European Commission President Jose Manuel Barroso was reported to have said today that the commission will soon present options for the introduction of a common bond for the euro area; while France said it would do all it takes to save Greece from default.

Greece, Italy and Spain are still front and center in terms of sovereign debt issues. Greece has the most serious issues, which will soon come to a head. The question concerning Greece seems to be restructuring now or later. European banks need to be ready to bite the bullet, take the capital charge and move on. Problem is they probably need more time and most importantly, more funding in order to prevent bank lending from freezing up. This common bond proposal looks to be part of a package to provide liquidity and looks like a good idea.

The odds of Greece being able to pay back their debt or for that matter service interest rates approaching 80% are non-existent. Given that the Greek public is not behind the austerity move, you’d think why not just let them leave the EU. If it were that simple I think they’d be gone and may be part of the ultimate outcome. One way or the other, a default of some type or organized restructuring needs to take place soon. It seems to be a matter of making sure that the banks that are exposed can handle the impact of writing down Greek assets on their books and still be able to keep their doors open. I think for some this will require European and possibly IMF help. This is not really a big issue given what took place when the financial markets got “hit” in 2008 and 2009. US banks needed help than and it was provided. Banks either merged, got more capital or closed. This is what Europe has to plan for and plan for now as time is running out. A TARP type plan is needed.

Sovereign debt issues have been supportive to gold. Even without the, gold would have plenty of ammunition to work higher as Asia continues to grow. Demand from India and China is robust.  

Without a pickup in employment in the US, our economy continues to languish. Each time the Fed provides a stimulus, they in effect debase our currency, which makes it more competitive for American goods abroad and at home. A main problem has been that the private sector hasn’t been provided with reason to expand their employment base given the lack of US leadership.

The upcoming Presidential election adds another element of uncertainty as many think Mr. Obama is a one-term president. His number one enemy as I see it is unemployment, which isn’t expected to change very much by election time.

On September 7^th, gold culminated with a break from 1923.7 down to 1793.8. Rumor was that a “fat finger” trade took place, which means in plain English more contracts were sold than called for by some firm.  An error, maybe. That rumored trade did not however result in bust trades according to the CME Group who reported nothing unusual, so who knows and more importantly, does it really matter? I don’t think so since as I see it all that matters is that that break created a chart pattern of lower highs and lower lows which a week later is still dominating the Daily Chart trade.

Seasonally speaking gold has a lot going for it. Prices in bull market years, which this is one of given that new all-time highs have just been made, often rally into the end of the year. Therefore, if there are surprises, I look for those surprises to be bullish.

If the Fed enacts another form of stimulus at their next meeting on September 20-21, gold will most likely react by rallying further as any form of printing Dollars will be taken as bearish the Dollar.

If you think the lower Dollar hasn’t created issues for some, you are wrong. The Swiss recently took the Swiss Franc out of play as a Reserve Currency by pegging their currency to the Eurocurrency.  That move took the Swiss from an intraday parity move in early August to now trading approximately 23-cents less than the Eurocurrency. It seems that there is a race on to lower currency values in order to protect exports from countries that deem their currency value as being too high.

Gold should also find support from the move by the USA and now others to keep interests low and move parts of the longer term part of the yield curve even lower. As this takes place it “forces” investors to look beyond treasury instruments for returns, assuming investors ever get beyond just looking for return of their capital. If Greece defaults, the impact of investors running to safe havens in the short term should be rather pronounced.

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. A move under 1794.8 would immediately change my chart analysis and cause me to consider the bear side of gold, at least in the short term.

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 highs” and “higher lows”, which is bullish. Unless or until 1783.1 is broken, the bull market chart pattern remains intact. I’ve labeled in dashed green lines the channel the market seems to following.

If the most recent break low of 1783.1 were to be broken, major support at the 18-Week Moving Average of Closes, 1643.6 would become a potential downside target. The important thing is that as long as price trade over this moving average, the way I teach chart analysis would mean that my students would not be looking for a short position, but would rather be looking for new a buy signal to develop over this indicator. If you look at how this concept has fared, it has kept traders who followed it with the price trend.

The Slow Stochastic Pattern remains 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 this pattern were lost, I would lose my bullish enthusiasm.

I am displaying a lot of patience in waiting for a new buy signal to develop. Emotionally I’d be long. However, emotions don’t rule my chart analysis, chart patterns and the lineup of indicators do.

Right now the gold market is consolidating against its 18-Day Moving Average of Closes on the Daily Chart. That is bullish.

What is needed is to a high like this morning’s early high of 1848.2 become a Swingline high that is taken out. That would trigger a buy recommendation from me and could happen at any moment, so get ready.

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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 Wednesday, 14 September 2011 | Digg This Article