-- Posted Friday, 13 July 2007 | Digg This Article
7-12-2007
In last week’s commentary section I made a point of stating that there was no story, including the foiled terrorist plot in England that was at that time supporting gold or silver prices. Crude Oil at that time was near $72 a barrel and the US Dollar was near the bottom of its trading range, the 81.20 level.
In the past week there has been a shift. The gold story starts and centers on the US Dollar. Simply put, it appears that the Dollar is being allowed to drop in a controlled manner. Numerous foreign central banks are once again raising their interest rates, while our central bank stands pat. The effect of this combined with slow but stable US growth in terms of GDP, is a falling Dollar. Today’s break in the Dollar matches the low made in December 2004. The next downside target, the all important low of 78.43 was made in September 1992. That is where I believe the Dollar is headed.
While the Dollar is falling, a number of commodity markets are on the rise. Crude Oil today got over $73.50, Soybean and Wheat prices are soaring. At the same time the US Stock Markets are either making new historic highs or depending on the index, approaching such. At the same time the US Trade Deficit is narrowing.
The falling value of the US Dollar is bailing out the US economy. It in large part is the reason US businesses are now worldwide competitive and the reason many corporations are profitable. Given the immediate benefit of a falling Dollar, I don’t think you should look for anything to be done by our government to change their policy regarding the Dollar’s value.
The difference this week over last week is that the market place now recognizes this. “Smart Money” traders are pushing the Dollar down, while at the same time bidding gold prices up. So far this seems to be well enough controlled as to not make headline news. However, it is occurring and represents a serious change of events while providing gold with a “story” that it is responding to.
Silver is taking its queue from gold. It is not the leader. Copper’s overall price advance, combined with the rally in the CRB Index is finally being noticed and is what silver prices need to hold and/or advance.
If the Dollar breaks through 80.00, expect another wave of buying to come into gold. Ultimately I think the break in the Dollar will go to and below the 1992 lows of 78.43, which should put gold well over $700. In fact, just the Dollar getting under 80.00 might be enough of a catalyst for an immediate move in gold to $700.
As I see it the key to gold is what the Dollar does the rest of this year. Not terrorism or inflation. Rather, the value of a Dollar.
In last week’s Metal Report I stated that August Gold was caught in a $20 trading range. The top of the range was at that time 661.3 while the bottom of the trading range came in at 641.1. I went on to state that “no matter which way prices break out, the initial dollar risk in following the trend will carry initially too much risk for me to recommend my customers take on.”
August Gold has now broken out of its trading range to the upside. In fact the Swingline Study, which is the yellow line on the chart below, shows the market making “Higher Highs and Higher Lows”, confirmation that the market now is in an Uptrend. The Swingline Study has turned up on both the Daily and Weekly Charts, which is a new bullish development.
On the August Gold Daily Chart shown below, I have 4 studies:
- Swinglines…a proprietary tool I use to determine Trend and Dollar Risk associated with being in the trend...this is shown in Yellow
- The 18-Day Moving Average of Closes…shown in Red
- The 100-Day Moving Average of Closes…Show in Green
- Slow Stochastics…the graph at the bottom of the chart below
In last week’s report I stated that if gold broke out its trading range, the initial risk in getting involved was going to be too much to large to take on. It didn’t matter which direction the market broke out to me, the risk in playing was going to be too large.
As it turned out, the market broke out to the upside and the current risk is but one-tick under the most recent low of 646.7. That is nearly $23 away from where the market is currently trading. Couple this risk with a Stochastic Study reading that has an overbought reading, along with resistance at 673.2, which comes from where the 100-Day Moving Average of Closes currently is and I come to the conclusion that the dollar risk in getting long at the current price level is simply too large to take on.
Given the overbought condition of the market and near term resistance of 673, I think you are best off waiting for a pullback or consolidation to occur.
Gold is now in a Bull Market Phase. Due to where the most recent market low is, 646.7, there is simply too much risk in getting long right here. What I expect to occur is a pullback back to the $660 level or the down to wherever the 18-Day Moving Average of Closes ends up being, on a pullback. From that point expect some consolidation and a buy signal. Look at the Weekly Gold Chart Below. It too has entered a Bull Phase with prices making higher highs than previous highs.
Let’s assume I am wrong about the pullback. If so, Stochastics should embed. Embedding means that both K and D lines, the “yellow and red lines” will go and stay over an 80 reading for 3 consecutive days. If that occurs, I will look fro a chart pattern to get long from at these higher levels.
In both of the above situations, I am looking for a way to get long.
As long as the US Dollar continues its path down, I believe you need to be bullish and begin now, to look at ways to use gold as a long position.
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Like gold, silver has finally come to life. Like gold, silver is also overbought and has much too much risk given the current chart pattern to become involved with just now.
Unlike gold, silver is an industrial metal. Like gold, a falling Dollar benefits prices.
Outside commodity market influences have surfaced in silver. The CRB Index is at new highs. Stock market indices are at new highs. Energy prices are strong and copper and gold prices are acting bullish.
The most recent low in September Silver is 12.42. Given that the current price is at 13.16, this means that if you get long here and risk back to one tick under the most recent low, the risk equates to near 74 cents. That is way too much risk for me to make a recommendation for you to go long at this time.
Let’s look at the September Silver Daily Chart below:
This market is overbought as show by a 71.11 Stochastic reading.
Support is back near 12.89, the 18-Day Moving Average of Closes.
Prices have not had a chance to consolidate and build a base from which to move higher. Rather, prices have simply spiked up nearly $1 since the low made on June 27th and more importantly, prices only broke back to 12.42 before rallying to today’s high of 13.18. A base has not been built. Rather, prices are rallying off of short covering and moderate new buying.
Unlike gold, the weekly chart action has not turned up. It will take a move over 13.415 to accomplish that. Resistance on the weekly charts is against the 18-Day Moving Average of Closes, at 13.25.
The good news is that momentum on the Weekly Charts, as displayed by Stochastics has turned up.
Last week I did not think the odds very good for a rally of this size. However, I did say that “A Close over the 18-Day Moving Average of Closes, currently at 12.898 would be bullish.” That has come to pass, but prices have rallied so sharply that a trade that would get you long makes no sense right now.
What is important is that we must look to get long, especially if the Weekly Chart action turns up. That does not mean jump in right now. It simply means we wait and see, looking for an opportunity to get long.
I will keep you informed as to what to do via my Twice Daily Recommendations along with my Nightly Audio/Video Recordings.
Right now I am making no recommendation.
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