New all time high…$1317.5

Gold hit a new all time high today, the last day of September and the quarter.

The new 10-ounce Gold Contract will launch this coming week. It will in my opinion bring additional trading volume and traders to the gold markets given the low margin required to trade in it.

Keep a close eye on what transpires between the US and China in terms of a trade war. A House Committee is moving towards formal charges of Chinese currency manipulation which could create a backlash from the Chinese. The most likely backlash result would be China curtailing their purchases of US Treasury instruments, which could drive real interest rates higher, causing in turn a Dollar rally.

A rally in the Dollar could initially bring with it a down draft in gold prices over the short term. Longer term, I view price breaks as buying opportunities.

What bothers me is that practically everywhere I turn I see recommendations from trade advisors to get into gold, for investors to have a portion of their portfolio in gold and so on. While the advice is good, seeing so much of it take place at new all time highs has me concerned.

It’s important to remember that markets can and do correct. Few go in straight lines, gold included.

A popular seasonal play I mentioned in past reports was to go long in early to mid September and be out on October 1^st.  That idea worked out nicely, given where prices are as I write this report.

The Dollar continues to fall, the Eurocurrency continues to rally and EU sovereign debt issues are again surfacing with Ireland and Spain in the news. However, the Eurocurrency has not been negatively impacted by sovereign debt headlines nor by rating agency downgrades of EU member debt as took place today with Spain’s debt rating. The rally in the Euro, at the Dollar’s expense, continues to fuel the rally in gold.

Behind the wings is the threat of quantitative easing in both the US and in England. Over the past few days different US Fed Governors have via speeches been offering different perspectives on a quantitative easing package. The news sources I read are inclined to believe that Fed Chairman Bernanke has the votes he needs to initiate such a program, should or when he thinks one appropriate. If he initiates one it most likely will include some form of treasury purchases. 

In my opinion, in order to negate the downtrend currently at work in the Dollar Index, prices would have to rally through 80.010. That would negate the downtrend, but not in my opinion begin an uptrend.

A downtrend as I define it is comprised of lower lows and lower highs. The lower low is in place with today’s break to 78.620. If 80.010 were taken out the chart pattern, displayed via the blue Swingline Study would be broken. Until this occurs, rallies in the Dollar Index continue to look like selling opportunities. If the Slow Stochastic Study loses its embedded reading by having the red line, the “K” line which currently has a reading of 4.51 get over 20, I would expect to see a short covering rally, one that could carry prices up to the 18-Day Moving Average of Closes.

If such a rally developed, I would expect it to impact gold and to see gold prices initially drop off the rise in the Dollar Index. Until or unless this occurs, simply keep an eye on where the Dollar is trading in planning your gold trades.

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 has followed its historical pattern.

Now gold may be ready to correct before beginning another up leg, late this year.

I welcome a price break as I think it offers those not involved yet in gold, a possible entry point at lower prices.

Gold hit an all time high price today. It is also following the 12 Year Pattern of past bull markets, as displayed on the above chart

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.

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

The Swingline Study continues with its pattern of “higher highs and higher lows”. This is the classic definition of a bullish pattern. Should prices get under 1276.2, this pattern would be broken and a price correction, one deeper than recently seen might ensue. It could end up carrying prices down to the Bollinger Band Bottom over time.

$1300 an ounce is what I term a milestone number. Since it has been hit, prices have been swinging around it and have not yet begun another up leg.

Even if the last break low of 1276.2 were to be taken out, the seasonal chart implies another leg up by year end. I expect today’s setback in gold prices has a lot to do with “profit taking along with end of the month and quarter window dressing”. Keep an eye on the seasonal tendency of prices in early October to break or stall out. This may provide you with an opportunity to buy at lower price levels.

If China and the US let words of a trade war become a reality going into November elections in the US, the Dollar may rally putting selling pressure initially on gold. Keep an eye on this. Until prices break down through a lower low and as long as the Slow Stochastic Study stays embedded, I recommend approaching gold from the long side.

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 Thursday, 30 September 2010 | Digg This Article