Gold & Oil Rise As The Dollar Weakens

By Colin Twiggs
October 30, 2007 4:00 a.m. ET (7:00 p.m. AET)

In an attempt to make this newsletter more readable, I will trial splitting the coverage in two: gold, oil and forex on Tuesdays; the economy and interest rates on Thursdays. We will conduct a survey, after a few weeks, to obtain your feedback.

These extracts from my trading diary are for educational purposes and should not be interpreted as investment advice. Full terms and conditions can be found at Terms of Use.

Gold

Gold is surging ahead after successfully testing support at $750. Expect (medium term) resistance at $800, but the long-term target is $900 [725+(725-550)]. Reversal below $750/ounce is unlikely — and would warn of another correction.

The Fed is expected to cut interest rates this week because of the falling housing market and subprime credit squeeze. This should weaken the dollar and further boost the (dollar) price of gold.

Source: Netdania

Crude Oil

December Light Crude broke through $88/barrel and is advancing rapidly, in line with gold. The up-trend is accelerating, increasing the danger of a blow-off: a sharp rise followed by an equally sharp fall. Reversal below $85 is not expected — and would signal a secondary correction. Expect crude to further appreciate as the dollar weakens.

The monthly chart shows how the current target of $100/barrel is calculated — a far cry from the $20/barrel after the 2001 recession. Remember that the tree never grows to the sky. If we head into another recession, one positive outcome would be far lower oil prices as a result of falling demand.

Currencies

The euro continues to test the upper border of the trend channel. Reversal below $1.4125 (the low from 22-Oct-07) would warn of a down-swing to the lower channel border. The long-term target is calculated as $1.57, but it may be prudent to use the more conservative target of $1.50 [1.35+(1.35-1.20)].

Source: Netdania

The dollar is consolidating between 113.50 and 115.00 against the yen. Downward breakout is more likely and would signal a test of support at 112, while upward breakout would indicate another test of 118. In the longer term, failure of 112 would warn of a test of the key 100 support level (from 2005).

Source: Netdania

The Australian dollar broke through $0.9100, confirming the long-term target of parity with the greenback [89+(89-78)=100]. Expect a retracement to test the new support level of $0.9100. Reversal below $0.8750 is highly unlikely — there is plenty of support in between — and would signal another test of primary support at $0.7700.

Source: Netdania

As fewer and fewer people have confidence in paper as a store of value,
the price of gold will continue to rise.

~ Jerome F. Smith

To understand my approach, please read Technical Analysis & Predictions in About The Trading Diary.