The Recent Rally in Gold: Is It For Real?
By Al Martin
(9-10-07) We have seen repeated rally efforts in gold over the last 24 months that have continuously been turned back.
We would note that the December gold (GCZ) rose every day last week and, indeed, established an intra-day high in Friday’s trade at $715.30 before falling back late -- an area in which, by the way, we recommended our day traders shorting the contract at 715 in Friday’s trade to scalp a $5 profit.
That was our scalp recommendation for the day on our daily trade line service -- to pick up a $5 scalp in the gold.
However, the broader question, “Is this gold rally for real?” – meaning “Will it hold and will it be sustainable?”
We have breached technical resistance levels that exist in the gold in the 702 to 706 area. That was important technical resistance, for the near term, that is the 5-year high, in spot gold, or cash gold, 721, the high in the continuous future contract 732.40.
If gold can hold the $700 or so area, it is likely that we probably will go up for a test of 721 or 722. That’s strictly from a trading standpoint.
However, the bigger question that you hear everyone asking in financial media is, “Is this gold rally for real?” because we’ve seen so many false rallies in the gold in the past.
My own opinion would be that it is not yet “for real.” This is not yet a state of a rally in the gold because we haven’t seen enough of the fundamentals change yet.
For now, it’s not a sustainable rally in gold because we haven’t seen enough of the underlying fundamentals change.
Global central banks that hold gold are going to sell more of it this year than in any year since 1999. There is still plenty of gold coming into the market. Recent increases in Chinese and Russian and Saudi buying are really nothing more than a drop in the bucket compared to fresh central bank supplies coming onto the market.
Also you have to realize that, in a rising gold price environment, if you look at what the World Gold Council says about new mine production, you will see that the new mine production of gold will increase substantially in the second half of 2007 and into 2008.
After all high prices cause more of the stuff to be gotten out of the ground. This would include refurbished mines that were shut down because of low prices or the expansion of existing mines.
And, in the second half of ’07, you will see that global gold production is going to be about 300 tons more than was first thought, even as of January 1 of this year. We will see 2008 production probably 700-800 metric tons higher than it was forecast even 6 months ago because higher prices tend to bring the stuff out of the woodwork.
The only thing that can sustain a real rally in the gold would be a sharp break in the dollar. The dollar did fall back sharply in Thursday and Friday’s trade (Sep 6 and 7). However, we have seen that dollar declines have not been sustainable.
The September dollar index (DXU) broke, not only under 80, but traded at a new low at 79.82 in Friday’s intra-day trade, before lifting a little bit. But we have seen repeatedly the dollar index trade under 80, only to subsequently rally.
So the question to ask is this -- is there anything new? Has there been any fundamental change of interest cross rates between central banks that would exert pressure on the dollar?
Are the rest of the G-20 nation states continuing to raise their rates? No, they’re not. Is the United States lowering its rates? No, it isn’t. So there’s no fundamental rate difference that would pressure the dollar.
Those are the primary indicators. Obviously, if the Fed does act in the September 18th meeting to reduce the Fed funds rate a quarter or a half a point (which the Fed itself says is not going to happen, but if it were to happen), yes, the dollar is going to get hit. And the dollar is trading like a Fed funds rate cut is already a fait accompli, but a lot of commodities are trading that way in anticipation of something that hasn’t happened yet and something that the Fed says they’re not going to be rushed into.
Every week that goes by that the Fed does not reduce interest rates and another central bank, i.e., the BOE or ECB or BOJ, does not raise rates means that the dollar is going to have yet another rally in here.
So there’s more resilience. And therefore gold will come back down.
The price of gold moves up and the gold bugs come out, but until proven otherwise, gold is still a short-selling opportunity on rallies…