As we can see from the chart, gold fell to near $800/oz, so funds started jumping in. It is interesting that gold rallied to $900/oz, but did not break it convincingly. The implication is that gold traders are waiting until Monday to see which way the markets will go. Clearly they will be looking for a lead from the rest of the market. Expect some volatility in gold in coming weeks. Clearly moves of 5% are attractive for traders because gold is a pretty liquid market.
The fact that gold closed below $900/oz at $897/oz is a weak indicator, but the fact that it closed just $5/oz from its high could be considered a sign of strength. One need only compare the current chart with Sept 2008, where the gold rally was quickly sold into over $900/oz. The current strength suggests gold is going higher, though it might not happen for a few days. We need to look for direction from the market. Likely the market will find a lead from the Dow on Monday.
So what about the rationalisations of the gold fundamentalists? Well they are not wrong. Weaker global markets means less growth, reduced tax receipts, subdued earnings, greater welfare spending, tax increases and of course more government debt, and even printing of money at some point for those countries with weak credit ratings. This package of problems of course results in greater inflation since it implies more money and less economic activity.
The markets are not yet suggesting to me a breakout, though we are coming close to that point. Gold has risen to a point where it is making new highs, so that is a bullish sign, though in the short term, gold can still come off, and it might just do that. In these times of weakness its a good idea to buy.
Andrew Sheldon www.sheldonthinks.com