GOLD IS TESTING SUPPORT LINE, BUT IS STILL BEING EFFECTED BY THE YEN -- RISING COPPER BOOSTS FREEPORT MCMORAN COPPER & GOLD
GOLD STILL TESTING SUPPORT LINE ... I got an unusually large number of questions on the gold market. Actually, very little has changed since the last time we looked at it. Chart 1 shows the streetTracks Gold Trust Shares (GLD) still testing an uptrend line drawn under its October/January lows. It looks like gold (and gold shares) are being influenced by at least two factors. One is the recent stock market selloff. Stock losses have forced gold traders to liquidate some of their long positions to finance margin calls. That being the case, gold seems to be rising and falling with the stock market for the time being. A second influence that I wrote about recently is the rise in the Japanese yen.
Chart 1
RISING YEN HELPS EXPLAIN GOLD DROP ... On Monday March 5, I used this same headline in an attempt to show what I believe to be a link between the recent jump in the yen and the drop in gold. Normally, a weaker dollar is good for gold. The dollar, however, has weakened over the last two weeks along with gold. The main reason for the dollar's drop has been the surge in the Japanese yen. That hurts old in two ways. For one thing, a rising yen (and the possible unwinding of the yen carry trade) has weakened stocks which, in turn, has helped pull gold lower. The second factor has to do with the yen/gold relationship directly. Chart 2 plots the GLD (price bars) versus the yen (orange line) over the last two weeks. There's a clear inverse relationship. The surge in the yen two weeks ago coincided with the downturn in gold. Each day the yen rises, gold drops. When the yen drops (like today), gold bounces. As I explained on March 5, gold has fallen harder when quoted in a rising yen. That's caused gold selling among Japanese traders. Gold would probably benefit from a more stable stock market and a more substantial pullback in the yen.
Chart 2
XAU INDEX IS BACK OVER JANUARY LOW... The PHLX Gold & Silver (XAU) Index is rising 2.6% today and is one of the market's strongest groups. The daily bars in Chart 3 show the XAU gapping back over its early January low near 130 after yesterday's upside reversal. The 9-day RSI line (top of chart) is bouncing off oversold territory at 30. And the XAU/S&P relative strength ratio (bottom of chart) may be starting to firm as well. Even so, the XAU still needs to close over 135 to add more credibility to its rally attempt. Today's biggest gainer in the XAU is Freeport McMoran Copper & Gold. Chart 4 shows FCX climbing nearly 7% today on rising volume. The FCX/XAU ratio (bottom of Chart 4) has broken out to a new high. That makes FCX a leader in the XAU. FCX may be benefitting more from copper than gold however.
Chart 3
Chart 4
COPPER JUMPS 5% ON CHINESE OUTPUT... Copper prices have lost 40% since last May. That decline may be over however. Copper jumped 5% today for the biggest gain in eight months. The green arrow in Chart 5 shows copper trading at a new three-month high. Much of that renewed optimism is based on a surge in Chinese industrial output. Chart 6 shows another reason why copper could start to rally from here. The monthly bars show copper bouncing off a four-year support line drawn under its 2003 and 2005 lows (using a logarithmic scale). [FCX may also be getting a boost from shareholder approval of its merger with Phelps Dodge, the big copper producer].
Chart 5
Chart 6
FCX IS ALREADY ON P&F BUY SIGNAL ... Point & figure charts often provide more clarity to buy and sell signals. Chart 7 shows the XAU Index on a p&f sell signal since the end of February. The rising green boxes reflect today's improvement (using a percentage scale). A close at 135.28 or higher would repair some of the recent technical damage. Chart 8 shows Freeport McMoran already on a p&f buy signal. FCX still needs to clear resistance at 61.64, however, to resume its major uptrend.
Chart 7
Chart 8
