-- Posted Thursday, 24 July 2008 | Digg This Article
| Source: GoldSeek.com
7-24-2008
The Big Event
Fannie Mae, Freddie Mac, $3.9 Billion Dollar in rescue packages, a curtailing of Short Selling, talk of the Fed hiking interest rates in October, an investigation into Oil trading, and arrests and charges of market manipulation in energy prices have all taken place this week.
It’s a full time job just keeping up with all this.
Last week I asked “What Should the Markets Expect from Uncle Sam”?
I answered by saying and I quote, “the biggest and most important action the Fed has to now take on is unlimited support for Fannie Mae and Freddie Mac. If these GSE’s were to fail our financial system would collapse. Mr. Paulson got it right when he said he needed a “bazooka”, not a pistol to let the financial markets know that under no circumstances would the USA let these GSE’s go under. The problem with this is that it may take untold amounts of capital to shore things up. If so, the Fed will print money and so goes inflation. The threat that the Fed will add whatever is necessary to support these GSE’s is very important to stem panic thinking”.
So the Fed pushed this through and now things are all hunkey dory. Right? I don’t think so. Yes the Government got the job done of assuring the credit markets that Fannie Mae and Freddie Mac are not going under. Yes the government quickly changed short selling rules which helped shares of these entities rally. However the problems that caused the break in prices in the first place, the business of bad loans, has not gone away. Until it does, even with Government funds, more problems are sure to surface.
Crude Oil, the Dollar and Metal Prices
Last week’s break in energy prices did not have the same impact this week’s price break in energies did. My guess is that the overall $20 break in the price per barrel of crude oil was simply too much an aggregate to be ignored coupled with talk of demand destruction.
I don’t know if lasting demand destruction is taking place or not. Certainly a slowdown in the US economy is at hand and $4 gasoline has shown price does create less demand for gasoline. How long the slowdown and if it becomes worldwide is something I can’t answer.
What I can answer is that gold is at the time of year where prices often setback. You will see this on the chart below. August however often sees prices firm up and September is when the uptrend historically speaking sets in.
Gold’s Seasonal Story
For weeks on end I have been displaying a Seasonal Gold Chart, provided to us by the good folks of Moore Research Center…www.mrci.com
Let’s look at a Seasonal Chart of Gold.
As I wrote about last week, what I look at when viewing historical seasonal charts is market momentum. Without question, the above chart makes an argument upward price momentum into year end. Remember, gold demand picks up now for the Christmas Season.
December Gold
Lets start out by looking at a Daily Chart of December Gold Futures
The Stochastic Study has broken down and is not in oversold. Should prices reach down to the Bollinger Band Bottom, Stochastics will become even more oversold. Unless Stochastics embed, a bounce in prices off the oversold condition is likely.
However, at this point I see no change of trend from the Downtrend now in place nor is there an immediate chart setup that calls for a resumption of the Uptrend. The best that I see is for price to return to the 18-Day Moving Average of Closes, 956.8 at which point some sideways action would be hoped for.
Conclusion and Recommendation
Those that follow my Twice Daily Updates are long the December Bull Call $1000-$1025 Spread at 6.30. I got into it a bit early, as it is at $5.50. However I still like the position.
This spread has until the end of November. If the seasonals in gold and silver take hold and Crude simply holds steady or slowly declines, the gains ahead could be very substantial. If you or I am wrong, your risk is limited to the cost of the spread plus fees. Don’t forget that this strategy is not a do or die situation. You have the flexibility to get out at any time prior to expiration for whatever the spread is worth. Expiration is in late November, so you have a lot of time to see trends develop.
My recommendation at this time is to hold tight.
Silver
Let’s look at the Seasonal Silver Chart to see what it offers.
Silver and Copper have faired actually worse than gold due to the ongoing housing slump and the deflation that has hit the commodity markets.
Deflation is an interesting word. Do you really think $17.50 Silver, $937 Gold or $125 Crude Oil sounds like prices have deflated?
Let’s look at chart of December Silver.
Once the market got under the 18-Day Moving Average of Closes, shown in red as 18.469, the next support, the Bollinger Band Bottom at 17.523 was the objective. That was hit today. Given the oversold condition of the market, a rally is likely.
Do not expect a quick turn around as too much damage has been done to the chart picture. Rather, expect the 18-Day Moving Average of Closes to offer resistance on rallies. As summer ends, I look for the seasonal uptrend influence to take hold.
Right now, the bears are in control of price.
Recommendation
Last week I told customers to put on the 1900-2000 spread at 35-cents. They did so. I wish I had waited for this price break, as the spread could now be put on near 22-cents, which would surely be better than 35-cents. In any case, hold.
The link to my “Mid-Day Videos” videos is below.
http://www.iepstein.com/videos_start.aspx
