Is Gold An Investment Or A Reserve Currency?

August Gold finished the week last week on a down note as weaker than expected U.S. jobs data drove investors out of higher yielding assets and into the safety of the U.S. dollar. Since gold is priced in dollars, it became more expensive and demand for the precious metal dropped substantially.

The U.S. government on Friday announced that only 80,000 new jobs were added during the month of June. This was below the pre-report estimate of 92,000 to 100,000. At first glance, one would have thought that missing the estimate would have meant the Federal Reserve would have to support the economy with additional quantitative easing, but this was not the case as the number was not bad enough to warrant any action by the central bank. This assessment drove up the dollar as traders treated it as a safe haven causing equities and commodities to plunge.

At this time, gold is being treated as an investment and a reserve currency. What this means is that when investors are looking for value, they treat it as an investment when it is cheap and sell it when it is expensive. Additionally, when investors are looking for a safe haven, they have been aggressively turning away from gold and toward the U.S. dollar. This best explains last week’s huge sell-off.

Technically, the best way to describe the current chart pattern is rangebound, albeit a very wide range. At first the bottom from December 29, 2011 at $1537.00 was defended, but then some sloppy trading forced three bottoms to be formed at $1529.30 on May 16, $1532.10 on May 30 and June 28 at $1547.60. In hindsight, the first bottom was probably an attempt to fool traders into shorting aggressively.

Since posting the three bottoms in May, the market has formed three tops in June. Gann angle analysis suggests a triangle formation which is a non-trending chart pattern. This sideways pattern should not be ignored since all non-trending patterns eventually lead to a volatile breakout. The dates of the potential breakout if the market remains inside of this triangle are August 3 to August 6 which is when the angles form an apex.

An uptrending Gann angle was tested on June 28 when the market traded at $1547.60. This angle moves up to $1559.10 on July 9. A downtrending Gann angle stopped the market on July 3 at $1625.70. This angle drops down to $1617.70 on July 3. Swing traders may want to use these angles as support and resistance. Momentum traders may want to wait to trade a breakout.

If the U.S. dollar maintains its upward move then the most logical direction for gold will be down, but who says gold traders are logical?