In my last report I made mention that the majority of Fed members did not think inflation was a problem. This past Tuesday the FOMC released their announcement in which they said that inflation is below the Fed’s target.

For those of us that are not as “Fed language sophisticated” as others may be, I take this to mean the Fed is ready to do whatever it needs to do to stimulate the economy.  The low level of inflation is not a “worrisome factor” at this point in time. In other words, the Fed’s put the markets on notice that it is prepared to add funds to the stimulate economy. How they do it beyond buying debt that matures remains to be seen.

One of the main issues for both the Federal Reserve and President Obama’s is that jobs are not being created at a meaningful pace. I’ve repeatedly said this over the past year. My personal belief is that what has taken place is that corporate balance sheets have improved to the point where mergers and acquisitions are now they way corporations grow. As these events take place jobs are often lost due to synergies that take place as one company merges or takes over another. This isn’t of course always the case, but it has been an observation that I often see when a takeover or merger occurs.

There has been a round of announcements of corporate dividend increases this week. Microsoft was amongst those making such an announcement. In fact, some companies like Microsoft are now doing stock offerings since they can raise money easier than investing it, given today’s low interest rates. The funds these company’s raise could be used for more takeovers.

My point here is that corporate America and for that matter corporations around the world have in the past year done financially better than right after 2008, as evidenced by risking stock indices, the ability to increase dividends and the like. Banks by the way are corporations. What is also clear is that the corporate growth has come via increased productivity, not a meaningful increase in new jobs.

I can’t quantitatively prove it, but it seems to me that without the housing industry growing, meaningful employment gains aren’t being seen in the US. It’s my belief that housing growth won’t be seen until job creation occurs. Job creation will occur as increases in productivity become marginal and as demand for goods increases. A loose money policy, a policy where banks start lending instead of investing their funds in treasury instruments seems to me to be the “new” Fed goal. To accomplish this, the Fed is embarking or threatening to embark on what many term “quantitative easing”. In other words, they are buying more debt and have the ability to print money to do so. Keep in mind that the Fed doesn’t have to limit their debt purchases to only debt issues that come due. They have other weapons at their disposal.

What I’m leading up to is this. As the Fed embarks on easing, it’s not unusual for the Dollar to come under selling pressure. Lower US interest rates in an environment where investors are willing to risk the return of their capital, drive investors to engage in riskier investments.

Whether you agree with my take on this or not, as you can see on the above chart, the Dollar Index has been making new break lows. Prices are currently trading against the Bollinger Band Bottom, so I think it wise to wait and sell rallies, not a vertical price break.

The graph on the bottom of the above chart displays the Slow Stochastic Study (SSTO). It is embedded, which I term a very bearish signal.

As the Dollar has been falling, gold has been rising. Gold also has a future inflation story in front of it…once the economy turns around. Gold also has continuing sovereign debt issues confronting it.  All in all, other than technical corrections that could come at any time and for any reason, the fundamental story for gold remains very bullish in my opinion.

Below is a Seasonal Chart of Gold prices produced and provided 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. Last week I mentioned that September 10^th began another seasonal time frame for a run up in prices.  

Gold at this point in time is following its historical pattern which leads me to believe that more upside momentum lies ahead. Possibly a lot more given that prices are already approaching $1300 an ounce.

Gold this week has hit an all time high price. It is also following the 12 Year Pattern of past bull markets, as displayed on the above chart. How long this lasts is anyone’s guess, but there’s no denying what it’s doing now.

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

What’s also interesting is that this gold 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.

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.

As I pointed out last week, since August 3^rd 2010 gold prices have not closed under the 18-Day Moving Average of Closing Prices, which is bullish since when prices are over this moving average and the Swingline study is pointing up, I consider this combination to be bullish.

The Swingline Study continues with its pattern of “higher highs and higher lows”, which is bullish as this is the definition of a bullish chart patter.

Prices are however continuing to hit the Bollinger Band Top, a projected resistance point. The idea behind this algorithm is that prices will not stay over or under the Bollinger Bands more than 5% of the in total. The band however is widening and as it does so, prices can hug it to move higher while not staying over it for very long.

$1300 an ounce is a milestone number.

It is not surprising to see gold stalling out a bit as it approaches this milestone. I believe that higher prices will be seen by year’s end and see support near $1265.

Price corrections continue to look to me to present buying opportunities.

There hasn’t been much of a break in prices since early August. Should the Fed initiate something “new” in the way of stimulus, I would view that stimulus to be bullish gold. When prices do correct, I expect it to be short lived, but lively.

I think the launch of the new 10-ounce gold contract will attract new gold traders to the futures markets.

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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, 23 September 2010 | Digg This Article