Gold encounters resistance as Dollar finds support

Spot gold ran into resistance at $1800/ounce and is testing medium-term support at $1700. Recovery of 63-day Twiggs momentum above zero signals a primary up-trend but we will not have confirmation until there is a clear break through $1800.
Spot Gold

* Target calculation: 1800 + ( 1800 – 1500 ) = 2100

The Dollar Index is conversely testing support at 78.00. 63-Day Twiggs Momentum may be slowing but the dollar remains in a primary up-trend. Respect of support would signal continuation — and weaker demand for gold.

US Dollar Index

* Target calculation: 80 + ( 80 – 75 ) = 85

Gold tests $1800/ounce

Spot gold is testing resistance at $1800/ounce on the weekly chart after completing a small flag to signal continuation of the up-trend. Breakout would signal a primary advance to $2100*. Respect of the zero line by 63-day Twiggs Momentum would strengthen the signal.

Spot Gold

* Target calculation: 1800 + (1800 – 1500 ) = 2100

The US Dollar Index remains weak as inflation expectations rise. Failure of medium-term support at 78.50 would warn of trend weakness, while recovery above 80.00 would indicate trend strength. Target for a breakout above 81.50 would be 85.00*.

US Dollar Index

* Target calculation: 80 + ( 80 – 75 ) = 85

Gold hesitates on dollar strength

Spot gold displays a small flag consolidation, suggesting continuation of the advance to test $1800/ounce. Breach of the descending trendline indicates that the down-trend has ended and breakout above $1800 would signal an advance to $2100*. Respect of the zero line by 63-day Twiggs Momentum would strengthen the signal. A strengthening dollar, however, would weaken demand for gold.
Spot Gold

* Target calculation: 1800 + ( 1800 – 1500 ) = 2100

The US Dollar Index found support above 78. Recovery above 80 would indicate another test of resistance at 82. Rising 63-day Twiggs Momentum continues to signal a strong up-trend. Breakout above 82 would confirm the target of 85*.

US Dollar Index

* Target calculation: 80 + ( 80 – 75 ) = 85

Gold up-trend not yet confirmed

Spot gold is consolidating below resistance at $1800. Until we have a breakout there is no confirmation that gold has started a new up-trend. Reversal of 63-day Twiggs Momentum below zero would warn indicate weakness.

Spot Gold

* Target calculation: 1800 + ( 1800 -1500 ) = 2100

US Dollar Index continues to decline, boosting gold and commodities. Respect of the rising trendline would confirm the primary up-trend — as would a trough on 63-day Twiggs Momentum that finishes above the zero line.

US Dollar Index

* Target calculation: 80 + ( 80 – 75 ) = 85

Peter Schiff Speaks to James Rickards, Author of Currency Wars | Peter Schiff | Safehaven.com

James Rickards: The dollar is not necessarily on the road to ruin, but that outcome does seem highly likely at the moment. There is still time to pull back from the brink, but it requires a specific set of policies: breaking up big banks, banning derivatives, raising interest rates to make the US a magnet for capital, cutting government spending, eliminating capital gains and corporate income taxes, going to a personal flat tax, and reducing regulation on job-creating businesses. However, the likelihood of these policies being put in place seems remote – so the dollar collapse scenario must be considered.

via Peter Schiff Speaks to James Rickards, Author of Currency Wars | Peter Schiff | Safehaven.com.

Gold rallies as dollar weakens

Spot gold is headed for a test of resistance at $1800 after breaching the descending trendline on the weekly chart, indicating that a bottom is forming. Breakout above $1800 would complete a double bottom reversal, with a target of $2100*. Respect of $1800 remains as likely, however, and would indicate another test of primary support at $1500.

Index

* Target calculation: 1800 + ( 1800 – 1500 ) = 2100

The Dollar Index is weakening in anticipation of QE3 ahead of the November 2012 elections. The primary trend remains upward, though breach of the rising trendline, and/or reversal of 63-day Twiggs Momentum below zero, would warn that a top is forming.

Index

* Target calculation: 80 + ( 80 – 75 ) = 85

Gold & Commodities: Copper breakout as dollar weakens

The US Dollar Index has retraced to test medium-term support at 79.50. Respect would confirm a strong primary up-trend, while failure would suggest trend weakness. 63-Day Twiggs Momentum above zero still indicates a primary up-trend, but breach of the rising trendline warns that the up-trend is slowing. A weakening dollar is likely to cause stronger commodity prices.

