Gold and the USD: Where's the Movement Going?

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Last week we talked about how we fully expected gold to have a breakout. The fundamental reports back up that this could definitely happen. Plenty of technical chart movements also tell us the same thing. Although the expected breakout has not happened in the past week, we still believe this movement will take place. Let us take a look at the most recent gold reports and reports on the US Dollar to get a sense of where this potential trade might be going.

Focusing in on gold

One of the first things we notice with the gold market this week is how little reaction there has been. There is definitely some counter-trend action going on. Gold did not react much to a negative US jobs report, but it also did not react much to a decent success at the Spanish bond sale. We are looking at gold right now as an even split between the bulls and the bears in the short term.

But longer term analysis is still in the air. 2011 was the 11^th straight year that gold increased in value. Can this bullish trend continue? Those looking for a bullish movement from gold want to see the international markets close back to back trading periods at over $1,700 USD. The other sign to look for is the Indian market for gold going over 28,950 Rupees.  Many market analysts believe that the outlook for gold is slightly bearish in the short term but still bullish for the long term.

The technical analysis on this requires us to look at where the resistance lines are and to watch for prices moving to and from those points. Obviously we are hoping for stronger signals than we have seen to this point. However, the idea that gold is still heading for a breakout is still fully in play.

The most recent fundamental factor that caused four days of losses and one stable day of gold trading last week was the weakness of Spain’s banking system. The bond sale was okay but not great, which caused some traders to go to the USD for security. Right now, all of these situations are still worth watching, although how the major US fundamental reports play out over time (especially with employment numbers) will continue to have a major role.

Looking at the USD this week

This week the US Dollar is in an interesting position. The USD has traded in a very tight range against other currencies. An update to unemployment benefits applications showed more people applied than expected. While this is a negative job report, it had a minimal impact on gold prices or USD value.

The USD actually lost ground to the Euro this week, which is another interesting development. The Spain bond sale went well enough for approval. Add in a lack of defaults and the IMF coming out publicly to strengthen their commitment to seeing a recovery through, and you can see why the Euro gained ground on the USD. The other worry is that the United States is still deep in the red is with debt. Some traders are whispering that this type of gap cannot be sustained. While it’s a long way from the Greek levels – this is something that needs to be watched closely.

In fact, the Associate Director of the Tyche Group has even come right out and said that gold is safer than either the USD or EUR. This is despite some positive recent gains by both economies. He is less than impressed with Spain or Italy’s auctions for the Euro. He also sees the USD as looking bleak long term, since the books on debt seem similar to Greece from a few years ago. This type of open criticism will not go unnoticed among traders.

Even so, the USD gained against most currencies this week in the short term, but again, long term concerns remain. Traders in the Forex will not keep giving the USD the benefit of the doubt if negative reports plague the US, especially if other currencies keep getting at least decent news. The one major thing that can be taken away from this week is that the USD alone is not doing much to prevent gold from going bullish again.

So what does this mean for us?

We still are holding that in the short term, gold is set for a breakout.

We want to continue to follow news about the USD, as well as precious metals in general. There are plenty of reasons to see the gold breakout happening. We are staying in the camp that believes it’s just around the corner.

Good investing,

Jason Fielder

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