Why Declines in Gold Do Not Change the Bullish Outlook at the Moment

By: Przemyslaw Radomski | Fri, Oct 21, 2011
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Based on the October 21st, 2011 Premium Update. Visit our archives for more gold & silver analysis.


 

Whenever gold prices rise or decline the headlines give a flavor-of-the-week reason--the dollar is up, the dollar is down, the eurozone is in trouble, it's the latest jobs report, etc. There is no doubt that global economic conditions are inter-related and that a "butterfly flapping its wings" in one part of the world can effect gold prices. This week was no exception. This week's decline was partly explained by news out of China. The Chinese economy, the second largest in the world, expanded by only 9.1 per cent in the third quarter, down from 9.5 per cent in the second quarter and 9.7 per cent in the first three months of the year. This is a growth rate that all countries on the planet would give their eye teeth to find in their fortune cookie. But for China it was the slowest growth since 2009. This prompted fears that the world's economic engine will slow down eating into demand for exporting countries.

Just to give you an idea of the numbers we are talking about--the Chinese growth rate compares with just 1.3 percent growth in the United States and 0.2 percent growth in the 17-country eurozone during the second quarter.

China's slowed growth is a result of China's government struggle to rein in high inflation by tightening credit markets, raising interest rates five times since last October and imposing higher reserve requirements on many of the nation's banks. So far they have had little success with inflation and consumer prices still zoom at the rate of China's new high-speed trains. (Come to think of it, didn't one of those trains crash recently killing 40 people? The crash has come to symbolize much that's wrong with China's warp-speed, lack-of-attention-to-safety-and environment development.) In September prices increased 6.1 percent annually, compared with just 3.6 percent a year earlier.

Can China rein in its high inflation? This is an important question for gold investors. China's high inflation will inevitably be exported to other counties along with the higher priced Chinese consumer goods. Gold is a classic hedge against inflation and Chinese emerging middle class knows this well.

Can China do it? It will be difficult at best. Although China may understate its inflation statistics, it is clear that inflation is inevitable. Recall that Chinese companies raised worker wages after a spate of worker suicides. In addition, real estate prices are up 13% in the past year. Everything that China manufactures will become more expensive in dollar terms and that is how you import inflation. There are other emerging markets with significant inflation, including Russia with 6%, Brazil with 5.4% and India with 14.5%, to name a few. The commodities and manufactured good in these countries will become more expensive in US dollar terms. This is bringing inflation to developed countries through the back door, via the emerging market ones.

Once we have the big picture in mind, we will move on to the technical part of today's essay to see what's gold's potential in the short-term. We will start this analysis with gold's very long-term chart (charts courtesy by http://stockcharts.com.)

In the chart (if you're reading this essay on SunhineProfits.com, you can click the above chart to enlarge it) we see that even though gold's price has declined this week, it reached the intersection of two important support levels and the touched and rallied late on Thursday. Therefore, no breakdown has been seen from the long-term perspective and the general direction for gold still appears to be to the upside. This is also confirmed by the current RSI levels.

A likely upside target level for gold at this time appears to be $1,780, which is a good bit above where the price is today.

We are inclined to think that we're relatively close to an upswing in gold. The point here is if a decline is seen before the upswing, it could simply be the formation of a double bottom with the rally yet to come. So a short move down did not invalidate any rally this week since the rally had not yet begun. We have simply seen a rebound after an initial bottom with a second bottom now being formed. As long as the two support levels in the $1,600 range hold, the outlook remains bullish.

$GOLD:UDN

In the long-term chart for gold from a non-USD perspective, we see another move towards the lower border of the trading channel. This appears to be no more than a test of the support line and the upside potential appears greater than the downside risk. The outlook is therefore bullish from a non-USD viewpoint this week.

GLD Chart

In the short-term GLD ETF chart, we could be seeing a double bottom formation being started. There is a possibility of a breakdown below the 61.8 % Fibonacci retracement level created by the July to September rally, but this breakdown has not yet been verified and no conclusions should therefore be made at this time.

The situation here could turn bearish if a move below this key support level holds for two or more days, but this does not seem likely. Another point to keep in mind is that gold is quite close to its declining resistance line and a move above the $160 or so level for the GLD ETF could signify a breakout.

Summing up, although gold's price declined in the past few days, we still believe the situation remains bullish.

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Thank you for reading. Have a great and profitable week!

 


 

Przemyslaw Radomski

Author: Przemyslaw Radomski

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

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Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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