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Brad's Desktop
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Breakout For Gold, Some Say |
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Written by Brad Zigler
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Friday, 20 June 2008 15:58 |
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According to Jamie Chisholm of the Financial Times, gold's now staging a breakout move. Traders, however, may find it difficult to take much comfort in that headline because Mr. Chisholm is hedging his bets.
Is gold headed higher or lower? Hard to tell from his perspective. Physical demand for jewelry is off and investor demand, expressed in share creations for gold grantor trusts, is flat or falling.
Inflation, expressed through the foreign exchange market, though, seems to be the factor that buoys Mr. Chisholm's bullish spirit. Interest rate moves signaled by the U.S. Federal Reserve, he says, hold the key to gold's destiny.
No surprise there, really.
Gold decided to go up yesterday without waiting for a Fed signal, but that other bellwether of inflation - oil - was pushed lower by the Chinese government's surprising decision to jack up fuel prices. These events might have cheered gold followers who've been watching the gold/oil ratio for signs of renewed vigor in the yellow metal. The ratio expresses how many ounces of gold a barrel of oil would buy at current market prices.
From the looks of things, gold hasn't quite been defibrillated yet.
A little bounce was seen on the ratio chart but, if it's a signal of the future, it's still rather weak. Gold found support at an 8x multiple to oil's price earlier this year, only to have the chair knocked out from under it in April when the metal swooned, exhausted from its run-up past the $1,000 mark. By any technical reckoning, 8x will be the resistance level gold now has to overcome. Meantime, there's the work required to get through shorter-term resistance at 7.2x.
Oil/Gold Ratio - Black vs. Yellow Gold
If there was a breakout foretold, it was really written in the oil chart, not in gold's. A pennant flag - a series of compressing daily trading ranges - had popped up on the NYMEX chart over the past two weeks, so technicians and options traders have been busy lining up volatility trades. Straddles have been the name of the game over the past few sessions.
After falling more than $4 a barrel yesterday, crude oil traded higher in the overnight markets and followed through in this morning's floor session. Technicals have taken on a bearish slant, indicating that somebody wants to put in a short-term top. The longer-term trend is still upward, but the low put in on Thursday indicates some weakness.
Still, oil's chart looks better than gold's. Gold was steady to slightly higher overnight and opened higher still in floor trading this morning. There are bullish indicators flashing now for the near term, but a lot of investors remain sidelined. Even if the gold's downtrend can be broken, a move to a range-bound market is possible.
And that won't make very interesting headlines for the Times' Mr. Chisholm or for me.
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