2-05-2009
Stimulus Plan
The battle continues within the US Government to gather the funds to spend our way out of problems. From what I’ve read, there seems to be a lot of “pork” in the bill, but I believe that very shortly, possibly with a modification or two the plan will pass.
President Obama has a blank check and pen. The American People want help and the President is expected to offer it. Even if the Stimulus Plan proves wrong, it was one of the reasons he was elected and a promise he made to the American People. It will be kept.
Therefore, a tsunami of money is about to hit the market place. Trying to be short stock indices in front of this seems dangerous. No, I am not yet bullish but I do know when it’s time to get out of harms way.
Inflation
Will the Stimulus Plan cause inflation? I think so. The United States is not the only country initiating a Stimulus Plan. We don’t live in vacuum. China, England and even Russia are either doing or discussing them. England is even discussing setting up a “bad bank”, as the US is proposing.
While many say that this stimulus won’t be inflationary, I don’t believe them. Factories around the world have laid off or are laying off workers. In the end this means less product is being produced. Once the Stimulus Plans take hold, not only will people be put to work on infrastructure projects, but demand for raw materials for those projects that needs to be processed will take place. Most factories today are using their stockpiles to service demand. We wake up practically every day to news of new job cuts in all industries. Mines, refining plants, steel manufacture and the like have cut back. A Stimulus Plan will change this and with that, as people are put back to work, inflation in my opinion, will gather steam. Once people get jobs and feel better about prospects going forward, they will open their wallets.
Daily Chart
The Daily April Gold Chart is in a clear cut uptrend, but is in an overbought status.
Prices continue to make higher lows and higher highs. I have marked off the lows as “aqua” circles on the above chart. My point here is that the market is in an uptrend but the risk in getting long has been too large the way I teach trading.
Additionally, the Slow Stochastic Study has been bothersome it has remained overbought and refuses to embed, leaving the overbought status behind it. Embedding occurs when the K and D lines in Stochastics maintain themselves over 80 our under 20 for 3 consecutive days. Today is but day one. To further complicate things, the move up fits in perfectly with the seasonal study below which often results in a mid month break in momentum and price. Given this is but February 5th, caution must be exerted.
Gold’s Seasonal Story
To get an idea of the longer term picture, look at the Seasonal Chart below, as provided to us by The Moore Research Center...www.mrci.com. This is the newest Seasonal Chart which includes 2008 pricing.
An early February peak in prices often occurs. The run-up in prices from late January through today cannot be denied. It worked as it has over the past 34-years. While the past is just a tool in trying to predict the future, it bears watching now since the seasonals seem to be working fairly well. Again, keep in mind this is just another trade tool.
Conclusion and Recommendation
I have not made any new trade recommendations in weeks in gold. Yes the trend is up but the Dollar risk in trying to catch the trend has been too large.
The breakout occurred when prices crossed over 868.3 on January 20th. Up until that point I had been bearish, but did not get you short. Now I am bullish and have the same concerns as the market is overbought.
I have issued a buy signal in Silver using a 12.75-13.00 Call Spread, which I am covering in my twice daily updates.
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