Gold Price Forecast: Euro Flaw Weighs Down Gold

So last week gave the bulls hope again and was slightly above our forecast range. However, we maintained our consistently bearish position in our forecast published every Sunday before the markets open. Our expectation has been that June is set to be a bad month for the bulls, if we know one thing about the gold market is that it always leaves things to the last possible moment before the true direction is known.

Our assertion for the last few months has consistently been that we have been in a multi-month bear market consolidation with lower lows yet to come.

SPDR Gold Trust (GLD) saw a rise in its inventory at the start of this week by some 7 tonnes. Western investors have continued to sell down their gold holdings for a couple of years now and although we have had a small uptick we are at low levels relative to the past. We will continue to monitor this data looking for a sustained rise as evidence of a change of trend but at this stage it is likely that this is just a countertrend blip.

The Commitment of Traders Report shows the specs are still net long and the commercials are still net short. As we have maintained for the last few weeks we would expect the two main parties to reduce their net exposures more towards neutral before a new up leg can begin.

The gold silver ratio has gold outperforming silver as it has done for a couple of years now. In an inflationary environment we would expect to see silver outperform gold as we had up to the beginning of 2011, currently this is not the case.

The yield spread ratio between 2yr and 10yr treasury notes has remained relatively unchanged last week. Yields for both the 2 and 10 year have consolidated recently but remain subdued in relation to 2011. Much of the volatility in yields is down to ECB and Fed noise and the Greece situation.

As a commentator noted the other day the problem with the Euro is the Euro. Our snapshot view of the Euro and its implications for gold are as follows; the Greeks can’t devalue their currency and are being forced to devalue internally which means wage and pension cuts but no devaluation of the debt owed to foreign entities, as their GDP crumbles and their debt increases their ability to repay becomes even more implausible.

Germany especially on the other hand maintains the value of the debt owed to it by refusing any haircuts but gets a free devaluation helping its export economy. These are the two intractable sides of a flawed political and ideological union.

In our opinion the only short term winner of this mess is the Dollar, US Treasuries and German exports. However the Euro is a political entity driven by fanatical ideologues and will not be allowed to fail.

When a final fiscal union is created as it must in order to survive then it will represent a genuine alternative to the Dollar. We feel this would be the point at which gold will begin a new bull market and the Dollar will begin to fall.

Whenever we produce our forecast we analyse market structure using our unique sets algorithms over multiple timescales, this collectively creates a picture of the underlying market and removes any emotion from our analysis. This logic gives us the confidence to say that the probability based on past events is that it is still highly unlikely that a new bull market is underway at this stage.

For us to turn bullish we must have evidence that the market structure of the last few years has changed that is how we work we will not change our minds from week to week it is simply impossible for a market.

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