12-5-2007

I record and publish two Mid-Day Video’s: One on Gold and Silver along with one on Stock Indices. These are in addition to the in-depth nightly video I record that specifically covers charts and my market opinions on all the major futures markets.

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The impact of a somewhat stable Dollar, more bad Subprime woes and falling Crude Oil prices weighed on Metal Prices this past week……

The Dollar has found support. No, the trend has not turned up in the Dollar. Rather the cash market has found support near 74.74 as can be seen in the Cash Dollar Index Chart below. Dollar support took away one of the props in silver and gold.

Since November 21^st, Crude Oil prices have fallen nearly $10. That’s right, nearly a 10% correction in but 8 calendar days.

Last, the Fed seems to be putting out feelers concerning another Fed Fund Rate Cut. This spurred in large part the recovery witnessed yesterday in stock indices.

The problem…..

The problem as I see it is this. The Subprime issues are not going away. In fact, more issues are in front of us due to the very large number of mortgages that are set to “reset” to higher interest rates starting in the first quarter of 2008. As they do so, more foreclosures are likely.

This has not been lost on the Fed. In fact, another Fed Fund Rate Cut is now in play. It’s obviously too soon to know what the Fed will do, but not too soon for some markets to price a cut in. Just look at Bond or T-Notes. They are doing so. So that leaves the question about the Dollar’s performance.

The US Dollar…..

You would think that the Dollar would be tumbling with talk about another rate cut. Instead it has stabilized. In fact, against the Euro and Pound it has begun to rally. The question is “Why”?

My guess is that the markets had already discounted a lot of the issues into a 75 cent Dollar Index price. Now the financial markets have to deal with something new. Dollar stability, which is the Fed’s goal and a goal they are likely to obtain.

People forget that the US Economy is the world’s largest. As such a falling Dollar has improved GDP via exports of our goods. This has helped the economy to offset to a degree what is going on in housing. The housing issue, while dire, has probably seen the worst. I am not saying that home values are going up. I am saying that the rate of decline in home values is going to slow.

Eventually lenders will begin lending again. New homes that were under construction are being completed, but new homes without buyers in hand that haven’t begun construction won’t be getting built soon. The vacant condominiums in Florida, Las Vegas and California that are coming on the market will do so, but the markets have to some degree already priced that impact into exiting condominium prices. Rents will soon be impacted as more units in these areas become available. Again, I believe that marketplace is factoring all this in.

The Fed…..

Now the question is “what does the Fed do?” The Fed’s weapon to invigorate and stabilize our economy is left to one of two choices, both using the same tool. To rate cut or not to rate cut. If the economy continues to weaken, I see the Fed with little choice but to cut. It is still too soon to predict how Holiday Retail Sales will end up, but on the positive side of things they don’t look like their going to be severely impacted.

That is a reason not to cut.

Yesterday Fed Vice Chairman Cohen let the “cat out of the bag”. He implied the Fed would be easing. Tonight Chairman Bernanke speaks and will have the opportunity to either affirm this or take a step back. My guess is he will take a step back. This doesn’t mean there won’t be a rate cut. It just keeps us guessing.

Fed Fund Futures now are predicting a 100% probability of a ¼ point December Rate Cut at the next December FOMC Meeting. As of this writing the futures are predicting a 40% chance of a rate cut.

My personal opinion is that there will be another cut. After this cut, the Fed might slow down.

Seasonal Chart

When I re-read my Metal Report each week, I sound like a broken record when it comes to my mentioning how important it is to study the Seasonal Chart below as provided by the Moore Research Center, Inc.

As a map of market strength and weakness, it has done a really good job. Good enough that you should pay attention to it.

We are now at the end of November. As we enter December gold historically has turned its momentum to the upside. My guess is that if the Fed does another rate cut at their next FOMC Meeting, that move will be the catalyst to move gold higher into the end of December.

Look at the Daily Chart of February Gold below.

My expectation is for a “bob and weave” chart formation over the next few days. (I couldn’t resist putting some sporting terms into this week’s report.) By this I mean that gold will probably get under Tuesday’s low of 798.1. Once it does so, a move back up to 815.0 will trigger a “Buy Signal”, using whatever low is made once 798.1 is taken out. Upside target will initially be the Stochastic Band labeled in white on the above chart.

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Conclusion and Recommendation

Those who follow this report already have their core position on in the $830-$850 February Gold Call Spread. This spread was recommended a couple of weeks ago at $600, not including commissions or other fees.” This spread is now trading right near this price.

If you prefer using futures, than I think the “bob and weave” tactic laid out above makes sense. I will update my thinking regularly in my Twice Daily Update, which I e-mail out to those who have subscribed to them.

Silver

Next, let’s spend a moment or two looking at the Silver Seasonal Chart provided by Moore Research (MRCI).

Regular readers of this report know that I have been waiting for the end of November, since that is when silver historically speaking tends to come alive.    

Let’s look at a chart of March Silver.  

The current breakdown in prices is completely in line with what silver has done over the past 40-years according to the Seasonal Chart shown above.

March Silver is oversold. The Stochastic Reading, a reading that measure both market momentum and whether or not a market is getting internally stronger or weaker is just plain….oversold. Oversold conditions often lead to moves to the upside to at a minimum correct the oversold condition.

If March Silver takes out today’s lows of 14.35 tomorrow and than gets back up and over 14.705, a signal that the end of silver’s current decline will be at hand.

It is near impossible to offer accurate market timing in a Weekly Metal Report. I am not trying to. Rather, I am pointing out that silver has a strong tendency to rally starting in early December. The trick is trying to figure out when the rally begins and how to get involved.

Recommendation

Traders who follow this report already have on a core position in the March Silver 15.25-16.00 Call Spread at 24.00. I look to add to this once I see an end to the current decline in prices.

Given the amount of time premium in this spread, unless something dramatic occurs to negatively affect silver, I think you have plenty of “wiggle” room to play with. In any case, should silver fall dramatically in price, your total risk is limited to the price you pay for the spread plus commission and other fees.

To discuss these Gold Call Strategies in more detail, either call your IECo Representative or Mark Pesek.

Mark can be reached at:

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