Last week, the hourly chart of the gold price was at a critical level, with key support at about $371 - and rising quite steeply. The gold price broke briefly below this support level on two occasions, but the break did not hold and gold could end the week above $381 and well clear of the bottom of the bull channel.
Yet a new week brings new challenges and in today's climate of managed currencies - and it is not only the Yen and gold that is being manipulated - anything could happen to the still rather fragile bullion market.
The yen is mentioned in particular as the Bank of Japan is quite open about its continued support for the US dollar. Over the first seven months the Japanese Central Bank spent a cool ¥9 trillion (it is not only the US Federal Reserve that deals in trillions, although this Japanese amount is only the equivalent of $78 billion) to keep the value of the Yen within its recent trading range between ¥116 and ¥120.
Despite fears that major problems can surface in the Japanese financial system - a legacy of the tremendous and largely still hidden bad debt situation that arose out of the collapse of the Nikkei and the property market in the early 90's - the Japanese currency has shown a sustained tendency to rise against the dollar. This is the last thing the Japanese want; a rising Yen means that Japan becomes less competitive against exports to the US out of China, which has its currency pegged against the US dollar and thus do not fear the consequences of a weaker US currency.
China has already overtaken Japan as the primary exporter to the US and the firmer trend in the Yen is interpreted as bad news for Japanese exporters. However, fears of a weaker dollar has triggered some repatriation of Japanese investments in the US, including any remains of the earlier Yen Carry trade, while a belief that the Japanese could be closer to a sustained economic recovery than what the US is had investors in the US and elsewhere switching funds to Japan in a move that also strengthens the Yen.
No wonder that of the ¥9 trillion spent over seven months $2 trillion, or more than 20%, had to be spent in July, the most recent month in this period. The pressure on the yen to appreciate against the dollar is rising.
So what has this to do with gold? Surely, if the Japanese have been buying gold largely as a hedge against a Yen that was expected to weaken against the dollar as a consequence of the Japanese Government's sustained issue of debt and some other aspects of a Japanese financial crisis, then they would cease to do so if the Yen is in a bull trend. That would mean the high level of demand for gold that brought it over the $380 level would decline and it would be easier to force the price down again.
In other words, a strong Yen should be a negative for the gold price.. Thus, the gold price should have dropped early on Monday morning, after a call from the ministers at the G-7 meeting in Dubai that there should be more flexible exchange rates - and recent news that the Japanese economy had grown by over 3% during the second quarter - in response to which the yen surged briefly to below ¥112 from the already strong close last week at ¥114. Yet, surprisingly, the gold price also jumped in dollar terms, becoming very volatile around the $386 level, well up from the New York close just below $382.
The first question is whether this can last - a higher gold price in the face of a strong Yen - and secondly, what could be the reasons if the trend is sustained.
Japanese demand has been a significant factor in a resurgent gold market for some time. More than a year ago it was widely reported that Japanese individuals were buying bullion - which is easy to in Japan as there are chains of shops that sell gold in bar form - and in some cases quantities were substantial, with purchases of in excess of 20 kilograms being reported on occasion. But it should be remembered that gold, too, is a currency - gold is real money and as such is assigned a currency value. If the dollar suddenly appears much weaker that what it was last week - while the Yen surged against the dollar on Monday, it was joined by the Euro, jumping from $1,138 to $1,146, while sterling improved from $1,637 to $1,649 - it is not really surprising that the dollar price of gold should also be on a roll; and should do even better if the dollar is fully into the next leg of its bear market.
In other words, by examining the future of the US dollar against other paper currencies, one can obtain an idea of how gold should behave - if it can shake off the shackles of the parties who are trying to cap the advance in the gold price. Of course, turmoil in currency market also stimulates greater concern and uncertainty among investors about the safety of their investments in the dollar in particular. This perception of increased risk manifests itself in an increased demand for the safe haven of last resort - gold; demand which may well exceed whatever decline there might be in Japanese purchases of gold as a result of a stronger Yen.
The focus should not be on Japan and the lessening effect a stronger Yen will have on Japanese buying of bullion, but on the increased risk that a weaker dollar brings to the currency markets in general. This is positive for gold on two counts; firstly since its value as money will increase against a falling dollar, while an increase in safe haven demand for gold will make it more difficult to contain the rising gold price and could even result in a much steeper increase than warranted by the declining value of the dollar.
Weekly chart of the Dollar-Yen rate
The chart below is of the weekly rate of the Dollar-Yen. As is usual in Chart Symmetry analysis, one master line is generated between two points on the chart, with all other lines derived from the gradient of the master line. These lines have a single point on the chart, as their gradients are predetermined by the gradient of the master line.
In this analysis, the master line connects the two tops in the value of the dollar, in 1998 and in early 2002. Lines A and B are exactly parallel to line M and they are also evenly spaced, which means that line A is the centre lien of the new dollar bear channel, B-M.
Line I is the direct inverse of M - it has the same gradient, but opposite sign - and was generated from the centre of the bifurcated bottom in May of 1995. Such bifurcated tops or bottoms generally form on the outside of a major pattern, as in this case. The fact that the inverse line as generated out of the bifurcated low in late 1999 acts as dollar support with less than 0,2% error adds to the validity of the analysis.
It is evident that the Yen had closed last week just a fraction below line I; if the current strength in the Yen lasts to the end of this week, the break will be confirmed. Should this happen, it will be of major importance for the currency markets.
The pattern M-I is a symmetrical triangle that has its base left off-scale of this chart, well before the start date of this history in 1992. It is a 10+ year chart pattern and to have the very accurate fit shown on this chart supports the conviction that the break lower below the triangle - should it be confirmed - is of great significance for years, not only months.
With leg 1 of the triangle off scale on the left, ending with the bifurcated low in 1995, the count for the triangle shows that Friday's break lower through line I occurred at the end of leg 5, as is to be expected of a normal triangle. However, the standard method for the estimate of the extent of the break - adding the length of the 'flag pole' to the break out of the triangle, or, more conservatively, to the start of leg 5 - results in the value of the dollar against the Yen falling to zero.
If one uses the inverse of the chart, the cost of ¥100 in US cents, the following applies. The 'flag pole' begins in February 1985 when $0,38 bought ¥100 and it ends in 10 years later in 1995 with a cost of $1,19 for ¥100. This means the length of the flag pole is $0,81 and added to the start of leg 5 at $0,74 per ¥100 it seems that the dollar is on its way to a $1,55/¥100 rate. That equates to about ¥64 to the dollar.
With line B currently at ¥90,6 and declining at about ¥1 every 3 months, probably means that the Yen will break below line B in due course. The exact target at the moment is really of less concern than the fact that technically the Yen stands at the verge of making a major break against its market resistance.
Conclusion
Previously, Japanese support for the dollar had to spill over into other currencies as well, thereby providing the dollar with a broad base of support over the recent critical period of 2-3 years. Now that it seems the wall of resistance for the Yen has been breached, the other currencies will also benefit, as already is happening - they too, including gold, are strengthening against the dollar. So far, at time of writing, Monday trading is confined to Asian markets. Should the rest of the world sustain or even extend the new trend. - and with short covering expected to kick in - it is conceivable that this week will become very interesting indeed; for the dollar and for gold.
Is this going to be the week we see $400 conclusively breached under a combination of a much weaker dollar and a new surge in demand for bullion?
It may well be so.
24 September 2003
© September 2003 Daan Joubert
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