Since I wrote my last gold report on May 6^th, a lot has taken place.

Last Thursday the financial markets witnessed what is now being termed a “Flash Crash” defined as the swift meltdown in prices of stock, ETFs and stock indices that took place last Thursday. New regulations are being drafted by US market regulators in an attempt to prevent this from again and are expected to be announced as early as tomorrow.

This past Sunday saw the world presented with what some have termed a “shock and awe” financial rescue package in Europe. This is the rescue plan that the European Union (EU), the, International Monetary Fund and the US Federal Reserve Bank put together to deal with the lack of confidence seen in EU financial markets. Even the European Central Bank joined the plan by reversing itself and announcing that it was going to buy bonds in the secondary market to ensure market stability. The package put forth approaches one trillion dollars in size. The goal of this plan as I understand it is to dissuade those attacking the Eurocurrency’s value and the worthiness of certain EU member’s sovereign debt.  

Investors appear to be concerned about the plan’s cost. Extra Euro-Zone spending and the breach of independence displayed when the European Central Bank reversed its stand on buying debt could end up being inflationary.

At this same time this was going on Britain held an election and has now seen a change of government. Gordon Brown and his Labour Party lost the election and for the first time in two decades Britain has a coalition government. How that plays out remains to be seen.

The election in Northern Germany presents new questions to the current German government about their future electability. The EU bailout seems unpopular among the German people.

The impact of all this has reinforced gold’s role as a safe haven investment. You need not agree with this, but as I see it the proof lies in gold’s pricing, which today hit all time highs.

Below is a Daily Chart of June Gold. Each individual bar on the chart represents one day of trading. In “red” I have plotted the 18-Day Moving Average of Closing Prices, in “dark blue” the Swingline Study and the “black dashed line” is the Bollinger Band Study.

The Swingline Study is displaying a chart pattern of lower lows and higher highs, which is not an “ideal” bullish chart pattern. The fact that the market made a “higher high” as its last move means the momentum, aka the trend, is up.

The Swingline Study is displaying a “stepping ladder” pattern. Highs are higher than previous highs and lows are higher than previous lows. This is taking place as prices are over the 18-Day Moving Average of Closing Prices, last displayed as 1175.0 on this chart. This is a bullish pattern.

The Slow Stochastic Study (SSTO) displayed on the bottom graph of the chart is displaying an Embedded Stochastic Reading, which in my opinion means that the internal pricing momentum is very bullish.

It’s my opinion that prices have gotten a bit ahead of themselves in terms of Bollinger Band theory since the market is trading over the Bollinger Band Top at the time of this writing. Bollinger Bands are an algorithm designed to have prices trade within the upper and lower bands 95% of the time. Quantitatively speaking, this study is designed to allow market prices to trade or close over the upper band 2.5% of the time and under the bottom band 2.5% of the time. It is not uncommon to see prices in a bull market continue to attack the upper band, as is now taking place.

The trend on the above chart is up but prices are over the Bollinger Band Top which I interpret to be a warning signal that prices at any time can either pull back or go sideways in order to get themselves back within the bands. A third possibility is for prices to advance and just not do so, but that means prices may not get back to trading within the band, which is not what I expect.

I think prices in gold will continue to have the ability to move higher as long as:

·         Uncertainty remains in European Debt Markets

·         The Eurocurrency remains under attack

·         Inflation worries persist

·         As long as gold remains the “darling” of those who don’t what’s going on in currency markets

Obviously there exists both a short and long term point of view as some may believe that none of the above will quickly go away while others may believe that in the short term, price has or will soon have discounted some of the above events.

Another observance of mine is that “gold” thrives when financial market events go bad. It likes to be in the news. When it’s in the news it takes on another character, it “comes alive”. By this I mean investors and traders flock to it. The “herd mentality” takes over. By way of example, I was listening today to CNBC and heard some of their regular market analysts say that hedge funds were dropping energy holdings and moving into gold and probably silver. Price action seems to confirm that.

So what’s the upside?

As regular readers of my report know, I believe gold moves in increments of $25, sometimes multiple $25 increments. Therefore, the $1250 level, where gold traded today was one of my first new upside targets. If prices don’t stall here, the next targets are $1275 and $1300 an ounce.

Even numbers like $1300 can produce stall points. Think back to the last rally high in gold of $1226.4 in June Gold, made the week of December 4, 2009. Prices stalled there and fell as low as $1045 which occurred the first week of February, 2010. Now the market is up to new high.

Do not get carried away. Remember that markets that rally as sharp as gold has, tend to also have when corrections come, swift price breaks. Breaks that often are quicker than rallies as too many try to move through a narrow doorway at the same time.

I don’t see gold falling out of favor for a very long time. In my opinion gold has taken on a “reserve currency” status in the minds of those who have become disenchanted with the ability of governments to control spending. The days of the Eurocurrency to survive as a quasi reserve currency are in my opinion over at this point in time. In fact the very future of the Euro currency seems to be in question. Add to this the amount of debt that governments through their central banks are issuing in credit and the ratio of GDP to debt in a number of major economies becomes uncomfortably high, which supports gold.

On the other side of the coin, it’s important to be on the lookout for potential sales of gold reserves by the IMF or other entities that are to provide financial support for the EU-IMF rescue package.  My guess is that in this environment gold players like India or China are candidates to buy a large amount of gold, should it be made available.

But the impact of an announced sale could provide a reason for a price setback.

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Disclaimer: This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is taken from sources believed to be reliable, but is in no way guaranteed. Chart data is courtesy of LGP-IraCharts. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures and Options on Futures trading involve risk. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from The Ira Epstein Division of The Linn Group, Inc or The Linn Group, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are not indicative of future performance.

-- Posted Thursday, 13 May 2010 | Digg This Article