-- Posted Wednesday, 23 January 2008 | Digg This Article
| Source: GoldSeek.com
1-23-2008
Rate Cuts and the Economy….
Mr. Bernanke did what he thought best with a preemptive strike, whereby he cut the Fed Fund Rate by 75 basis points, ¾ of a point in plain English. The market place is already looking for another cut at next week’s FOMC Meeting and will be disappointed if it doesn’t get one.
The size of the next rate cut will in my opinion determine if the Fed can get ahead of the curve. Yesterday’s cut did not do so, at least from a psychological point of view. I say this because all of the major Stock Indices closed lower on the day. So far this morning the Nasdaq has made a new low for the move, the S&P has come within 6-handles of yesterday’s low while the Dow Jones has held up the best, getting nowhere near yesterday’s low.
Those of you that follow my nightly videos know that I am now focused on market momentum in the stock indices. The bottom or at least a solid short covering rally will most likely develop when the Stochastic Study turns up. I expect that at any moment now that prices have broken down again this morning. Some might say that today’s break in Stock Indices was a successful test of the low, especially if prices close higher today and the Stochastic Study turns up.
My Take on Things….
You might be wondering why I am focusing on Stock Indices in my Weekly Metals Report. Let me explain why.
There has not been a “mad” rush into gold or silver for financial protection during the past 6 or so days that Stock Indices have been breaking. Breaks in gold and silver have been well contained, which leads me to believe that a rally in stocks should go hand in hand with a rally in both gold and silver. Why?
The answer to “why” is because at some point what the Fed is doing will take hold. When it does, our economy and that of our trade partners will have pressure taken off them. As that pressure comes off, demand for goods will increase. When threatened, corporations, nations and people tend to “hunker down”. Hunkering down is term for taking protection.
Easy money, which ultimately will occur as banks again develop a willingness to lend money, the business they’re in, will also eventually occur. When this occurs, these forces will combine to create inflationary pressures. I have been adamant about this and will continue to be until I see reason to change my take on what these rates cuts produce.
Eventually the Fed will have to deal with inflationary pressures, but now is not that time. Now is the time to save the patient, our economy. Once saved, the “doctor”, Chairman Bernanke, will have to deal with his prescriptions side effects, but first things first. His goal now has to be to get his patient on the road to recovery and his main prescription for that has inflation as its side effect.
Seasonal Chart
Below is a “new” Seasonal Chart of Gold, which covers the last 15 and 34-years respectively. It was just created and provided to us by the Moore Research Center, Inc.
In the above Gold Seasonal Chart, I’ve highlighted the seasonal January action that has taken place over the past 15 and 34 years respectively. The “Blue Line” represents the 34-year line and the “Red Line” represents the most current 15-year line. What is striking is that by month’s end, prices tend to peak out, at least historically speaking and rally back in early February.
I am writing this letter a bit earlier than normal due to a business commitment that takes me out of Chicago tomorrow. Let’s look at a Daily Chart of April Gold. Yes I’m moving my attention to the April Contract as the February comes up for delivery in just a matter of days. Please keep in mind the time of day on the charts in this report, as I am writing this report fairly early on Wednesday morning.
As you can see, Stochastics are no longer overbought. In fact they are trending sideways to lower in the 60’s.
Once Stochastics lost their embedded status prices fell down to the 18-Day Moving Average of Closes, which I’ve labeled as 881.7 support. I now expect to see support develop on pullbacks to the 882 price level. The upside target is the 920 level.
Conclusion and Recommendation
At this moment, those who follow my recommendations have no position in gold. A silver position however is in play. I wish to stay this way until I see stock indices turn up. Once this occurs, if I have a new recommendation I will issue it in my Twice Daily Commentaries.
Silver
Spend a moment or two looking at the updated Silver Seasonal Chart below provided to me by Moore Research (MRCI). Afterwards refer back to the Gold Seasonal Chart above and you will see that this is “seasonal time” of year where silver often displays a tendency to be stronger than gold.
As I said last week, based on seasonal factors alone I look for silver prices to continue up into the February-March time frame.
Let’s spend a moment or two looking at a Daily Chart of March Silver.
Since silver made its high of $16.715 on January 14th, prices have fallen back to a low of 15.255, a price break of nearly $1.50 per ounce. In large part this was due to the break in stock indices. As prices broke, Stochastics turned down and remain in an overbought condition with the K line, the “yellow” line, having a current reading of 71.56. A reading over 70 is overbought.
Last week I said, “Should prices break under 15.77, I would expect a challenge of the 18-Day Moving Average of Closes, currently displayed at 15.504.”. As it turned out, I was right on the money.
Now, should prices break down again, I think the logical support again will be the 18-Day Moving Average of Closes, which is currently at 15.756.
Last week I recommended using the break down in silver prices to establish a position using Long Call Spreads. I still like them.
Recommendation
The current trading range is easy to see. It’s 16.715 down to 15.255.
I believe that when stock indices turn up, silver and gold will follow for the reasons stated at the beginning of this report. I also prefer silver over gold due to the seasonal strength of silver.
What’s important to keep in mind is that without stock indices finding a base, metal markets will not have the support needed to make new highs due to traders selling anything and everything as they take a protective stance. A hunkering down if you will.
This hunkering down can cause a temporary deflationary mentality. However, once stock indices find a bottom and turn up, this deflationary mentality will be replaced with the euphoria of a market bottom and an inflationary event should take place.
At this moment metals are at a very important price area. On their own, they have little upside momentum. They seem to be looking to stock indices for a reason to go up. Without a recovery in stock indices, I see more sideways action. With a recovery in stock indices, I look for new contract highs.
Hold long the March Silver Long Call Spread. I recommended buying the 1625 March Call and selling short the 1675 March Call at a difference of 18. It closed at .173 last night. I still like this spread and recommend putting it on at .173 or lower.
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