Wednesday, March 3, 2010

Gold Priced in Euros at New High, Not Priced in Dollars

Here is a chart comparing the movement of the price of Gold in Euros (Top Chart) and in US Dollars (Bottom Chart). I want to point out a couple things that I see –

Gold moves in fits and starts. It consolidated for much of 2003 – 2004 and then went parabolic in 2005. It sat around for a lot of 2006 and 2007, then had a sharp rally into early 2008. It then had a series of consolidations for much of 2008 and 2009, before going parabolic again into December 2009.

I bought most of my Gold via GLD at about $84 and again at about $88. I sold a third a day before the top (educated luck) and then sold the remainder on the counter-rally towards $115. Some thought that I was nuts for selling, but I sold because I know how gold trades and I didn’t want to be stuck with 30% of my money in an asset stuck in a violent 12 to 18 month trading range.

Now back to the chart –
The Euro has imploded since the Dubai crisis started on December 1st 2009. It gathered steam as it has become clear that the PIIGS (Portugal, Italy, Ireland, Greece and Spain) need to be bailed out by Germany and France.

The flight from the Euro has caused Gold, as price in Euros, to hit an all time high in price. See how the chart has that wedgy, vertical move so far in 2010? Now compare that to how orderly the consolidation has been for Gold priced in US Dollars. The consolidation in the first half of 2009 was also very orderly for Gold.

2010 has been a very difficult environment in which to make money. Normally, in times like these, I would have a lot of money in safe stuff, earning 5% with no risk. But with the Fed holding safe rates at effectively zero, it is not possible right now to get a decent yield on cash.

Now, with all of that said, Gold is at key resistance. Stocks are also at key resistance. There is a cluster of time cycles from March 3 – 9. So you once again have a market at resistance and time at a place where the boys love to reverse trends.

There has been a Follow-Through Day this week for the NASDAQ, but it barely qualified and volume continues to be crappy. I took note that the Follow-Through Day was right at the beginning of these time cycles and right as price was getting into the meat of resistance. Would it surprise anybody to see them suck you in right before they take price down? I also noted that key risk indicators, like Australian Dollar, are not confirming the last two weeks of the rally.

I think the resolution to Greece will force a lot of money back out of the Dollar and Gold and back into the Euro. I also think that the IMF will have to bail out the PIIGS. This is just naked monetization and should be another driver for risky assets.

I am interested in Gold if it can break out of this consolidation, because it is a pretty easy pattern to see and should attract the herd. Any purchase will be a trade only, as it looks like Wave 5 off of the October 2008 bottom. I am tired of using the word “trade”, but I have to, because risk is higher than at any time in my 19 year career.