Dollar Index

* Target calculation: 80 + ( 80 – 75 ) = 85

The weekly chart shows spot gold testing its descending trendline. Respect would indicate another test of primary support at $1500/ounce, while breakout would suggest that a bottom is forming. Reversal of 63-day Twiggs Momentum below zero would complete an iceberg pattern, warning of a primary down-trend. The bull-trend of the last few years was driven by quantitative easing (QE1 and QE2) from the Fed. We are unlikely to see another bull-trend without QE3.

Spot Gold

* Target calculation: 1600 – ( 1800 – 1600 ) = 1400

Copper broke through resistance at $8000/tonne, completing a higher trough and signaling a primary up-trend. Recovery of 63-day Twiggs Momentum above zero would strengthen the signal. The primary up-trend in this bellwether commodity suggests an economic recovery is under way.

Copper A Grade

* Target calculation: 8000 + ( 8000 – 7200 ) = 8800

The broader CRB Commodities Index, however, lags behind. Breach of the descending trendline indicates a base is forming, but only recovery above 325 would signal a primary up-trend. Cross-over of 63-day Twiggs Momentum above zero would strengthen the bull signal.

CRB Commodities Index


Brent crude is also forming a base, after breaching its descending trendline. Breakout above 115 would signal the start of a primary up-trend.

Brent Crude Afternoon Markers

* Target calculation: 115 + ( 115 – 105 ) = 125

Dollar tests support while gold hints at new base

The US Dollar Index retraced to test support at 79.50/80.00. Respect would confirm the primary up-trend, signaling an advance to 85.00*.

Dollar Index

* Target calculation: 80 + ( 80 – 75 ) = 85

Spot Gold is testing resistance at $1700 and the descending trendline. Breakout would indicate that the down-trend has ended and the metal is forming a base.

Spot Gold


Commodities also appear to be forming  a base, with the CRB Commodities Index testing resistance at 315 after piercing the descending trendline. Recovery above 325 would complete a double-bottom reversal. Recovery of 63-day Twiggs Momentum above the zero line would also be a bullish sign.

CRB Commodities Index

US Dollar Index

The Dollar Index continues in a primary up-trend after twice successfully testing support at 79.50/80.00. Target for the advance is 85.00*.

US Dollar Index

* Target calculation: 80 + ( 80 – 75 ) = 85

Mega-trends and their impact in 2012

To arrive at an outlook for the year ahead we first need to analyze the big trends that endure for decades and in some cases even longer.

Population growth and food resources

The number one dynamic over the last century has been the exponential rise in global population. It took 123 years for the world population to grow from 1 to 2 billion (by 1927) and only 12 years to grow from 5 to 6 billion (by 1999). Growth, however, is now slowing and we are predicted to rise from the current 7 billion to a peak of 9 billion in the 2050s.

At the same time we are faced with increasing scarcity of food and water. Advances in technology have improved crop yields, but increased meat consumption in China and other Asian economies will reduce overall output. The area of land required to produce an equivalent amount of edible protein from livestock is 4 to 5 times higher compared to traditional grains and legumes, and up to 10 times higher for beef. Diversion of land use for ethanol production will also restrict food output.

Global warming, whether man-made or a natural cycle, may also contribute to declining food production — through droughts, floods and depleting fish stocks.

Depleting natural resources

We are also depleting global deposits of ferrous- and non-ferrous ores — as well as energy reserves of crude oil and coal — as global industrialization accelerates. Commodity costs can be expected to rise as readily available resources are depleted and we are forced to dig deeper and endure harsher conditions in order to access fresh deposits. Deep water ocean-drilling and exploration within the Arctic and Antarctic circles are likely to increase.

As energy resources are depleted, nuclear energy production is likely to expand despite current safety concerns. Development of technologies such as thorium fluoride reactors hold out some hope of safer nuclear options, but these may be some way off. Wind and solar energy are likely to remain on the fringe until technology develops to the point where they are cost effective compared to alternative sources.

Global competition

Competition for scarce resources will increase tensions between major economic players, with each attempting to expand their sphere of influence — and secure their sources of supply. The Middle East, Africa, South America, Australia, Mongolia and the former USSR are all potential targets because of their rich resource base.

