GOLD RALLIES TO THREE-MONTH HIGH -- ENERGY ETFS BOUNCE OFF BREAKOUT POINTS

GOLD JUMPS $4... The rally in gold continues. In today's trading, bullion has risen $4.00 and is trading at a new three-month high. Chart 1 shows the Gold ETF (GLD) having broken its eight-month down trendline and moving to up to test its March high. I think it will eventually reach its late 2004 high. And it's doing that in the face of a rising dollar. That's pretty impressive. Gold shares are up 2% today and are one of the day's strongest market groups. There are a couple of ways to tie the gold rally to currency moves. One is that a rising gold market is hinting that the dollar is near a top. Another is loss of confidence in the Euro. Over the last few years, money coming out of the dollar moved into the Euro which also become closely tied to gold. With the Euro under pressure due to European weakness and political bickering (and suspicions about the dollar rally), I believe that some currency money is moving directly into gold. Some of it is also moving into commodity-based currencies like the Canadian Dollar (Chart 2). Another explanation for gold's strength is the recent drop in global bond yields. Gold does better when interest rates are falling. The 10-year T-note yield has fallen back under 4% and is following European rates lower. Gold is hitting new highs against the Euro and the yen which is a sign of a true bull market.

Chart 1

Chart 2

ENERGY ETFS HOLD BREAKOUT POINTS ... The two energy ETFs plotted below recently achieved new record highs along with record crude oil prices. As August crude oil backed off from the $60 level, some normal profit-taking set in. With oil prices rising over a dollar today and back over $59, energy stocks are rallying again. Chart 3 shows the Energy Sector SPDR (XLE) staying above its spring high just below 45. More important in my view is the action in Chart 4. It shows the Oil Service Holders (OIH) bouncing off their spring highs near 100. One of the rules of charting is that prices should find support along old peaks (see arrows). That's especially important in the case of the OIH because it just broke through its 2000 high to achieve a long-term bullish breakout. (See monthly bars in Chart 5).

Chart 3

Chart 4

Chart 5