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Gold Vulnerable if Money Flows Back to Stocks

U.S. stock futures are trading a little higher but paring its gains ahead of this morning's Weekly Initial Claims Report. This report, the first U.S. jobs data since last Friday's Non-Farm Payrolls Report, may provide more evidence about the strength of the recovery.

Asian markets showed more gains overnight as concerns about European sovereign debt eased. Today, investors are banking on the markets to continue the upside momentum developing since traders returned following the Labor Day holiday.

The easing of worries that European debt issues will derail the economy seems to have given investors a little more confidence, but today's jobs data will likely set the tone.

This week's rally has been nice but will not mean anything until the September E-mini S&P 500 takes out 1107.25. If this happens then it will indicate that the bulls are gaining a little more confidence.

The break in the T-Bond market this morning also indicates that investors will be willing to dump safe assets if there is another alternative, but in my opinion the market that investors should watch for signs of a stock market rally is the Gold market. I think that a sure sign that investors are gaining confidence in the global recovery will be when they begin to sell gold with conviction.

Recently, investors have been pouring money into gold because stocks haven't been paying off and for a hedge against a collapse in paper assets. If this fear begins to disappear, then look for money to flow out of gold and into stocks.

December Gold futures declined from their high late Wednesday to finish lower for the day. Good news from Portugal helped alleviate European bank concerns and stronger demand for equities helped draw money out of hard assets, sending Gold futures lower.

Earlier in the week, Gold soared on European banking concerns and economic growth worries, encouraging investors to treat gold like a safe-haven investment.

Wednesday's action in the Gold market suggests that the movement in the stock market will have a lot to do with its short-term direction. A rally in the stock market is likely to send Gold sharply lower as the two-asset classes resume their fight for investment dollars.

Technically, Wednesday's closing price reversal top has the market in a position to break further to the downside. Based on the short-term upswing of $1211.70 to $1264.70, traders should watch for the start of a 2 to 3 day break to $1238.20 - 1232.00.

The U.S. dollar trimmed a little of its losses late Wednesday after the Federal Reserve's Beige Book cited a slowing economy and limited inflation pressure. Most of the damage to the Dollar was done earlier in the session, however, following a strong Portugal Bond sale and amid better news out of Canada and the U.K. Greater demand for riskier assets as evidenced by the strong rise in U.S. equities also contributed to the bearish tone affecting the Greenback.

Ahead of the release of the Federal Reserve Beige Book, the U.S. Dollar was trading weaker against most major currencies. This report wasn't expected to be a market mover, but traders were likely to read it to gain a little more knowledge into what the Fed was thinking when it made its recent Federal Open Market Committee decisions.

The Japanese Yen was under pressure versus the U.S. Dollar after rising to a 15-year high against the Greenback. Strong moves in the equity markets helped to revive the carry-trade too. The Yen also took a hit this morning after Japanese government officials expressed apprehension about the rise in its currency.

Technically, the September Japanese Yen formed a closing price reversal top. This pattern, if confirmed, often triggers the start of a two to three day correction with a minimum objective of 50% of the last swing up. If this is the case this time, then look for a short-term retracement to at least 1.1877 or maybe as low as 1.1831.

The Japanese Yen chart will get most interesting if 1.1867 is broken. At this time, the Yen is set up for a weekly reversal, but a close under 1.1867 will put the market lower for the week, forming a possible major top.

Last week it appeared that conflicting forces were going to keep the Japanese Yen in a tight range, but after Wednesday's action, it is clear that the Dollar has a chance to make a tremendous rally versus the Yen if the Japanese government continues to threaten action against a strong currency and if trader appetite for risk continues to grow.

 

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