The rebound in the US dollar continues, putting some pressure on gold

goldIt was not so long ago that I was writing about the weak US dollar and how it was one of the main reasons why the gold price was increasing. But, since around the middle of November we have seen resurgence in the value of the US dollar and now this reversal in trends is putting some pressure on the gold price.  During the last few weeks the US dollar has gained around 5%, and during last week, the Euro dropped sharply against the greenback on news that Greece was downgraded by a second credit rating agency. Just two days after the Greek government unveiled measures to trim its debt by cutting 10% in public spending, S&P downgraded Greece's government debt rating from A- to BBB+, reflecting their opinion that the measures are "unlikely…to lead to a sustainable reduction in the public debt burden."

With the EUR/USD breaking through an important support level at 1.4483 and the Dollar index showing signs of a short-term reversal in trend as it breaks the 77 level, it is likely that the dollar may continue to gain strength while gold retreats and consolidates again.

Even though the US dollar has broken through an important downward trend, I do not accept this as a major reversal in trend. I do believe that the US dollar was oversold and have stated this on numerous occasions, but for me this is a rally in a bear market.

As I have often stated, it is important for you to decide if you want be an investor, a trader or a bit of both. As an investor these price fluctuations should not concern you, and in fact any weakness should be looked upon as a buying opportunity. However, if you are a short-term trader who is using leveraged instruments such as gold futures, these short-term price changes can be very costly especially if you are on the wrong side of the market. That is why it is important to use good money management techniques.

The problem with most markets is that, in the short-term, many of the moves are unpredictable. For example, how many of you knew that Dubai was going to default followed by Greece. And, this all happened after non-farm payroll figures were positive, followed by good retail sales in the US. But, what I find extremely strange is how all this news came out just as the US dollar had hit is lowest point in months and was showing signs of being oversold.

Whatever the short-term implications, the long-term picture remains the same for me and I for one concur with the comments made by China's Deputy Governor Zhu Min who said, "when the US has to fund its deficit through the combination of issuing more Treasuries and printing more dollars, it is inevitable that the dollar will continue to weaken."

Yes, indeed. When it comes to the bigger picture, the major trends are still very much intact, and if you haven't bought gold, while it consolidates you have another chance to add it to your investment portfolios.

My recommendation has always been and remains the same. Firstly accumulate some physical gold. You may buy bullion bars and bullion coins for this purpose. Then, once you have built up a core holding of the physical metal you can look to add to this position by investing in an exchange traded fund (ETF) and gold shares. On the subject of gold shares, due to the strong South African Rand, most South African mining shares have performed dismally in particular Harmony Gold, the fifth-largest gold miner in the world. However, during 2010 I expect to see most of the South African mining companies out-perform the gold price.

Technicals

The upward trend in the gold price has been well supported by the support line of this channel. While the dollar rebounds, we may see some short-term pressure on the gold price, but it should find good support at $1075 – $1100. If this level is broken, then any pull-back to around $1000 – $1025 should be used a buying opportunities.

About the author

David Levenstein is a leading expert on investing in precious metals .He brings over 29 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He is also a regular commentator on www.kitco.com and www.mineweb.com David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

For more information go to: www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.