Gold , Oil & the Dollar
September 22, 2006 3:25 a.m. ET (5:25 p.m. AET)
Spot gold broke upwards from the descending flag formed over the last week. Expect another test of resistance at $600.
Medium Term: Falling crude oil prices should weaken gold and strengthen the dollar. Expect gold to test primary support at $540.
Long Term: The dollar is likely to weaken and gold to rise -- unless there is a fall below $540 (signaling a primary down-trend).
Light Crude has fallen to $61.59 per barrel. Expect major support between $55 and $60. A fall through this band would signal a sharp down-trend, but we are just as likely to witness a consolidation -- followed by continuation of the long-term up-trend which began in 2002.
The euro is consolidating below resistance at 1.30/dollar. This is a bullish sign, warning of an upward breakout.
We can see from the weekly chart that the euro/dollar and dollar price of gold tend to rise or fall together -- with the euro leading. If the euro strengthens, expect gold to follow.
Though unlikely at present, a downward breakout (from the consolidation) would test support at 1.16/1.17. A breakout below that would complete a major head and shoulders reversal.
Another major influence on the dollar is interest rates. Falling long-term rates are likely to weaken the dollar.
Ten-year Treasury note yields broke below their recent consolidation, after interest rates were left unchanged at this week's FOMC meeting, and appear headed for 4.55%.
Medium Term: The yield differential (10-year T-notes minus 13-week T-bills) retreated well below zero. However, the primary cause is falling long-term yields rather than rising short-term yields -- reducing the significance.
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