Gold Bugs Should Put Caution Aside

Gold Bugs Should Put Caution Aside !

Gold passed every strength test we could devise last week, ending on an upswing that hints of significantly more upside to come. From a purely technical standpoint, we like the fact that corrections have been routinely reversing at Fibonacci-based supports, and that most of the subsequent rebounds have easily surpassed at least two prior peaks on the hourly chart without pausing for breath. Such rallies are known as “impulse legs” in our Hidden Pivot nomenclature, and the ones that we’ve been seeing in bullion lately have been giving us the confidence to trade and position from the long side even as some well-known gold bulls have been calling for an correction to as low as $750.

We’ll be ready if and when it comes, since no important price reversal can possibly occur without signaling us first on the five- and fifteen-minute charts. When bearish impulse legs start to metastasize for a day or two in this way, that will be our warning to reef the sails. However, so far, gold has shown no signs of weakness, only a heartening eagerness to move higher.

Certain developments have understandably stoked fears that bullion is overdue for a punitive correction. For one, a sharp dive recently in Europe’s economic vital signs appears to be turning the European Central Bank dovish, and that would be bullish for the dollar, at least in theory. And for two, despite extremely aggressive easing by the Fed in recent weeks, the dollar has stood its ground. If it survived such a nasty hit without falling to new lows, the thinking goes, then it must be revving up for a powerful rally. Thus, with two seemingly good reasons for the dollar to strengthen, gold can only go down, right?

Credit-Fairy Skeptics

We don’t think so, and here’s why. In the first place, there is no chance the ECB is going to ease more aggressively than the Fed. Although most American economists evidently believe that easy money is the way back to growth, their European counterparts have never put much store in the credit fairy. Consequently, the ECB could lower administered rates somewhat, but not nearly as much as the Fed. And this means that both the dollar and the euro should continue to cede ground to gold.

Goldbugs who are worried about a rising dollar should keep in mind that when we speak of a “strong” dollar, it is only relative to other currencies, all of which are fundamentally worthless, that it could be so egregiously mischaracterized. In the weeks and months ahead, if the ECB shades toward easing, that could slow the dollar’s decline relative to the euro, but both currencies can only fall relative to gold. Indeed, gold priced in euros has just broken out on the long-term charts. As it gathers strength for an historic push above $1,000, we see little reason for caution.