Gold, China and the US Dollar

Nov. 11, 2002
Clive Maund, Diploma Technical Analysis

Gold is being squeezed into a corner, an area of compression, which will lead to a big move before much longer. With the dollar caving in, greatly assisted by old Al's panic rate cut it seems obvious to me that this move will be to the upside. A lot of gold bulls and would-be gold bulls are concerned that the "Da Boyz", those who have an interest in suppressing the price of gold in an attempt to preserve the credibility of their rotten fiat money system and/or to protect their bloated derivative positions, will continue to cap the POG somewhere between the current price and $340. I am myself not sure how much truth underlies these fears, but make the following observations; if the intelligence I have received is correct then approaching half of all the gold in bank vaults has been exhumed during the past ten years and quietly sold, some of it ending up in jewellery. Does it really make sense to continue selling a potentially rising asset, particularly when you take into account that rising powers, such as China, may back their currencies with gold? Banks involved in the alleged conspiracy, such as JPM, are, for various reasons, in an increasingly precarious situation, which can be expected to compromise their ability to control things. Another very important factor to take into consideration is the fact that, when a major shift in investor sentiment towards gold occurs (what we've seen so far is nothing in comparison with what is possible), demand will greatly outstrip supply. Taking these factors into consideration it seems obvious to me that any forces attempting to restrain or suppress the POG will eventually be overcome and swept away. Even without looking at a chart, it is well known to traders that there is a great wall of supply between $320 and $340, so clearly, if there is a conspiracy, this is where the parties to it are well dug in.

Let's now look at a chart for gold going back 3 years (see below) where we can see gold consolidating in a large triangle that has formed since the May-June high. This triangle is almost flat-topped with the price so far contained by heavy supply above $320. The intensifying compression arises from the price being shepherded higher by the rising 200-day moving average, not far beneath and now at about $310, which is driving the price into a corner of the triangle - calling for a breakout.

I am now very confident that we will soon see a breakout to the upside. It is not so much the gold chart as the chart for the dollar which gives rise to my optimism. Looking now at a chart for the dollar index also going back 3 years we see that, following a weak counter-trend rally lasting about 4 months, the dollar is plunging again. This counter-trend rally was a very bearish rising wedge pattern, which portends a swift drop to the 90 area. The half-point drop in interest rates last week pulled the rug from under the dollar and the fact that Europe didn't follow suit with an interest rate cut just added insult to injury.

I was intrigued to learn last week that China may move to back its currency with gold. Such a move would certainly help to explain the opening of the gold exchange in China. The Chinese are very astute business people and should never be underestimated. China is, to my mind, the evolving economic powerhouse of the 21st century. In China, the emphasis is on production, not consumption. What a contrast with the United States, which is openly the opposite. The United States unashamedly encourages its own citizens to believe that "spending every last penny" is the patriotic thing to do, to keep the economy going and has effectively exported its own manufacturing capability, thus making it a hostage to external forces. It has also, in recent years, contrived to create a global currency and a system designed to funnel the capital and savings of the rest of the planet directly into its coffers in order to fuel its unending orgy of consumption and enormous consequent balance of payments deficits. They have even succeeded in creating the erroneous belief, in the rest of the world, that their economic welfare is somehow dependent on the continuing well-being of the American consumer. What does the rest of the world get in return? Mountainous piles of paper - dollars printed like confetti, bond, junks bonds, shares, share issues - all effectively a highly degradable heap of IOU's. Can you imagine what will happen when the rest of the world finally wakes up and realizes it's been a victim of the biggest scam in the history of the planet?! Can you imagine what will happen to the US dollar if at the same time China backs its currency with gold?! The consequences will be awesome.

While gold is now down by the grand sum of about $12 since its May -June peak, many gold mining stocks have fallen a lot during the same period and now offer much better value, particularly given that gold is now in position to make a big move. It is fairly obvious that, given the heavy resistance in the $320 - $340 zone, should gold succeed in breaking through this it will trigger an avalanche of short covering which will drive the price much higher in a spike - I believe it will run straight to the next significant resistance level at $420. It is also clear that when this happens gold stocks, which are highly geared to the gold price, will make very large gains. 

Clive Maund
email: Clive.Maund@t-online.de
Kaufbeuren, Germany, 11 November 2002

Clive Maund is an English technical analyst living in southern Bavaria, Germany where he trades US markets. 

No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

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