-- Posted Thursday, 26 June 2008 | Digg This Article
| Source: GoldSeek.com
6-26-2008
Due to my time constraints, I will not be able to write on Silver today. Rather, I will focus on Gold.
The Seasonal Low in Gold now looks to be in place…
Last week I headlined this Weekly Metal Report with this headline; “The Rally This Week Is Important to the Longer Term Picture”. As it turned out, last week did in fact set the stage for what I term near term low confirmations in both gold and silver.
The Fed misses an opportunity
I have been using the term “Stagflation” often lately since I see the US economy as being in a slow downward spiral while inflation in food and energy is dramatically moving higher. CPI as used my most US economists typically discards food and energy, something that most of us that eat, heat our homes and drive cars know needs to be addressed.
Wages have not yet moved up to keep up with the energy and food cost spiral. This has provided the Fed with the freedom to say that labor costs, a key element of inflation are not in an inflation environment. They’re right since job loss continues. Keeping one’s job right now seems more important to many than making more money.
The Fed announcement also implied that the economy had avoided a recession. I don’t think so but frankly, terms don’t matter. What matters is that the Dow Jones Industrials are down to 2006 levels. General Motors is at a 53 year low. Energy prices are back up to all time highs and grain and metal prices are soaring. Even the lowly Japanese Yen made dramatic gains against the Dollar today.
I often make mention of the “Yin-Yang effect, when major market reports come out. This is because the initial reaction in the USA is often not the true reaction to a major Economic Report. This is due to the impact of the report having little chance to be fully taken into account in Asia or Europe until their next respective trading days. This is because contra to what many think, traders do sleep. When those traders are not in their offices, the impact of reports here often takes a while to take hold there.
The Fed did what the markets thought the Fed would do by standing pat. However, the Fed had a chance to use verbiage to put the market on notice in a much stronger way than they did about stating the Fed’s concern on the value of the Dollar and the need to soon raise interest rates. Stronger verbiage is what was needed. The end result of not doing so was the decline in the Dollar and the impact the falling Dollar had on commodities today.
The simple fact is that many of us believe that the Fed is not in position to raise interest rates just yet. What the Fed did, probably knowingly, was take on the role of a trader as their announcement predicted that inflationary pressures would soon begin to abate, which implied to many that interest rate hikes in the near term need not or were not going to occur.
The result of their announcement is what took place today.
The Gold Seasonal Story
For weeks on end I have been displaying a Seasonal Gold, provided to us by the good folks of Moore Research Center…www.mrci.com
As readers of this report know I have been predicting for a long time that gold would bottom out in early July and move higher into year end, with the “Fall Months” being the most likely time where prices acceleration would take place It appears to me that the bottom has been skewed forward by just a bit with today’s rally. Not much of a skew, but just a bit as I now believe that the most recent low(s) are now major correction bottom lows that need not be soon seen again for a long time.
Let’s look at a Seasonal Chart of Gold.
Last week I said that “the ensuing break into the end of June, should it develop, is where I wish to establish a long term position. If my analysis proves correct, I think new all time highs in gold will be hit before year end.” OK…I was off by 2-weeks in terms of long term market timing as I now have reason to believe that the early July low, occurred this week. Remember the above chart is a compilation of both a 34 and 14-year study. Skewing forward a bit is no big issue. Therefore, until we have reason to believe otherwise, I would treat the most recent break low as the end of the downside correction. As such, I look for new all time highs to come into play.
Weekly Gold Chart
Let’s depart a bit from what I normally do in this report and let’s look at a Weekly Gold Chart.
As you can see, on the Weekly Chart Gold is about to hit the 18-Week Moving Average of Closes, the “red-line”, which is the first important resistance point.
The “trade pattern” is now one of higher highs. This currently will remain in place until prices get back under $871.3 on the Weekly Chart. Therefore the trend is up and the next immediate upside objective is the white Bollinger Band, displayed on the chart as $985.3.
December Gold
The problem in getting long after a rally like today is one of Dollar risk. Should my analysis prove wrong, how much you have at risk is very important. The second issue is one of “risk-reward”. What reward do you get for risking a certain amount of funds? The last issue is one of cost. At what cost can you get involved for trying to catch a longer-term trade in Gold?
Lets start out by looking at a Daily Chart of December Gold Futures
The pattern is one of the chart making “higher-highs”, prices being over the 18-Day Moving Average of Closes (the “red-line”) and now having an overbought condition on the SSTO (Stochastic Study) with a reading of 76.11. Anything over 70 in Stochastics is considered overbought unless Stochastics embed, which they haven’t begun to do. More on that next week.
Is the market a bit ahead of itself? Probably. The math that Bollinger Bands use is based on an algorithm that uses 2-standard deviations from a mean, which in plain English translates to this. Mathematically speaking, prices should only 5% of the time trade above the Bollinger Band. In addition, when you see Stochastics overbought at the same time that prices are over the Bollinger Band Top Band, prices often stall out or correct a bit.
The most recent high on this chart is $948.3. If that high is taken out I would expect prices to surge to at least $1027. I derive this objective by taking the current trading range, which I label as having a trading top of $948 and a trading bottom of 869. That gives us a 79 Dollar trading range. If I add $79 to the top of the trading range, my objective is $1027.
In the longer-term, if Crude Oil moves toward $175 as I believe it will, Gold at $1027 will simply look cheap. At some point Crude Oil pricing will begin to influence Gold. As long as the Dollar stays range-bound, that time is sooner rather than later.
Conclusion and Recommendation
Last week I said to get ready to put on Gold Call Spreads. At that time I thought you would have until early July. That no longer looks to be the case.
The spreads I am recommending below will require patience to hold onto. Those buying these should not be concerned about the daily grind of up and down prices, at least early on. Later we must as the premium you pay will eventually decay if an upward movement in prices does not take place as I think it will. These spreads are meant to be held onto for a while. If my analysis is wrong, you may lose most of the premium you pay to own them. However, your risk is limited to what you pay and no more.
On the other hand……. if I am right, the reward could be very substantial.
Here is a matrix of Gold Spread make up by one of my company’s broker’s, Mark Pasek, who can be reached at 1-800-284-1065
I like the 1000/1025 Call Spread for a cost of $550. If you use a Broker at IECo your “All in Cost” which means commissions, exchange, NFA and other fees is $660. If you make your own decision and don’t use a broker, you costs will be lower.
In addition I like the 950/1000 Call Spread for a cost $1500 and an all in cost of $1610.
Both of these strategies require Gold to be higher in late November, as December Gold Options expire on November 20, 2008. There are 147 days left until expiration.
The link to my “Mid-Day Videos” videos is below.
http://www.iepstein.com/videos_start.aspx
Starting this week, I will begin recording interviews with many of the best know market technicians in the Futures Markets. Free trial subscriptions to their newsletters will be included.
Jake Bernstein of MBH will be my guest tomorrow.
