Gold's Suspicious Fundamentals

A breakout to the upside is a possibility in the near future since Gold broke another downtrend recently. However, it seems that some fundamentals behind Gold's move are a bit suspicious.

Let's look at Jim sinclair's 5 Golden Pillars. I consider each of the Pillars below and rate them on the following scale:

Strongly Bullish +3
Moderately Bullish +2
Mildly Bullish +1
Neutral or Indeterminate +/- 0
Mildly Bearish -1
Moderately Bearish -2
Strongly Bearish -3

1. Recognized Top in U.S. Dollar: Yes, the USDX has definitely topped out a few years ago. That is a given. It is also currently trading below pretty major resistance between $85 to $86. However, it is also not that far away from the $80 level which is important support for the Buck. Some might also argue that, from the point of view of trading psychology, there are currently too many US Dollar bears. As Clyve Maud recently mentioned (though I think he was quoting someone else), there are enough Dollar bears to fill 20 football stadiums and almost no Dollar bulls, or something along those lines. So overall, I rate this factor as "moderately bullish" for Gold.

2. Trust in U.S.A. Paper Assets Declining: There's been some evidence of that. Some foreign central banks have made some moves to diversify away from huge US Dollar holdings. Also, the Euro has come on strong, more strongly than some people expected. However, there's been no stampede to the exits. Also, China continues to hold massive US Dollar reserves of well over $1 trillion. Again, I rate this factor as "moderately bullish".

3. Bullish General Commodity Markets: The central Pillar has definitely crumbled recently in a fairly spectacular way. Oil and Copper are in at least short to medium term bear markets unless and until proven otherwise. Many other metals are also in bears. Oil not only broke a 5 year uptrend recently, it also broke down from a 3 month long consolidation. With winter approaching its stretch run, the fundamentals for Oil look rather bleak in the near term, barring any eruptions from Iran. We may go back to a bullish posture, but it will probably take some time. I rate this as "moderately bearish".

4. Triple Deficits of U.S. Budget, Current Account & Trade, Firmly in Place: That is true, they are "firmly in place", but the trade deficit has been getting a bit smaller recently, in large part due to falling energy prices. I think we've had 3 straight monthly readings below $60 billion now. I rate this as "moderately bullish".

5. Recognized Top in U.S. Treasury Long Bonds: This one is a bit unclear upon further investigation. I generally agree that long bonds cannot really stay bullish much longer and that a top is likely to be in place in the not too distant future. However, let's keep in mind that it is unclear whether such top is Dollar positive or negative. Generally speaking, higher interest rates are supportive of the Dollar. Sinclair seems to recognize this dilemma and counters with "If the increase in interest rates comes from liquidation of Treasury instruments by other central banks and international investors the dollar will reflect it by not rising with rising interest rates." That is the key issue, but I think it is still unsettled which way this issue will cut. I rate this as "Indeterminate".

So there you have it:

3 Factors that are "Moderately Bullish" (+6)

1 Factor that is "Moderately Bearish" (-2)

1 Factor that is "Indeterminate" (0)

The net rating for Gold comes to +4 on a scale of +15 to -15. In other words, the current fundamentals are only somewhat bullish for Gold in my opinion. Not nearly as bullish as they were in 2006, but definitely still positive. But positive enough to get a breakout past $650? The technicals currently seem to suggest that is a possibility, but the technicals in the Gold stocks are still unclear.

What do you think? What ratings would you give to the 5 Golden Pillars?