Gold has come into its own since October as traders continue to hang on every word coming out of Europe. Investors have breathed a collective sign of relief in recent days as Europe's financial ministers plan to unveil a new rescue fund next month. In the meanwhile Italy and Greece are left to deal with their own debt crises until then. Greece must provide written acceptance of bailout terms before it receives its next 8 billion euro loan installment.
European officials are also consulting with credit ratings agencies over options for increasing the rescue fund's 440 billion euro guarantee into as much as 1 trillion euros. "In the end," wrote the Wall Street Cheat Sheet, "many investors believe Europe will resort to money printing to 'solve' the sovereign debt crisis." As we've discussed in recent reports, gold therefore has a dual impetus to propel its recovery: fear of the unknown in regard to the euro zone crisis and loose central bank monetary policy in response to the crisis.
Also this week, gold has gotten a short-term shot in the arm courtesy of last week's failure of broker-dealer MF Global. Trading volumes have declined for gold, crude oil and other commodities as MF Global customers wait for their accounts to be unfrozen so they can resume trading. The Wall Street Journal observed that "Others with access to the trading floor also have stepped back, worried about market distortions that could emerge due to the events of the past week."
Gold futures trading volume on the Comex, for example, has been under the 200-day moving average every trading day since MF Global's collapse, falling 52% below that level Monday. Crude-oil volume on the New York Mercantile Exchange has been more than 20% lower than its 200-day average for four of the last six trading days. Yet the fact that both crude oil and gold prices have moved higher in the wake of MF Global's failure and the worries surrounding it speaks volumes about the smart money's near term outlook on both commodities. A rising market in the face of worry and uncertainty is typically bullish and describes the market's famous "wall of worry."
It's also a good thing from the standpoint of market sentiment that gold has mostly kept out of the financial headlines of late. The last thing we want to see when we're long gold is for the yellow metal to be touted on the front cover of financial magazines and newspapers like it was earlier this summer before the interim top was made. The mainstream press has been asleep on the metal since the bottom of the summer decline, which improves gold's recovery prospects. The fact that the public isn't heavily participating in this recovery yet, which gives gold some additional upside potential.
In the early stages of a recovery following a corrective decline, the first thing we look for in the way of confirming a bottom is for the gold price to overcome its 15-day moving average and for that trend line to turn up. Gold has established a recovery above the rising 15-day MA since the last part of October. Below is a chart of our gold proxy, the SPDR Gold Trust ETF (GLD), in relation to the dominant immediate-term trend line.
Once gold has established a recovery trend above the rising 15-day MA, the next thing we look for is for price to recover above the next most important series of moving averages, namely the harmonic 30/60/90-day MA series. The 30-day MA reflects short-term external (price) momentum, the 60-day MA reflects the market's main interim trend, and the 90-day represents the market's interim bias.
It's even more important for the sustainability of a market recovery for the gold price to not only overcome the 30/60/90-day MAs, but also for the 30-day MA to turn up and cross above the 60-day and 90-day MAs. As you can see in the following GLD chart, this important moving average crossover is on the verge of happening.
The fact that the 60-day and 90-day moving averages for GLD have already achieved an upward trend is another positive reflection of the positive bias the gold price has achieved in recent weeks as investors' attention has been turned from the market to the euro zone debt problem. In other words, the recently rebuilt "wall of worry" has improved gold's near term prospects.
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