Gold finds new range between $990 and $1020

During the last week we saw the gold price see-saw between $990 and $1020, while the value of the dollar weakened and then strengthened and oil prices went higher and then lower. The correlation between the US dollar and the gold price is very interesting. A falling dollar usually pushes gold prices up, so when the dollar falls, gold usually rises. For instance, the dollar is down 15% in 2009, while gold is up 15% in 2009.

The one thing that caught my eye was a report by the IMF. In their semiannual report the Global Financial Stability Report (GFSR).,released on September 30, the GFSR calculates that actual and potential write downs from bad assets such as loans and securities have fallen by some $600 billion over the past six months-from about $4 trillion to $3.4 trillion, as a lessening in financial stress has narrowed spreads. Although write down estimates are subject to considerable uncertainty, the analysis shows that the financial system is on the mend. However, the GFSR estimates that commercial banks have already recognized $1.3 trillion through the first half of 2009, but face another $1.5 trillion of potential asset write downs ahead. Hence, overall, banks have recognized slightly less than half of their expected losses. U.S. banks have recognized slightly more than have those in the United Kingdom and euro area.

According to Peter Dattels and Laura Kodres of the IMF Monetary and Capital Markets Department, banks will still have to raise more capital, and that there may well be another large round of losses ahead. The global recovery, and especially the recovery in the US, has been hampered by an ongoing lack of access to credit. Another round of bank losses could make that problem worse and, in the process, tighten the credit markets again. That could break the back of an economy that is improving in very small increments.

When the U.S. Labor Department released its latest U.S. Nonfarm payroll figures for September which fell 263'000, (economists expected a decrease of 175, 000), the gold price first dropped to 987.50 offered, the day's low, before being bought straight back up as the euro gained strongly against a faltering US dollar, trading eventually back above 1.4600. Gold pushed all the way up to 1007.50 bid, the day's high. Later, the U.S. Commerce Department reported U.S. factory orders fell 0.8%, more than the 0.6% drop predicted by analysts. Gold lost some momentum and settled into trading around 1002 bid, eventually closing around $1003.

Technicals

Towards the end of August, the gold price broke to the up-side of an ascending triangular pattern, and then rallied to just under $1030. Since then, it seemed as if the price ran out of momentum and has been trading gradually lower. Technically speaking this is not uncommon, and it is possible for the price to trade back to the level of the previous resistance which is around $980. However, at this point, it could very well find major support and then begin it's next leg upwards.