Today the government released its latest payroll figures and it shows that non-farm payrolls continue to lose ground. The private sector is hiring, but not at a rate strong enough to overcome the loss of government related jobs so net-net, there is job loss.

The statistics mean little as the end result is that the Fed has ammunition for its next FOMC Meeting, scheduled for November, to initiate further moves to stimulate the US economy.

The fundamentals now look such that I don’t see much on the horizon to harm gold prices in the longer term other than normal price corrections.

It seems to me that the government is in favor of more inflation given that prices, according to the last FOMC Meeting Notes, had room to move higher without meeting the Fed’s inflation target. That statement hasn’t been lost on the markets as stock indices and most raw commodities have moved higher in price. There of course are some exceptions, but not many.

Overall, it appears that the fundamentals are such that stock indices look to move higher, interest rates lower and raw commodity markets higher. Within these sectors individual stocks or certain commodities may not participate, but that isn’t the point. My point is that if the Fed is going to find ways to flood the markets with capital and if those funds can somehow find their way into mid-stream America, those funds will be spent. A lower Dollar will give America a way to compete in foreign markets, but at a price given that China and Europe will soon be making noise about the falling Dollar. Even that noise is likely to be given a bullish spin by metal bulls.

Earlier this year I was hoping to see gold go to the $1300 an ounce. I considered that a milestone. Here we are in October and that objective is already history. Will prices move up to $1400 or even $1500? Well no one including me knows.

Yesterday showed just how strong gold is. The December Futures Contract had a “key reversal day down”. This occurs when a new high is made and subsequently the market takes out the previous day’s low, closes under the current day’s opening price and closes lower on the day. What I found fascinating is that after gold’s large recent gain, it was only able to break $40 from its all time high and has already gained back half that loss as of this writing.

As chartist I respect yesterday’s technical action. In fact until the all time high of 1366 is taken out, I expect in the immediate near term sideways to lower price action to develop. At least I hope so, as I think there is more upside ahead.

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 would welcome a price break as I think it would offer an entry point for those who want to buy gold at a lower price.

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.

Prices recently moved up and briefly through the Bollinger Band Top. This study is an algorithm that is designed to keep prices trading within the upper and lower bands 95% of the time. The odds of prices closing over or under the bands are but 2.5%, which I interpret to mean that the bands offer both price resistance and price support. The band also moves with price flow in strong trending markets. It can arc up or down and the bands are not parallel to each other.

Yesterday, prices hit an all time high of 1366. However prices were ahead of themselves in relation to the Bollinger Band since in order to get to that price, prices were trading well over the Bollinger Band Top.

Thursday, October 7^th also saw prices form what is commonly called a “key reversal day down. Both a higher high and lower low were made on the Thursday, the closing price was lower than the opening price and the closing price was lower on the day than the previous day’s close.  Chart analysts commonly refer to this as a key reversal.

Until prices get over 1366, this chart pattern has me, as a chart analyst, looking for reasons for prices to pullback. Whether this pullback, if it even comes to pass results in a change of trend can’t be told but the odds favor a pullback off this chart formation.  

In addition, the momentum study called Slow Stochastics has turned down after being embedded. Those of you that have taken my charting course know I interpret this to mean more sideways to lower price action often occurs after this formation is set in place.

On the positive side, the Swingline Study continues with its pattern of “higher highs and higher lows”, which is the classic definition of a bullish chart pattern. It will take a move under 1313.3 to break this pattern.

Last, even if a break occurs, all I would be looking for is a test of the 18-Day Moving Average of Closes. In other words, don’t get bearish.

$1300 an ounce is what I had termed a milestone number in my last report. Prices have advanced another $66 an ounce since then and yes, there’s been a $40 decline off that high. However it hasn’t been easy for prices to break and stay down, which is a characteristic of a bull market.

My intention is to buy the market on the next price break, hopefully one that carries prices down to or close to the 18-Day Moving Average of Closing Prices.

I see nothing at this time on the chart that calls for anything in the way of a reversal of the longer term bull pattern. If anything, I see things getting even more bullish toward the end of the month.

I will issue my entry signals in my Twice Daily Updates.

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 Friday, 8 October 2010 | Digg This Article