Friday, July 20, 2012

AUD Gold Price Falls Below Support

I have used the weekly chart for Australian priced Gold on several occasions recently to indicate what I consider a "buy zone" (for example in this post 6 months ago), a price band where I am comfortable purchasing Gold based on the longer term (since mid 2007) trend higher.

So what about if Gold priced in Australian Dollars falls below the trend and support on the chart as it has done over the past couple of weeks?

Are we likely to see traders drive the price lower given the technical breakdown on this chart?

The issue with such an expectation is that the price of Gold in Australian Dollars is not driven by those trading it as an individual security (e.g. those trading PMGOLD or GOLD on the ASX are not moving the price), but it is instead a derivative of the AUD/USD exchange rate and the price of Gold in US Dollars. 

The price of Gold in Australia can be moved by various influencing forces:

Strength/Weakness in the Australian Dollar
Strength/Weakness in the US Dollar
Strength Weakness in the price of Gold (priced in US Dollars)

Are traders likely to try and influence all of these securities in order to push the AUD price of Gold lower, trading the break below support on the chart? Of course not.

That said, could short term trends in the contributing forces for the local price of Gold continue to send the price lower?

The Australian Dollar (AUD/USD) has seen a large push higher from the lows of early 2009:

The exchange rate is currently range bound and has been for a couple of years.

Recent strength in the Australian Dollar is partly a result of recent central bank diversification into the Australian Dollar (such as these instances reported on MacroBusiness: Czech Republic, Germany), as well as investors seeking exposure to one of the (seemingly) strongest economies (for now) around given the slowdown being experienced in most other developed countries.

It's unlikely that the Australian Dollar will trade above resistance of $1.11 against the USD and it's more likely to trade lower as our two speed economy continues to take it's toll on the larger populace. So in my opinion there is limited upside for the Australian Dollar which reduces the potential for the AUD/USD exchange rate to influence the AUD price of Gold lower.

Strength in the US Dollar (Index) managed to push it to a new high recently, something that I didn't expect given the wildly bullish sentiment (taking the contrarian stance that it is at or nearing a top), however has since rolled over and may struggle to breach the 84 level to the upside.

I have seen it suggested that the price of Gold is simply an anti-(US)Dollar, but I think this is an attempt to oversimplify a bull market in which Gold is rising in all currencies (as trust in practically all fiat currencies deteriorates). A measurement introduced by Kitco shows the reality over the last 5 years where Gold has increased in value by the same amount measured against the same basket of currencies that make up the USDX as priced in USD alone:

The Kitco Gold Index has one purpose, that is to determine whether the value of gold is actual, a reflection of changes in the US Dollar value, or a combination of both.

The U.S. Dollar Index® represents the value of the US Dollar in terms of a basket of six major foreign currencies: Euro (57.6%), Japanese Yen (13.6%), UK Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%) and Swiss Franc (3.6%). It is an exchange traded (FINEX) index and has become a standard used worldwide.

The Kitco Gold Index is the price of gold measured not in terms of US Dollars, but rather in terms of the same weighted basket of currencies that determine the US Dollar Index®.

Since the Kitco Gold Index has no US Dollar component it needs to be compared to the actual US Dollar price to give it some perspective.

Gold (priced in USD) has continued to trade sideways for the past couple of months, but is yet to breach the (potential) bottom that I suggested was made in mid May (see these two posts: May 18th, May 20th). 

Gold continues to trade within a descending triangle pattern which if broken to the downside does have some nasty implications from a chart perspective, however given depressed sentiment in the precious metals sector I suspect the downside will be limited and a drop below US$1500 is more likely to be a short term false break to run stops, rather than an indication that Gold is heading to $1200-1300 as a few are suggesting from the chart pattern. That said those engaging in a "buy the dip" strategy and plan to hold through any short term corrections should mentally prepare themselves for a lower Gold price and have cash free ready to buy more.

US Gold price aside, those watching the AUD price chart should not be concerned by the break in support. Unless the USD price breaks below support at $1500 (which would indicate potential for further downside) then the lower AUD price should be a seen as an opportunity to buy more at last years prices.


On another quick point, there was a report recently released (by Erste Group Research) on the Gold market which I would recommend all read or at least flick through (Follow me on Twitter for more timely updates and resources such as this: @BullionBaron). Find the report at the link below:

The report covers the Gold market from many different angles over 120 pages.

Many mainstream economists and commentators have been quick to dismiss Gold. In one recent example Stephen Koukoulas went as far as comparing Gold to a can of baked beans, but as the report above points out (one of many arguments for Gold), Gold is far from just a doomsday asset:

Gold is often called the investment of doomsayers and chronic pessimists (“fear trade”). This component is currently presented to the public as the only reason for the gold bull market. However, this point of view fails to acknowledge the fact that China and India are the driving forces on the demand side. Real interest rates remain negative in both countries. Basically, local investors are very limited when it comes to investment opportunities for their savings. Gold has been a time-tested store of value for centuries. The traditionally high affinity for gold and rising net worth will support demand in the long run. Whoever expects incomes in China and India to continue rising and real interest rates to remain negative or Gold is a beneficiary of rising incomes in China and India low, will by default recognise gold as the beneficiary of this development (“love trade”).

It's somewhat ironic that Stephen has used China and India's growth as a crutch to support his optimistic view on Australia, while dismissing (by omission, not directly) that these two developing economies also support a rising Gold price.

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  1. Would like to see $1500AUD/oz broken before I'm convinced the trend is broken. Good article!

    1. Thanks Shervin. Will have to see how it plays out, but I think the AUD strength is providing an exceptional buying opportunity for Australians. Though can't dismiss possibility of sub$1500 prices.

      USD Gold at $1550 and AUD/USD at 1.04 would land an AUD$1490 price tag, but I think if we do see sub AUD$1500 it won't last long.