Trade wars

In addition to competition for scarce resources, we are also likely to see increased competition for international trade. Resistance to further currency manipulation — initiated by Japan in the 1980s and perpetuated by China in the last decade — is likely to rise. US Treasury holdings by China and Japan currently sit at more than $2.3 Trillion, the inflows on capital account being used to offset outflows on current account and maintain a competitive trade advantage by suppressing their exchange rate.

Rise of democracy

Another factor contributing to instability is the rise of democracy in some parts of the world. The Arab Spring is still in its infancy, but the development has no doubt caused concern amongst autocratic governments around the globe. Food shortages and rising global prices will act as a catalyst. The likely result is increased suppression in some autocracies and a rapid transition to democracy in others, like Myanmar. But the transition to democracy is never smooth — especially in countries with clear fault lines, such as language, religious, racial or cultural differences — and can lead to decades of conflict before some degree of stability is achieved.

Decay of Democracy

On the other hand we are witnessing the decay of long-standing, mature Western democracies. Undue influence exerted by special interest groups with large cash resources — such as banks, big oil, and armaments manufacturers — force politicians to serve not only their electorate but their financial sponsors. Aging populations pose a new threat: large voting blocs who are not participants in the economic workforce will wield increasing influence over distribution of social welfare payments such as Medicare and Pensions. And politicians are increasingly guilty of over-spending, running up public debt and debasing currencies, in their attempt to keep voters happy and secure re-election.

The long term hope is that we evolve a more consensus-based form of democracy, along the lines of the Swiss model, and away from the excesses of the current winner-takes-all system.

Global debt binge

The decay in Western democracy resulted in a massive debt binge over the last 3 decades, with private debt often growing at double-figure rates, accompanied by burgeoning public debt levels. The massive debt bubble far outstripped GDP growth, effectively debasing currencies and causing soaring inflation of consumer and asset (housing and stock) prices. The GFC marked the peak of the debt expansion and was followed rapid contraction as the private sector diverted income to repay debt. Debt contraction is catastrophic, however, and can cause GDP to fall by up to 25 percent as in the Great Depression of the 1930s.

The response has been a massive expansion of public debt as governments run deficits in order to offset the private debt contraction. Overall debt levels hardly faltered as government spending programs filled the hole left by private debt contraction. While this succeeded in plugging the gap, many Western governments are left with huge public debt and increasingly nervous bond markets.

Central banks such as the Fed and BOE stepped into the breach, purchasing government bonds with newly-created money. Apart from putting gold performance on steroids, central bank asset purchases had little impact on inflation because the effect was offset by the deflationary debt contraction. But cessation of the debt contraction would let the genie out of the bottle.

Outlook for 2012

Here is how I believe these big trends will impact on 2012. I do not claim to have a crystal ball and it may be amusing to review these predictions at the end of the year:

  • Further debt contraction
    Contraction of private debt and constraints on government borrowing will strengthen deflationary forces.
  • Further QE
    The Fed and BOE are likely to expand their balance sheets to support public borrowing. The ECB may make a limited response because of constraints imposed by member states such as Germany.
  • Low inflation
    Deflationary forces will outweigh the inflationary effect of QE by central banks.
  • Low global growth
    Debt contraction and a euro-zone banking crisis will ensure low growth.
  • Euro-zone banking crisis will require further bank rescues
    Placing further stress on public debt levels, and pressure on the ECB to act.
  • China “soft” landing
    A second massive stimulus focused on low-cost housing and quelling social unrest will restore economic activity, but export markets will remain flat and the banking sector inundated with non-performing loans.
  • Easing of commodity prices slows
    Massive stimulus from China will support commodity prices.
  • Further social unrest amongst autocratic regimes
    The Arab Spring will continue sporadically across a far wider area.
  • Crude oil prices remain high, aided by further conflict
    High crude prices will also contribute to low growth.
  • US current account deficit shrinks as yuan rises
    Increased pressure from the US will prevent China from expanding its Treasury investments causing the yuan to strengthen against the dollar.
  • Dollar strengthens against euro
    A euro-zone banking crisis will ensure that the dollar preserves its safe-haven status.
  • Gold bull-trend when QE resumes
    Resumption of QE by the Fed would ensure that gold resumes its bull-trend against the dollar.

I wish you peace and prosperity in the year ahead but, most of all, the good health to enjoy it.

Regards,
Colin Twiggs