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June 13, 2005

Why resistance at 427?
by Mark Griffith

I'm not saying gold speculators are wrong to be watching the woes of the dollar and the euro closely right now. They're both sick and they both count.

But another currency cross rate might have yielded gold bulls more immediate gains in the last couple of days: the dollar/rupee rate.

That's right, I did say that. The exchange rate between the USA, world's largest economy, and India - well, actually, world's largest country, since it squeezed past China at the end of the 90s. But large or not, even the explosively growing India is surely still a small factor in international financial flows?

In my June 6th online article (http://www.321gold.com/editorials/griffith/griffith060605.html) I drew attention to some technical levels in the precious-metals markets Western traders are not always aware of. Watching round numbers in other currencies and other traditional units of weight can make a lot of sense out of what look like some random retracements on the dollar/ounce chart.

An excerpt: (June 6) When speculators look for trends and levels in charts of gold and silver, it's reasonable we get our prices from the world's most public, most liquid precious-metals markets: New York and London. So it's not surprising those levels are calculated in dollars per ounce.

But every day huge quantities of gold change hands on the street all across Asia. In Arab countries, Pakistan and India, Indochina and the Far East, many small businesses treat gold as the only real thing. It's different there, not like the West where gold bugs are often seen as eccentrics, and Western businesses are happy (to date) to accept payment in wired dollars, pounds, euros. Or in paper promissary notes.

It would make a lot of sense to watch gold trading in Asia more closely, where they laugh at people who don't value gold. So how to better track their daily unofficial ups and downs for the yellow metal, traded off the official radar screen?

Every Western gold trader realises that breaching a level like 400 dollars an ounce is a big moment. There will be resistance from sellers on the underside, and once through and consolidated, 400 dollars an ounce will quickly act like a floor with resistance from buyers.

But how many Western gold speculators watch levels like 7000 rupees a tola? Or 3500 yen per tael?

7000 rupees a tola translates, at the moment, into around 428 dollars an ounce. Heavy trade in India, now the world's largest country, is done in rupees, and in tolas, a trusted unit of weight for gold. Just this level was broken through in late April this year, and then, in early May, gold fell back through 7000 rupees a tola, and drifted down the rest of May.

It didn't drift much lower, bouncing several times off an apparent floor somewhere in the region of 416 dollars an ounce. Which, at current values, is 3500 yen per tael....more

Gold just spent six days trying to go through 427 dollars an ounce, and moved up through it today, June 13th. It spent the first half of May attempting to move up through this region in the late 420s and failing, having bounced along just above 425, 426 in late March. In the third week of February, 427, 428 was a ceiling. Is there anything there we should know about?

At today's dollar/rupee exchange rate, 427 dollars an ounce (+ 40 or 50 cents) is 7000 dollars a tola, a trusted Indian unit of weight used for precious metals. Movements in the rupee this week brought that level down from nearer 429 dollars an ounce.

In recent days, the rupee fell against the greenback by over half a per cent, which is two dollars an ounce at current gold levels. This means that the world gold price, seen through the eyes of India's one billion people, just went up from 6,990 something rupees a tola to over 7000 rupees. In other words, a pretty big buy signal in one of Asia's giant precious-metals markets. Markets where huge aggregate amounts of physical gold are traded, in millions of small deals at retail level - every day. Countries where nobody trusts government paper, and gold never lost central place in anyone's idea of what constitutes real money.

There are other levels like this out East of course -- my June 6th piece had only space to go into one other unit, one that Chinese and Japanese traders think in, the tael.

How can this help us Western traders? Keeping an eye on a few really big levels in Asian-denominated gold-trading is not too hard - it all factors in to an educated speculator's guesswork, just like trailing averages or upward chart channels.

Right now, 7000 rupees a tola (at least as round a number as 400 dollars an ounce) is functioning the way all levels do: a mutually accepted signal watched by a massive bunch of gold speculators most American and European traders are hardly aware of. It might only work in that part of the chart, having no discernible effect outside the 423 to 432 dollar-an-ounce range, but as you get close to a level like that, its gravitational pull is intense. Think back to your instinctive calculations when gold was in the 395 to 405 dollar range, and project that onto 427. And don't forget - unlike 400 dollars an ounce, this one moves on the dollar-ounce chart. Rupee weakness pulled the 7000-a-tola level down a couple of dollars an ounce this week, helping gold move north.

If the rupee strengthens this week, and gold is not clear of 430 by then, you can expect gold to retrace and spend time again beneath 7000-rupees/427-dollars. But if the rupee stays weak and gold continues to firm past 430, then American bulls and Indian cows will be moving the same direction.

This week, gold rising past 430 and the rupee falling through 44 to the dollar would be a strong combined signal to buy gold.

Mark Griffith
email: markgriffith@yahoo.com

Mark Griffith has a BA in Economics and Philosophy from Cambridge University, England; has traded in the open-outcry futures and options pits of LIFFE, London; has been published by Forbes Magazine, Financial Times newsletters, and American Spectator.

He writes about commodity markets and finance, and is researching a book about how firms can profit from virtual currencies. He can be contacted at markgriffith@yahoo.com

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