Is Crude Oil Ready for a Breakout and Will It Help Gold?
05/16/2013 9:00 am EST
The US dollar strength and stock market rally has fueled further declines in gold prices, and Przemyslaw Radomski of SunshineProfits.com examines the charts to see if crude oil can come to its rescue.
Jim Rogers recently said in an interview to Morningstar, that he is not disturbed by the recent tumble in gold prices.
"Gold had gone up 12 years in a row, without a down year, which is extremely unusual in any asset. Equally important, gold has only had one 30% correction in 12 years. Again, that is extremely unusual. Most things correct 30-40% every year or two. So the action in gold has been very unique and gold needed a correction. The main thing that caused it, as far as I am concerned, was that the market was ready. It needed it and it is good for gold to have a proper correction," said Rogers. We agree. At the same time we would like to point out that this has no implications on the short term.
How does he see the future for gold?
"Certainly, over the course of ten years gold will go much, much higher because I don't see any possibility that governments are going to stop printing money in the next decade," he said. "And as long as that's going to happen then gold is certainly going to go higher and probably much higher." We agree once again.
In a recent interview in the South China Morning Post, George Soros says, "Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold." However, he also notes that central banks are still buying gold, so he doesn't "expect gold to go down."
One humorous headline asked: "Who's smartest on gold—Chinese housewives or George Soros?"
As weird as this may sound, if we're talking about the long term, we tend to side with the Chinese housewives who have been buying physical gold in unprecedented amounts.
Hong Kong government data this week shows that imports by China from Hong Kong more than doubled to an all-time high in March. India's purchases are set to exceed 100 metric tons for a second month in May as jewelers rush to beat central bank curbs on imports by banks.
Buyers in mainland China purchased 223.52 tons of gold in March, including scrap, compared with 97,106 kilograms in February, according to Hong Kong government data. There were also reports of similar huge surges in demand for physical gold in India, Dubai, and many other countries. Just the China purchases would account for roughly 10% of the gold mined each year.
According to the China Gold Association, there is a shortage of gold jewelry inventory in the country after consumers bought up supplies.
NEXT PAGE: Impact of Crude on Gold|pagebreak|
As we enter the summer, we want to know who is right, George Soros or the Chinese housewives who have been stocking up on gold. Let's take a look at the charts to find out. In today's essay, we will focus not only on gold itself, but also on the most versatile commodity—crude oil—and how it could impact the prices of gold in the near future (charts courtesy by stockcharts.com)
When we examine the crude oil chart, we see that another attempt to break out above the declining resistance line based on the 2008 and 2011 tops is underway. If prices move above this resistance line, it could very well trigger a rally in other commodities and in the precious metals prices.
At this time, since the breakout has not yet been completed and verified, and since several attempts have failed in the recent past, we prefer to wait for a confirmation of this breakout before discussing the bullish implications for the precious metals in any detail.
Let us move on to the yellow metal itself and have a look its long-term chart.
Here, the situation has changed very little as gold's price pretty much moved back and forth last week. The long-term cyclical turning point is now a few weeks away and could very well coincide with the end of gold's current decline. Whether this holds true or not, it seems likely that gold's current decline will continue for now at least as it appears to not yet be completed.
Let's have a look at Dow to gold ratio chart now.
We see the ratio getting close to a key resistance level. This is due almost entirely to the Dow's rally last week. The “problem” here is that if gold prices decline and stocks continue to rally (a real possibility), this ratio could break out above the declining resistance line and move toward 12.5, thus leading to even bigger declines in gold (below $1,200). We do not feel that such a breakout will be confirmed, however.
Summing up, a decisive breakout in crude oil could trigger a significant rally in gold. However, since we saw several failed attempts for the crude oil in the past months, it seems best to wait for a confirmation of the breakout before discussing meaningful bullish implications for gold. For now, it still seems that the final bottom is not yet in.
By Przemyslaw Radomski, CFA, Founder & Editor-in-Chief, SunshineProfits.com