 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

Well maybe I'll buy some more TBT to go with my gold.  TBT for speculation, gold to preserve my a**.

Fri, 12/25/2009 - 23:47 | Link to Comment Anonymous
Fri, 12/25/2009 - 22:46 | Link to Comment Kreditanstalt
Kreditanstalt's picture

I have a feeling that @$1077/oz. marked the low.  Each day last week we saw the 12-noon-GMT-to-US-market-opening gold plunge, but each time buying from the rest-of-the-world rectified that.  That was one of Jim Sinclair's possible scenarios for the near-term gold price, wasn't it?  That this was the bottom?  I myself bought more last week at $1085.

Someone has desperately, almost grubbily been trying to sell gold down but they have not succeeded.  They CAN'T succeed long-term, or even medium-term. 

We also have to differentiate here between the paper COMEX and ETF prices and the price of the real metal.  Look for a divergence some time early in the new year.  How will it manifest itself?  Are we still seeing slight but continuing backwardations?  Is the physical market still tight?  Also, exchanges have lately been copping out by allowing for the settling of contracts in paper...

As long as those conditions are in place, the paper gold price is MEANINGLESS.

 

Fri, 12/25/2009 - 22:43 | Link to Comment Anonymous
Sat, 12/26/2009 - 16:11 | Link to Comment Anton LaVey
Fri, 12/25/2009 - 20:37 | Link to Comment Anonymous
Sat, 12/26/2009 - 14:14 | Link to Comment mojine
mojine's picture

They are not positions. They are possessions - and I'm not selling.

Fri, 12/25/2009 - 20:31 | Link to Comment anarkst
anarkst's picture

"No, it is illogical to conclude that the buck's rise from near rubble is due to material improvement in the fiscal or monetary conditions in the U.S. Rather, it is the decline in the euro and some other key currencies has accelerated due to substantial weakness as compared to the Dollar."

I believe that markets rise and fall based on the effectiveness of the system's abilities to sell their lies.  It seems improbable that anybody with an IQ over 50 could believe any of the non-sense put out by the fascist coalition.  

 

"The Federal Reserve's announcement that it would keep interest rates low and money cheap for an extended period makes it almost inevitable that the Dollar will continue to weaken."

Right, just like the Yen.

Fri, 12/25/2009 - 18:53 | Link to Comment Anonymous
Fri, 12/25/2009 - 19:54 | Link to Comment hidingfromhelis
hidingfromhelis's picture

My bet's on 2010.  War isn't just peace any more; it's stimulus.

Sat, 12/26/2009 - 06:21 | Link to Comment Rusty_Shackleford
Rusty_Shackleford's picture

Yeah, and now with electrolytes and antioxidants.

Sat, 12/26/2009 - 15:59 | Link to Comment Anton LaVey
Anton LaVey's picture

I would have said: "War = Stimulus... Chunky style!".

Sorry. Disgusting, I know.

Fri, 12/25/2009 - 16:53 | Link to Comment A Man without Q...
A Man without Qualities's picture

"The trade has also been supported by a steepening of the spread between the yield on the U.S. 10-yr note and the 2-yr note. The markets take this steepening as an indication that the economy will continue to recover."

There has been significant steepening of the Greek bond curve as well, but the market does not see that as a sign the economy will continue to recover.  Is this a sign of the US exceptionalism, or maybe just economic propaganda?

Fri, 12/25/2009 - 14:30 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

Buy. Gold. Now.

Sat, 12/26/2009 - 23:05 | Link to Comment Anonymous
Sat, 12/26/2009 - 00:25 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

Already. Have.

Will. Buy. More. Next. Week.

Fri, 12/25/2009 - 18:08 | Link to Comment TheGoodDoctor
TheGoodDoctor's picture

And/or silver. More room to run.

Fri, 12/25/2009 - 17:08 | Link to Comment Anonymous
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