The majority of Fed members continue to tell us that inflation is not a concern. Let’s see why.

When looking at the Monthly Chart of the CRB Index I’ve inserted above, you can see that prices have a way to go to reach the 2008 high. Maybe that why the Fed says they’re not overly concerned at this time with inflationary pressure. However, it’s hard to deny that prices have and are continuing to climb rather sharply, which is something that markets like gold pay attention to. If there’s a further spike in the CRB, it will probably catch the attention of the Fed, but given the precarious position of our economy, I am not sure that the Fed will do much of anything. In fact, I believe the Fed would rather fight inflation than deflation, if inflation created jobs. Unfortunately, that’s been the “rub”. Jobs are eluding this raw commodity run in prices.

My expectation is that that Fed will use that argument that inflation is not just made up from raw commodity prices. Labor plays a major part. Labor costs have not yet moving up due to increased productivity and employer’s fears. Employer’s fears of where the economy is headed have kept labor costs under control. Employees are worried about job security. As a group, they are not pressuring employers for more pay or benefits. Need proof, look at yesterday’s Harley Davidson settlement between employees and management. The employees were happy to just keep the Harley plant open, without any guarantee Harley will do so.

Gold, silver, platinum, palladium and copper prices ramping up in price. Could it be that these markets see something other than currency moves as to why they’re rallying? It’s likely.

Below is a Seasonal Chart of Gold prices produced and provided to me by Moore Research Center, Inc, (www.mrci.com) . In my last report I wrote about gold’s tendency to see prices turn up in mid to late August and run up in the fall. September 10^th begins another seasonal time frame.

Gold seems to be following its historical pattern which leads me to believe that more upside momentum lies ahead. Possibly a lot more.

Gold made a new all time high in price. It is following at this point in time the 12 Year Pattern of past bull markets, as shown on the above chart.

For those of you that wish to learn more about seasonal historical studies than those displayed here, visit the Moore Research Center and sign up for their 14-day free trial.

What’s interesting is that this move is taking place without news headlines of inflation, no foreign threat to oil supplies, no new war threats or any new, gold moving news headline hitting the newswires. Rather the moving force today if you could call it that was a negative ZEW Survey out of Germany, which showed the German economy slowing down. On that news the Eurocurrency soared. Make sense to you? It shouldn’t but sense isn’t what this is about. In my opinion, this is no longer about summer trends but more serious fall season trends and trading mentality taking hold.

What’s driving gold is “herd mentality”, which I define as the comfort one gets when they consistently hear others talk about higher gold prices on the horizon. Couple the news media’s new found love for gold with the seasonal study, uncertainty over world economies and you have the recipe for higher gold prices.

Most important is that no short position in gold had a profit when prices hit an all time high today.

Below is a Daily Chart of December 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 dark blue line on the chart is the Swingline Study. This is a technical tool I developed to help me define what the current trend is of a market is and to provide an idea of financial risk to the last high or low, depending on whether the market is in an up or downtrend.

The Swingline Study has a bullish bias since the most recent move is that of a “higher high”. However, the most recent break low of 1237.9 is lower than the most low preceding it of 1239.2. Therefore, the pattern is not one of “higher highs and higher lows’ which is the definition technicians use to define bullish trends. Rather, the latest slingshot move from 1237.9 to today’s high of 1276.5 put the Swingline momentum back to the upside, while putting the bears on their heels.

Another important observation is that since August 3^rd 2010 prices have not closed under the 18-Day Moving Average of Closing Prices. This in and of itself is a bullish filter. When prices are over this moving average and the Swingline study is pointing up, I consider this combination to be bullish.

There are a few technical issues that even with all my bullish enthusiasm shouldn’t be ignored.

First, the Slow Stochastic Study is in overbought territory. I interpret this to imply that prices might be ahead of themselves and in need of a bit of consolidation.

Next, prices are over the Bollinger Band Top. According to my interpretation of this algorithm, prices trade 95% of the time within the Bollinger Bands, not outside of them. Just look at the chart above to see how often prices stay outside of the Bollinger Bands.

Being over the band implies to me that either some consolidation is about to occur which would allow the band to move higher than current prices or prices might break a bit. It does not mean the trend turns down.  In my trading course, I teach my student to lighten up long positions against a Bollinger Band, not to establish positions outside of the band. I see no reason to alter that thinking.

In my last gold report, written August 19^th, I wrote “I am bullish and looking for a test of contract highs”. Admittedly it took a while to take place, but take place it has.

Regular readers of this report may recall that I have a theory that gold moves in $25 increments. $1275 qualifies as such as does $1300, $1325 and so on.

$1300 is my next upside target and after that, $1325. The Bollinger Band Top on the monthly chart comes in at $1328, which at this time offers me with a technical reason for my $1325 price objective. Both the daily and weekly charts have already hit their Bollinger Band Tops, 1267.5 and 1274.5.

Given the strong seasonal tendency of prices to move up into year end, price breaks continue to look as a buying. It’s also very important to keep in mind that the higher prices go, the more volatile and large price corrections will be.

I can’t wait for launch on October 3^rd of micro gold contracts. This futures contract will be a 10 ounce contract, traded on the Globex platform. Margins should approximate 1/10^th the size of a regular contact. This means you’ll have as a trading vehicle 100, 33 and 10 ounce contracts. Scaling into positions will be a lot easier than it is now due to the many contact sizes to choose from.

Here is a link to more information about this contract.

http://iraepstein.linngroup.com/uploads/CME%20GROUP%20-%20E-MICRO%20GOLD%20FUTURES%20CONTRACT%20-%20FACT%20CARD.pdf

The key to keeping up with my trade recommendations is through my Twice Daily Written and Oral Updates. That is where I put out specific trade recommendations covering all the markets I cover with twice daily updates to them. I rarely put out specific recommendation in this Gold Report since it’s easier to use my Twice Daily Updates than this report which is limited to but once a week.

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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 Wednesday, 15 September 2010 | Digg This Article