-- Posted Thursday, 10 January 2008 | Digg This Article
| Source: GoldSeek.com
1-10-2008
The Economy….
I see absolutely nothing good taking place in our economy.
Job growth is slowing. AT&T now says that certain segments of its customers are falling behind on paying their phone bills. Crude Oil is stuck in the mid-90’s. Day after day we hear of more losses in sub-prime markets and now there is anxiety about bond insurers. Merrill Lynch and Citigroup are selling large stakes in their ownership to foreign governments.
There seems no clear leader in the Presidential race in America. It’s a horse race.
Faith in President Bush is lost. He is now turning to infusing the economy with a “tax gift” of some type. Who’s going to pay for that?
There however is a bright spot. The Dollar has had the “kitchen sink” thrown at it in terms of bad news, yet it seems to be holding fairly well against the 76.00 level. Keep in mind that many financial firms are predicting a cut of a full percentage point in the Fed Fund Rate this year.
My Take on Things….
I find it much too hard to forecast too far into the future. Over the years I’ve found that I like to look no longer than say 6 months or so down the road and revise my thoughts as often as necessary along the way.
Here’s what I now see.
The Fed has little choice but to cut interest rates, cuts that will most likely take the Fed Fund Rate down near 3% this year.
The Fed is behind the curve. Their stated policy is one of looking at the data and reacting to it, a philosophy and policy that clearly puts them “behind the curve”. By this I mean that this practice reacts, but doesn’t anticipate market conditions.
The financial markets would get a boost if the Fed simply “bit the bullet” and got things quickly behind us.
Inflation is a major issue, one that whether the Fed likes it or not will NOT be tackled right now. As I see it, the Fed can either deal with employment and credit issues or deal with inflation. Given the state of our economy, I do not believe they can deal with both issues, at the same time and will have little choice but to let inflation rise.
It’s easier to slow an economy down, than to rev it up. Therefore, the Fed is better off pumping money to keep things going.
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.
Markets often pause at “big numbers”. Think about all the fanfare that CNBC made about $100 a barrel Crude Oil. Day after day they had their announcers on the trading floor waiting for the event. It took place, but not when CNBC thought it would nor did they have all their resources on the trading floor when it finally occurred. That is not my point. My point is that “big numbers” have meaning. They act as a floor and often as resistance.
$900 gold is a big number, but $1000 an ounce gold will be the one that gets all the hoopla.
As gold approaches $900, I expect resistance to develop, for no other reason than the psychology of the number. Like we’ve just witnessed in Crude Oil, once a milestone is hit, markets often consolidate. I am not implying that $900 will be a top. I have no way of knowing. Rather what I am saying is that this phase of the bull ride may well need to pause and consolidate now that prices have approached $900 an ounce.
Let’s look a Daily Chart of February Gold. On it I have included in “red”, the 18-Day Moving Average of Closes along with a proprietary study I teach in my Futures Academy Course, which I call “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.
As you’ll see, I have labeled the $900 an ounce area and the last Swingline Break Low of $857.00. This is important as Uptrends are made up of higher highs and higher lows. The current highest low is $857.00, so until that low is taken out, I remain bullish.
Let’s assume prices break down.
If they do, support will most likely be seen at the 18-Day Moving Average of Closes, which at the time of this writing is $838.4. Because this number is derived from a formula using the past 17 closing prices and the most current real time price, this number moves. In addition, because of the upward ascent of prices over the past 2 weeks, this number is averaging a jump of approximately $4 a day. (Those who have access to our OST-IraChart scan easily move their cursors over their chart to see the jump in the Moving Average).
Within 4 days or so, the 18-Day Moving Average of Closes should be near the most recent break low. Should prices fall back to that price range, an interesting buy would be at hand.
Conclusion and Recommendation
As regular readers of this report know, weeks ago I committed my Metal Report Gold Recommendation to the February Gold 830-850 Call Spread, which could have been put on at $6.00. Yesterday, I recommended taking profit in my twice daily written updates at $15.00. The market closed at $16.20, so a profit of at least $900 per spread should have been taken not including commissions. Given that the spread prior to any commissions cost but $600, this was indeed a tidy profit for those who took this recommendation.
Now I look for consolidation. It doesn’t have to occur, but I suspect it will. My intent is to move into the April Contract and again buy Call Spreads.
As I have no current recommendation to put them on, I strongly suggest that you signup for my Twice Daily Market Letter as that is where my recommendation may well first show up.
Silver
For the past month or so I have pointed out that this is “seasonal time” where silver often displays a tendency to be stronger than gold. Spend a moment or two looking at the Silver Seasonal Chart below provided by Moore Research (MRCI). I hope to get an updated one from them very soon. It will reinforce this one as the “seasonals” moved in line with past history.
I look for silver prices to continue up into the February-March time frame. The amount silver can rally can be breathtaking should the economy believe it can get on better footing. Given my stance on inflation and the Fed’s speech today, I am very bullish on silver and look for it too closely follow past history.
Let’s look at a Daily Chart of March Silver.
Silver is zeroing in on resistance of $16.445 made this past November 7th. I think that today’s low of 15.415 is now key support, given the Outside Day Up that occurred today. Should today’s low be violated, a move down to the 18-Day Moving Average of Closes, the “red” line, would be highly probably.
I have not shown how Stochastics look on this chart. I prefer to do so in my nightly videos as they are key to the upside momentum staying in place. Should they turn down, I would abandon any long positions. Until they do so, stay long.
Recommendation
Those who follow my recommendation from well before Christmas as long the March Silver 1525-1600 Call Spread at .15. You should have already taken the long position from .24 off. This spread closed today at .438, nearly tripling what you bought in for. I will update this spread regularly in my Twice Daily Market Updates. In the meantime, hold onto the position.
I realize that many want me issue a new trade recommendation here. I just don’t see a favorable new risk-reward ratio that makes sense at this moment. I do look to add to longs, so stay tuned.
Make yourself a New Year Resolution of viewing the two Mid-Day Video’s I record: One on Gold and Silver and another on Stock Indices. Because I do these at mid-day, they cover many timely events. These videos 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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