-- Posted Thursday, 13 December 2007 | Digg This Article
| Source: GoldSeek.com
12-13-2007
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The Fed Mishandles The Day..…
What a marketing blunder!
The Fed had a wonderful chance to psychologically speaking “get ahead of the curve”, which is but another way of saying getting in front of the credit worry issues. They simply blew it in terms of media relations, which is key to their moves as how they do what they do drives “perception”. Perception is the key.
On Tuesday the Fed cut both the Fed Fund Rate and the Discount Window rates by ¼ point each. The ¼ point Fed Fund Rate cut came in as expected but the ¼ point cut at the Discount Window was disappointing.
On Wednesday the Fed made a surprise announcement that I believe they thought would be applauded and instill market confidence. In the Wednesday announcement the Fed announced they had put together a coalition made up of The Bank of England, The Bank of Canada, The Eurobank and the Swiss National Bank. The coalition would coordinate and attack the liquidity crisis by throwing lots of cash at the liquidity issue with the end result being a lowering of the Libor Rate, the rate at which banks loan funds amongst themselves. What they did is a good thing. The timing and manner of the announcement was so poorly chosen, its impact was totally lost.
This collation has been put together to initially purchase 64 Billion Dollars of credit that is now clogging the credit system. Don’t be fooled as I would bet that this is but an initial amount that will most likely grow much larger until they solve the credit issue.
Why the Fed did not make this announcement at the same time they announced the rate cuts on Tuesday is beyond me. That is where it should have been done. Without doubt, the coordination process had already been completed amongst the Central Banks due to the complexity of getting this many Central Banks to agree to this. Had the announcement been handled better it most likely would have been taken as a positive move and probably would have dampened the disappointment the market felt due to the Fed not getting more aggressive at the Discount Window.
That aside, any concerted move by central banks to add liquidity to the banking system to lower Libor Rates is welcome. Banks have to get comfortable enough to make markets for borrowers to get loans. It’s that simple.
Inflation
I’m experienced enough, having traded nearly 40-years, to know that sooner rather than later we’ll begin to hear that MI and M3 numbers of money supply are growing, growing fast. It’s just a matter of time before the large amounts of money these Central Banks through at their economies begin to move through the system.
In order for Central Banks to make more money available, they have to swell their respective currencies money supply. Once that supply begins to move through the system, it throws off the economic balance, which often leads to inflation. The trick is in keeping the balance, which deals with the velocity this cash moves through the system. Given the credit crunch, I think it safe to say that the Central Banks have elected to add enough liquidity to get the job done and worry about inflation later.
I believe this reason enough for longer term traders to begin buying gold and silver now. The seed for higher prices has been cast.
The US Dollar
I do not see the Dollar breaking down anytime soon. In fact, I see the Dollar getting stronger against its’ European counterparts because it’s only a matter of time before European Central Banks begin a series of “regular Fed Fund Rate cuts”. Once this begins, they will move in lock step with our Fed. In fact they may move quicker to lower their rates than our Fed has. Therefore my thought is that they will now match us cut for cut going forward, removing their opportunity to maintain effectively higher rates over the US.
What this means is that the US Dollar may have bottomed out. If so, the first main hurdle for gold is to recognize what is occurring and for investors to move their focus to inflation, not the value of the Dollar.
Employment is staying strong in the US. Retail Sales look pretty good and the PPI is simply red hot. The “hope” for deeper rate cuts, while still in play due to the credit issue is becoming muted out which adds credence to the Fed’s slow pace of lowering the interest rates that the Fed is directly in control of.
Seasonal Chart
Look at the Seasonal Chart of Gold, which covers the last 15 and 33-years respectively. It was provided to us by the Moore Research Center, Inc.
As you can see, from a historical perspective we are at the point in time where this chart historically turns breaks and ultimately turns up.
Now let’s look at a Daily Chart of February Gold. In this week’s chart I am including in “red” the 18-Day Moving Average of Closes along with a proprietary study I teach in my Futures Academy Course called Swinglines. Access to the Swingline Study is available in our Futures Academy Course which you can read more about by going to http://www.iepstein.com/MainAcademy.aspx.
The “Yellow Lines” displayed on the above chart show the proprietary “Swingline Study” that I use when teaching trends in my school, The Futures Academy (www.iepstein.com/MainAcademy.aspx). Swinglines define Trend and the Dollar Risk associated in being with the trend.
As you can see on the above chart, each of the most recent lows are higher than previous the low and each most recent highs are higher than each previous high. This pattern is defined as an Uptrend. You see this by looking at where the Yellow Line turns up and down. Higher Highs and Higher Lows are a key element of an Uptrend definition.
Support on this chart is shown as the 18-Day Moving Average of Closes, displayed as a “red line” which as of this writing is near 808.2. Unless prices get under the most recent low of 790.9, the current short-term trend in this market is up.
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Conclusion and Recommendation
Last week I recommended that you sit and wait for the FOMC Meeting to come and go. As the same time I recommended holding onto the February Gold 830-850 Call Spread, which should have been put on a couple of weeks ago at 6.00.
I now recommend using the current price break in February gold to once again buy gold. Assuming you are using Options on Futures, my recommendation is to buy the February 830 Gold Call at 15.00 or lower. I will update my thoughts in my Twice Daily Report which are available through the advertisement in this letter.
If you buy multiple contracts, I recommend taking partial profit at 28.00.
Using futures right now is a bit problematic. The problem is that you are not wrong under the current chart setup unless prices get under 790.9, the most recent “Swingline Low’. This represents too much Dollar risk. Therefore I recommend waiting for a better entry point if your trading style is one that only uses futures contracts.
Silver
At this time of year, silver often begins to display a tendency to be stronger than gold, historically speaking. Let’s spend a moment or two looking at the Silver Seasonal Chart provided by Moore Research (MRCI).
As you can see on the above chart, silver often breaks into mid-December and than moves higher into late December. In fact, there is a strong tendency for prices to historically continue to move higher from now into February. That doesn’t mean there won’t be price breaks along the way. There will be. However in using historical charts the bigger picture requires that we look for an uptrend in prices through the end of February.
Let’s look at a Daily Chart of March Silver.
As you can see, prices today broke sharply, so much so that the short-term trend has turned down. The good news is that this break is very much in line with the Seasonal Chart above.
I’ve included on this chart the Bollinger Bands. Bollinger Bands are an algorithm that is meant to keep the market with the “white bands”, 95% of the time. As you can see, silver got with 2-cents of the lower band, 14.088.
This is where I think you begin playing long Silver Call Spreads, looking for a move back up to at least the 18-Day Moving Average of Price. My expectation is for a move well beyond this.
Yes, this will be bucking the short-term trend which is down. However the seasonal trend is due to start up after this washout takes place. Therefore let’s use today’s washout to get long.
Recommendation
Add on to the March Silver 1525-1600 Call Spread at 15 or less. I will update this regularly in my Twice Daily Market Updates.
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