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Gold Being Driven Higher by Speculation Not Real Physical Demand

Commodities / Gold & Silver 2009 Dec 22, 2009 - 12:36 PM GMT

By: Graham_Summers

Commodities

Best Financial Markets Analysis ArticleOver the last two days, we’ve looked at the current Gold bull market from historical and supply/ demand perspectives. Thus far, the data has lead us to believe that Gold has entered a speculative “mini-bubble” phase in bull market.

This scenario can of course change at any time should the public’s demand for physical bullion pick up again. However, until that occurs, Gold is in the same phase that Oil was in 2008: a speculative market in which sharp rallies or corrections can occur at any time.


With that in mind, today we’re looking at Gold from a technical analysis perspective to get some insights into where the precious metal is heading in the near future.

Back in early November, I wrote that Gold’s latest rise was largely on the back of Dollar devaluation. One of the primary reasons I wrote this was because the precious metal had failed to hit new highs against other major currencies.

That situation has since changed. Gold has hit a new high against the Euro:

The Japanese Yen:

And the Swiss Franc:

However, as it did this, Gold became extremely over-extended from its 50-, 200-, and 340-DMAs. Indeed, by the time Gold had broken to new highs against other major currencies, it was due for a serious correction.

Bill King of the King Report notes that previously, any time Gold rose 40% above its 340-DMA, it suffered a steep decline soon after. King writes:

Gold got 40% above its 350-day moving average on May 15, 2006; it fell from 720 to 542 in one month. Gold also got 40% above its key moving average on 3/17/08; it declined from 1032 to 682 by 10/24/08.

At the beginning of December 2009, Gold (priced in Dollars) was 34% above its 340-DMA. So it wasn’t quite at the 40% level seen in March ’06 or March ’08, but it was getting close.

Sure enough, soon after this, Gold staged a serious correction, falling to test its 50-DMA in a few weeks. As an aside, I’d like to point out that this sudden reversal is typical of markets driven by speculation.

So what’s next?

Well, first of all, Gold looks to have bounced before it even hit its 50-DMA. This is extremely positive from a momentum standpoint since Gold didn’t even fully fall to test the 50-DMA.

The culprit for this sudden correction? A sharp Dollar reversal and rally:

As you can see, the Dollar has broken its 50-DMA with no problem and is now facing resistance at 77. This marks a break in the Dollar’s nine-month downtrend. As such it is a MAJOR reversal (as confirmed by the break above the 50-DMA) and likely the beginning of an sustained uptrend in the Dollar.

Thus, all eyes should be on how Gold performs in the next few weeks. As noted before, Gold has thus far managed to avoid a full test of its 50-DMA. However, this could easily change as the Dollar rally gains momentum. IF Gold breaks below the 50-DMA then the next lines of support are $1,050, $1,025, $1,000 and finally the 200-DMA ($983). I’ve drawn them in below.

This wraps up our analysis of Gold for this week. All in all the main points to take away are:

  1. Gold is currently being driven by speculation (not real physical demand), as such, it is prone to sharp rallies AND reversals.
  2. Gold has hit new highs against non-Dollar major world currencies which is indicative of a flight from paper currency in general as opposed to Dollar devaluation.
  3. Gold has entered a sharp corrective phase but has thus far has managed to remain above its 50-DMA despite the Dollar rallying sharply. This indicates that the upward momentum is still VERY strong.

The issue now is how Gold performs as the Dollar rally intensifies. If Gold remains ABOVE its 50-DMA then we’re looking towards bigger gains in the near-term. However, if Gold DOESN’T stay above 50-DMA, then we’re likely going to see a test of $1,050 or $1,025. Indeed, Gold could even test its 200-DMA ($983) and STILL be in a bull market.

Again, keep your eyes on Gold in relation to the Dollar.

I’ve put together a FREE Special Report detailing an unusual means of playing the gold explosion. While most investors blindly pile into the gold ETF or buy gold bullion, this backdoor play allows you to buy the precious metal at an incredible $188 an ounce. As the gold speculative bubble explodes higher in the coming years, this investment offers the potential for triple digit gains.

Swing by www.gainspainscapital.com/gold.html to pick up your FREE copy!!

Good Investing!

Graham Summers

http://gainspainscapital.com

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

    © 2009 Copyright Graham Summers - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

    Graham Summers Archive

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