Gold a Hedge vs. USD / Inflation

Written by JS T. Alexander | 24 November 2009

Record Setting Gold Prices

With a weaker and continued depreciating of the US Dollar would be supporting the new high price record for Gold at the USD1,173.62 level high. As cash capital investment still flows in Gold transactions in every part of the financial markets.

Based on current market conditions, the Gold prices will undoubtedly continue to move higher and the current prices may well be a bargain. Comparing these Gold prices and making adjustment for inflation from several years; the relative ratio between Gold and the Stock Market has been lagging behind. As the ratio level between these two investment instruments may well be at the 7.5 - 1; whereas the Dow Stock market above the 10K levels, Gold prices should be at the USD1,250 levels pre-calculated including inflation adjustments from the early 1970s to the current period.

Although, increased volumes and open interest have continued from a starting point this August of 2009 when it stayed in a short consolidation price range between 850 - 950 and finally breaking the USD1,000.00 tecgnical resistance level. Thereafter, continued to move with a much reinforced market and trend bias market particpants as the US Dollar moved lower. The depreciating dollar has moved in an orderly manner as no sudden drop in the USDX vs. other major foreign currency majors. The Gold's corrections has been limited to some profit-taking as some speculative positions from the open interest have taken some of the gains as the prices grew closer and ever-closer to their technically motivated over-bought levels as measutred by the Relative strength Index and the percentage rate change.

The consistency of the Moving Average Convergence / Divergence in a histogram format have been in parallel line with the volumes and the price movment heading to the upside. This scenario fundamentally reinforces the strength of an already bias market as shoen in this chart of Gold on a Daily basis.

GOLD DAILY CHART

Meanwhile, the Euro have been attempting to break the 1.5080 - 1.5100 levels, however every attempt has been unsuccessful. With that said the corrective movements both up and down swings have normally been at least 150-200 pips Average for every 4 - 8 hour movements from wehre it came from either at the low support price to the high resistance price. With this trading range, most speculative swing traders and short term day trading players have been having difficulty from such trades. The adjustments on tolerance points have made them unsuccessful to really predit the entry and exit points. What happens is that most stop-loss orders are triggered before the actual market movments are made.

The Thanksgiving holiday will undoubtedly make the markets' volume thin through the later part of the week's trade. However, price actions may well be susceptible to wide price actions and unexpected swings on both sides of the range. And due to this factor it could produce erratic US Dollar moves on several important reports. The first is on the Existing Home Sales report, which may create some market volatility. And the second release for Q3 GDP figures, Consumer Confidence survey results and the minutes from the FOMC's recent policy-setting meeting. These three events may considerably move the markets in the S&P 500 and US Dollar. As market participants are absent from the market making thngs more sensitive for some istitutional players assigned during such holiday trading.

Not only the holidays bring thin market conditions, it enables the major players to organize their previous and current positions as the end of the year is fast approaching. This has been the tradition for portfolio manager, hedge funds, institutional players not only in the Foreign Exchange market but to most financial instruments. Book squaring towards the end of the year and position adjustments is a traditon as most players stay sidelined in the market as this is the only opportunity through the year where most holidays from the three major markets celebrate the season.

There are no clear directions on the majors as erratic movements are expected before and after the end of the month of November till December. the major trend on the US Dollar still prevails overall on the other foreign currencies. However, some bigger blocks of US Dollar profit -taking may occur for those who would like to cash-in their positions and call it a day for the year. As we also would be taking our cue on these major traders and may call a market holiday for ourselves for the time being.