September should prove to be a very important month for gold. The month starts off with President Obama’s “new” game plan for the US economy. Whatever the plan, it will be taken as part of his re-election effort, whether it works or not.   

If the President can’t get Congress to act, which I don’t think he can, his plan will likely be dead before its announcement. He has little choice but to find a way to pull things together. He looks amateurish getting his speech date getting pushed back today.

The President is going to propose permanent tax changes. The depth of the changes is up for grabs. Corporate taxes as well as taxes on high income individuals will be mentioned, but hard to get reformed. He might be better off by focusing on taxes that currently curtail employers from new hiring. Head taxes of any kind should be on the chopping block. Government reform is another issue as he can attack this given the popularity of doing so with voters.

A speech by the President on Wednesday morning focused completely on infrastructure projects. It was interesting that he picked yesterday to float it, not on Labor Day and that it focused on infrastructure. Certain highway construction programs expire at the end of September. If allowed to expire it would cut the deficit and about 4000 people will go unemployed. My take is that this speech was a “test run” on his upcoming speech, now shortly after Labor Day.

Another wild card for gold is Europe’s sovereign debt issue. Finland will probably get from Greece the collateral it wants and get it placed where it wants. The German Parliament on the other hand is seeing a ground swell against further bailout measures. The rift is so large that it puts the re-election of Chancellor Merkel along with her coalition in Parliament in question, which puts the EU rescue plan at risk.

At the very least it looks like Parliament in Germany is determined to take control of further bailout measures out of the Chancellor’s hands and into theirs. This means that getting anything done will be even more difficult.

Currency intervention threats continue in Switzerland and Japan. The Swiss did a great job in driving down the value of their currency against both the Dollar and the Eurocurrency. The Japanese have not been as successful, probably because the rebuilding of their economy after the earthquake is underway and the economic data from them is starting to show signs of gain as Japan’s industry gets back on line.

In terms of heating up the news media, do you recall as many news stories or television specials on gold as you now see?  I don’t. Often this amount of media coverage is followed by a top. Think back to the real-estate market in 2007. It seemed that everyone was investing in real estate. Four years later, the vast amount of real estate sales taking place today are doing so via short sales and foreclosures at prices much less than sold at 4-years ago.

Gold admittedly is not real estate. It is portable. It has a limited supply, is now a quasi-currency and is priced worldwide in Dollars. It’s storage of value, but one that as some will find out, go up and yes, down.  

Will gold go the way of past bubbles in real-estate and tulips? The answer is simple. NO. I don’t see it doing so as long as governments fail to rein in spending and limit spending to only the amount that governments take in in, in terms of income. I don’t see this occurring, which means while there will be technical corrections along the way to higher prices, the longer-term trend remains intact and gold will continue moving higher.

My forty years of chart experience has taught me a thing or two about price action. For example, vertical price moves, up or down, don’t last very long. Another thing is that prices “learn” to deal with new price ranges. Gold is in that camp. When we saw gold hit a thousand Dollars an ounce, it didn’t just run to $1900 an ounce. It worked its way up, finding new price plateaus along the way. That is what I expect to see over and over. Whether gold retreats to $1600 or $1700 an ounce isn’t what’s important. What’s important is that without a change in fundamentals, gold is again basing out for another leg up.

One of the strongest times of the year is directly ahead in terms of gold pricing, assuming you believe in seasonal price trends. I will cover this in the sections below.

From a seasonal perspective, I see gold working sideways to lower for just a short bit of time and then breaking out to the upside. An upside trigger might coincide with issues being voted on in the German Parliament concerning bailout of Greece and other weak EU members.

Below is a Daily Chart of the December Gold contract.

Each individual “green” bar on the chart represents one day’s trading session. In “red” I have plotted the 18-Day Moving Average of Closing Prices and in “brown” is the Swingline Study.  

The Slow Stochastic Study is displayed on the bottom graph between dashed lines between a ratio of 80 and 20.

The current chart pattern is one of lower highs and higher lows. I’ve drawn in light blue the triangle pattern that this if forming. The good news is that as long as prices keep trading over the 18-Day Moving Average of Closes prices, the more likely a breakout to the upside looks.

If prices get over 1845.1, the chart pattern will change to one of higher lows and higher highs. That would trigger a buy signal according to the chart patterns I follow. Upside

The current chart pattern is one of “higher high” up at 1909.3 and a “lower low” of 1480.0. I have labeled these on the above chart.

Support is down at 1602.4, the 18-Week Moving Average of Closing prices.

My guess is that this will stay as an “Inside Week”, meaning that last week’s high and low won’t be penetrated.  Let’s assume this week’s low is broken. That would represent at a lower low week and be a continuation of brown Swingline continuing to move lower.

If this week’s high were to be taken out, the chart pattern according to the Swingline Study would turn higher, leaving 1783.1 as the new Swingline Low. It would also mean that the broad chart pattern would become one of higher highs and higher lows. A bullish pattern.

The Slow Stochastic Pattern is embedded, which is bullish. Both the K and D number are over 80, which means prices aren’t overbought, rather they’re locked into a bullish pattern.

If prices in the December Gold Contract get over 1845.1 or down to 1799.4, I will initiate a buying program. My preference is to buy as prices get over 1845.1, forcing the daily trend to turn up. Obviously tight stops will be needed and I will issue them in my twice Daily Updates.

For all the reasons listed at the beginning of this report, I don’t see gold losing much ground. Whether it’s European debt issues or the US election and its impact on Congress being unable to do much, gold has a strong case going for it.

If world economies were to suddenly change, with spending coming under control and job growth creation, I’d have to change my opinion. Since there’s little chance of either occurring, I remain very bullish.

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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, 1 September 2011 | Digg This Article