I think this is going to be a disappointing weekend as it doesn’t appear that the EU and IMF are ready to announce details of a structure plan for EU sovereign debt issues. There doesn’t appear to be consensus between Germany and France on leveraging the EFSF or not. Therefore, I think the announcement will be that a plan is being worked on, but that the plan is not yet ready. Very disappointing, but there’s still a few days left for compromise before Sunday’s announcement.  

At the core of the problem is that Germany and France in some manner have to guarantee whatever the Financial Rescue Plan is. Many ideas are being bantered about, but all come down to France and Germany putting their economies up as guarantors of whatever the plan’s details turn out to be. The credit rating agencies will be all over France and Germany’s every move since they as the main guarantors of the rescue plan will be the “standard” of the bonds that the ESFS ultimately issues. If they don’t have a mechanism to enforce terms of the guarantee they make on behalf of the issuing countries bond, there’s little point in them going forward. That seems to be where the impasse now seems to now be.

Given the uncertainty of the event, instead of investors moving into gold investors are dumping gold in favor of shoring up cash. Uncertainty has once again taken center stage. Some could argue that passage will lead to inflation gaining traction. On the other side, the bears are saying that until events in Europe become clearer, financial investments are at risk, risk which might result in a higher Dollar if the EU plan, whenever it’s announced doesn’t impress the markets.

Psychologically speaking, gold needs to get beyond the lack of nothing being done in Europe. Seeing a lack of unity in the EU today is not good. If Europe aggressively takes hold of the debt issue, the Euro should rise against the Dollar, which would be beneficial to gold. A positive reaction to the plan is needed to get positive market psychology back on track. I don’t see this happening this weekend.

The chart pattern of gold is ugly. Prices have been falling and have a pattern of lower highs and lower lows. The 1600-1625 level seems be the where gold is trying to find support.

As readers of this report know, I track the end of July to the end of December pricing. The results below show what occurred in past years if one were to buy December Gold on July 31^st and sell out on the close on December 31^st or the last trading day of the year. What’s key is whether or not this year ends up with a 2008 event due to lack of Europe getting sovereign debt issues under control or not. If they don’t this could turn out to be a 2008 event. If not, things look bright.

·         2001  + 2.8%

·         2002  + 7.9%

·         2003  + 18.0%

·         2004  + 10.1%

·         2005  + 20.0%

·         2006  + 2.8%

·         2007  + 26.2%

·         2008  -  5.0%

·         2009  + 15.7%

•   2010  + 15.9%     

I do not preach using past historical performance without use of other fundamental and/or technical analysis. What I found in my research was that from the close of business on July 31^st through the close of trading on December 31^st, gold often closed higher. I did not look at peaks or valleys trying to take advantage of market swings. I simply looked at close to close and therefore think that the current retracement back to the July 31^st close offers an area to get long at. That price was $1621.7.

Past history shows that on a historical basis, gold often rallies into year end.

Each individual “green” bar on the above 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.

Prices are clearly retesting their lower parameters. The Bollinger Band is now narrowing in, which could mean that a trading range mentality is about to set in.

The credit markets don’t think the EU will announce anything good. Interest rates on German bunds, Italian bonds and Spainish bonds are not perfomring well going into the weekend.

Gold has set itself up for disappointment concerning the EFSF plan as the press writes articles about lack of progress being made. So now the surprise has changed. If something really substantive were announced this weekend, the markets would be caught off guard.

Gold has recently fallen from $1923 down to $1535. Whether $1535 will be tested again is questionable. The $1600 level looks to me to have reasons to act as support via where the Bollinger Band Bottom comes in.

Those long the 1800 Gold Call per my recommendation are behind on the overall position they are holding, but keep in mind that you should have taken half the original position off for a profit of approximately $1000. I still intend on making recommendations soon in gold futures soon as well, so keep up with my Twice Daily

In my Twice Daily Updates, available through subscription you can keep up with my thinking and specific entry, stop and profit objectives.

By clicking here you will be taken to my subscription page or you can go to:

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Call 1-866-973-2077.

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, 20 October 2011 | Digg This Article