by Alasdair Macleod - Head of Research
The news that dominated the week was the eleventh-hour decision by the Republican Party to back down from its game of chicken against the President over Obama-care, the budget and the debt ceiling. The debate now continues facilitated by the debt ceiling being temporarily abandoned until February, when presumably the game of chicken will be run for a second time if nothing has been agreed. Understandably gold, along with other markets, was victim to rumour and counter-rumour emanating from Washington with few traders prepared to commit themselves until Thursday morning.
Within this context, the previous Friday (11th Oct.) someone clumsily dumped a big sell order on the futures market ahead of the US opening, which drove the price down $25 to $1262. On Monday this price drop was fully reversed before the market drifted lower again under persistent selling of futures to a low point of $1252 on Tuesday. On Thursday morning, just before 9.00AM UK-time gold suddenly took off, gaining $40 as the US dollar moved sharply lower, in a considered response to the suspension of the debt limit the night before. That sale a week ago, insofar as it has not been closed out is now showing a large trading loss.
This could turn out to be a major turning point, illustrated in the chart below. There is little doubt that the bears, having failed to see selling materialise on the opening mark-down of $4 on Thursday, suddenly realised how exposed they were when the US dollar suddenly weakened.
The result is gold has now broken up out of its short-term downtrend (the dotted line). More importantly, the bears failed to push gold down below the June lows under $1200; so gold looks like it has established two rising low-points, confirming that gold is in an uptrend. This being the case, after a brief consolidation gold has the potential to move swiftly higher to challenge the $1350 level and above.
This is generally bad for the dollar and good for gold.