Tuesday, December 15, 2009

USD rally & the correction in Gold prices

The recent bullish breakout of the medium-term downtrend line for the USD led to some correction in commodity prices. Traders are moving from a bearish position to a mildly bullish position on USD. While the action on USD may be purely technical, it could also be due to expectation that the FED may turn hawkish as the economic recovery picks up in the US. Some quarters are now expecting the FED to raise interest rate soon, possibly by first half of next year.

I think it is too early to be too bullish on USD. An upside breakout of the medium-term downtrend line need not necessarily translate to an uptrend for USD, over the medium-term. I am more inclined to believe that the last 2 weeks of rally in USD may be similar to the 4-week rally in USD in late-November to mid-December 2007. In that earlier rally, USD moved from a low of 74.5 to test its 20-week SMA line (at 78) before correction set in & a new low of 70.5 recorded in March 2008. Today, USD is again testing its 20-week SMA line & we will have to wait & see whether the outcome will be different from December 2008.


Chart 1: USD's weekly chart as at Dec 14, 2009 (Source: Stockcharts.com)

The strong rebound in USD caused a correction in gold prices in the past 2 weeks. The current correction is also quite similar to the correction in late-November to mid-December 2007 (which was probably due to a rebound in USD). If the current rebound is USD were to frizzle out, then gold prices may continue to rise. From Chart 3 below, we can see that the past 2 uplegs in gold prices resulted in a gain of about USD280-330. If the same were to happen, then gold prices may hit a high of USD1280-1330 before topping out.

(Note: I have used GLD (an ETF)'s price chart as proxy for Gold price.)


Chart 2: Gold's weekly chart as at Dec 14, 2009 (Source: Stockcharts.com)


Chart 3: Gold's chart as at Dec 14, 2009 (source: BullionVault.com)
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10 comments:

  1. solomonTuesday, December 15, 2009 9:12:00 PM

    The worry of cheap US dollar and its so called the unwinding of carry trade activities are getting a bit out. Gold and oil are only the temporary hedging tools. If there is a major devaluation of US dollar, the trades around the globe might be hurt again.

    The triangle currencies "USD-YEN-EURO", each of them have their own problem ie debts. So, are we holding valueless currencies then or waiting for the Do-re-mi domino knock outs?

    To side track, Alex, what is your take on Petra Perdana?

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  2. Mother of TwoWednesday, December 16, 2009 10:50:00 AM

    Hi ALex,
    Would you please comment on Muhibah? It's good time to accumulate now?

    Grace

    ReplyDelete
  3. Alex LuWednesday, December 16, 2009 11:52:00 AM

    Hi Solomon,

    Petra Perdana has broken its uptrend line that stretches back to Oct 2008. That support was at RM1.60. Now it look set to test the horizontal support at RM1.20-30.

    There are some funny things happening in this group. Recently, we learned that the main shareholders (Tengku Datuk Ibrahim Petra & the Koh brothers) are not getting along & they may soon split up. Sometime back, we learned that Bruce Willis sued Petra Group and its chairman, Tunku Imran, to recoup US$900,000 invested in a green rubber venture. Shortly thereafter, Tunku Imran announced his resignation as director of all Petra Group companies and as Group Chairman, saying "enough is enough".

    Some links for your reading pleasure:

    http://rockybru.com.my/2008/11/die-hard-hero-sees-red-over-green.html

    http://www.themalaysianinsider.com/index.php/malaysia/13667-embarassed-tunku-imran-resigns-as-petra-chairman

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  4. Alex LuWednesday, December 16, 2009 11:56:00 AM

    Hi miladawley,

    Get some warm clothing in this weather? Yes, that's a good idea!

    ReplyDelete
  5. Alex LuWednesday, December 16, 2009 12:14:00 PM

    Hi High Society,

    Muhibah has been affected by cost overrun in its Yemen LNG jetty contract (additional loss of RM10 million expected) and slow payment from the RM1.4b KIC petroleum hub project in Johor.

    For the 9-mth ended 30/9/2009, it recorded a net profit of RM20.3 million on turnover of RM1.57 billion. Financial position as at 30/9/2009 is not strong, with Liabilities totaling RM2.0 billion while Shareholders' Funds stood at RM560 million. Investors are understandably nervous about potential losses from the Receivables & Contract W-I-P totaling RM1.38 billion.

    Chartwise, it has just broken below the psychological RM1.00. Its next horizontal supports are at RM0.80 & RM0.65.

    ReplyDelete
  6. jamesWednesday, December 16, 2009 1:26:00 PM

    Hi Alex,

    Your blog's is one of my fav morning reads. Keep up the great work!

    I think the green rubber is associated with Vinod Sekhar's Petra Group.

    ReplyDelete
  7. solomonWednesday, December 16, 2009 2:13:00 PM

    Good day Alex,

    Many thanks. There is no relationship between Petra Perdana and Petra Group, as correctly pointed by James.

    For Grace's Muhibah, I am worried for its high receivables and the KIC project. If I remember correctly, the company also involved in a litigation against Gerbang Perdana. The amount might be small but the biz ripples effect cannot be undermined.

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  8. Alex LuWednesday, December 16, 2009 4:31:00 PM

    Hi James & Solomon,

    Thanks for the info.

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  9. Mother of TwoWednesday, December 16, 2009 5:27:00 PM

    Hi Alex & Solomon,

    Thank you so much for the information. It's highly appreciated.

    Grace

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  10. David ChanThursday, December 17, 2009 2:13:00 PM

    Hi Alex,

    I like your blog too.

    David

    ReplyDelete