Gold, HUI Index and the USD: What Gold, the HUI Index and USD are Telling Us

Pinnacle Digest writes: Gold has corrected from its September highs which saw it flirt with $1800 shortly after Bernanke unleashed QE3. Vin Maru, today's guest commentator, explains the current stance of gold, the HUI Index and the USD Dollar.

First off, gold has been correcting over the last two weeks. When applying technical analysis to the gold chart below, we can clearly see that there would have been overhead resistance at $1800 because for most of the year, gold has traded between $1550 and $1800.

Maru asks the question: How much of a retracement will we see in the price of gold? His answer is that while the shorts are currently in control of driving the price down, support will come from other central banks and buyers of physical gold. What choice do these central banks have when they themselves are devaluing their own currency?

Gold is near $1700, sitting below the 50 day moving average at $1720, which is above the 200 day moving average at $1662. The first line of support for this coming week was at $1720, the 50 day moving average. If gold can close the week above that mark, the correction is likely over. Today gold has rebounded swiftly and, at least for now, has held firmly above the 200 day moving average, but not the 50 day.

Maru suspects the price of gold could consolidate between $1650 - $1750 for the remainder of the year. He cites 4 major headwinds to gold in the coming months. Although gold is in its seasonal period of strength, the conflicting factors facing the precious metal are: a huge concentrated short position, the US elections, the US fiscal cliff and tax loss selling for the remainder of the year.

The HUI Index has also been correcting since late September following the hysteria of QE3. While we still remain cautiously optimistic that a new uptrend is in place, the HUI will most likely correct back to the 460 range ( + or – 10 points) over the coming months and 520 will now act as overhead resistance -  as a new trading range will be set.

The trend of the USD may be commodity investors best friend in the coming quarters. Maru explains that while the US dollar has traded strong recently, this could be very short lived. The up channel that has been in place from August 2011 to August 2012 has been clearly broken and now it has started a new down trend channel this past September.

Maru concludes that, "The best hope for the US dollar is for it to sit in a channel between 78 and 81.50 which is where I think it could trade sideways for some time until we clear the elections and get some direction on fiscal policy from the Fed."

All eyes will be on the US elections that are now just days away.


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