It’s all systems go as the QE2 program kicks in. The Fed is set to purchase the first round of treasuries using some of their newly acquired QE2 funds over the next 30-days. $105 billion is earmarked for this first round the purchase. According to the NY Fed, the purchased of treasuries will go in terms of date from 2012 to 2040, which means to some degree all parts of the yield curve will be impacted.

The news out of Europe is not good. Ireland’s debt is getting harder and harder to sell. While there are still some buyers, the interest rate Ireland has to pay those buyers is so high the whole thing is close to becoming a house of cards. Portugal in the eyes of many is right behind Ireland and taking up the rear for the time being is Spain. Greece is in the background right now, but clearly not of out harms way.

Markets often look for events to trade off of. Prior to this week the markets had quantitative easing and US Elections to deal with. As soon as both were completed, the markets turned cheek and looked elsewhere for guidance. They apparently found it by looking to the European Union, where economic troubles continue.

Wouldn’t you like to be at the G-20 Meeting? You’d be there just as the US embarks on its new QE program, China biting its lips as it can’t wait to say that the QE2 is currency manipulation and the Germans saying QE isn’t even needed? It is indeed an interesting meeting. Will we stop or alter our QE2 program because of what’s being said? No. Will we continue to charge China with currency manipulation? I don’t see how given what we’re doing. Will Europe be pissed at the US stance? I don’t see how they can’t be. What fun.

Below is a Seasonal Chart of Gold prices produced and provided by Moore Research Center, Inc, (www.mrci.com). I’ve been writing about gold’s historical tendencies for a long time.   

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.

The current rally in gold, from the break low on November 3^rd of 1325.5, is a signal to me that the odds favor continued strength into the end of the year. I base this on past historical patterns and the current environment whereby the Fed is enacting its QE2 program.

As I wrote in my previous report on November 4^th, “I now expect to see general upside momentum going into year end. Yes, there will be price breaks and somewhere along the way I expect consolidation to take place. But I don’t expect to see the most recent low of 1315.6, made on October 22^nd, to be penetrated in the near future. If it is, I will have to rethink my price objectives.” Nothing has changed.

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 Swingline Study’s current pattern is one of “higher highs and a higher low”. This is a bullish pattern and as of yesterday, some answers were cleared up. The most recent break low is now 1382.2. Today’s high of 1417.6 took out the last Swingline high of 1410.4. Yes, at times the Swingline high is not the same high as the actual high. It’s rare, but it can occur.

The Slow Stochastic Study remains in an overbought condition, which is a bit bothersome as I interpret this to mean that the market has now reached the point where either new buying comes in to drive prices higher, which in turn converts this study to one of becoming embedded; or prices work sideways to lower and this study corrects.  Either way, I see nothing that is bearish. It more a question of where the next upside launch comes from.

While prices are near the Bollinger Band Top, they are not up against it. Rather, this band continues to widen and prices continue to respect the band as a resistance point. As long as 1382.2 is not taken out, what the Stochastic Study does is more important to me than the Bollinger Band resistance is at this point in time.

The Weekly Chart has what I term, a “classic bullish pattern”.

Each rally high as displayed and measured by the Swingline Study is making a new high and each break low is higher than a previous break low. The current price rally has carried prices up to 1424.3, which took out the previous high of 1383.9. Break lows have not exceeded previous break lows.

The result of this is a pattern is what we chartists call a “Bull Trend”.

The chart internals as measured by the Slow Stochastic Study are getting stronger as prices rally. The Slow Stochastic reading is “embedded” which to me implies that internal strength is picking up as prices rally. This only occurs after a market gets overbought and changes character from that of being overbought to one of getting stronger. That strength can be measured by looking at the Stochastic scale. When both the “K” and “D” lines that makeup this study remain over an 80 reading for several time periods, the study is said to “embed”. In other words, momentum locks in. When the red line closes under 80, upside momentum is said to be lost and the study is no longer embedded.

Last, we have a chart of the Dollar versus Gold. If you look back you will see times where both rise and fall in synch. Gold can rise with a rising Dollar. It’s important to know when they are fighting each other or complimenting each other. Right now, I’m not sure it matters as I think the Dollar’s rise into the G-20 Meeting will prove over time to be no more than a fleeting moment.

The fact that gold has been able to rally as the Dollar has rallied only ads to gold’s bullish case.

Last week I wrote about how high gold could go.

I mentioned $1400 since it was an even number and one that I thought offered a logical, near term upside target. Well in the time between last week’s letter and today’s report, gold has rallied up to 1424.3 and broken back to 1382.2. In other words a lot of trade is taking place around the 1400 level.

I believe that the Fed is going to succeed in creating inflation. It is one of their goals. Along the way, there will be bumps and grinds. However, the reason for QE2 has to do with our government’s perception that the economy needs to be stimulated. This stimulus comes via printing of money, which debases the Dollar. Because of this I see gold going higher and the Dollar even lower.

The best advice I can give you is to not buy blindly. Know where you’re wrong or where you can’t stand the pressure of getting caught in a downside correction.

Given the seasonal tendency of gold to maintain overall upside price momentum into year end, coupled with the Fed’s commencement of an 8-month program of adding funds to our economy, I can’t help but walk away with the idea I left you with last week. That is one of higher gold prices; possibly much higher prices are on the horizon.

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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, 12 November 2010 | Digg This Article