Yesterday the Central Banks of Asia, Canada, the UK and Europe took action to stave off another leg of the financial crisis many world economies are in the grip of.

China reversed its tight bank reserve ratios, which means they have embarked on a policy of looser money. I’m pretty sure that this is the first time they done this in three or so years. My experience has been that once a country embarks on a change of policy, it doesn’t end with but one notch down, but rather a series of notches. This is very important as it means China is putting its foot on the gas to boost its economy. I now expect Chinese demand for goods of all types it imports to get stronger. This was not lost on the price of copper which soared 18.5 cents on Wednesday. Copper is a commodity I follow to keep track of expectations of world industrial demand. US industrial production figures aren’t doing poorly either.

Central Banks banded together to lower swap rates so that banks needing US Dollar loans to banks in Europe and elsewhere get them at lowered rates. This was in my opinion an unexpected very good move. It certainly took stock markets by surprise as can be seen by the gains in them on Wednesday.

Gold rallied strong on this news.  Why not? The Central Bank move means that there’s going to be more liquidity in the financial markets and that there’s going to be “easy money” to be had. The Dollar fell on this news and gold responded by rallying.

A bother to those of us who follow gold has been that Europe’s sovereign debt issues no longer are acting as gold prop, nor has the war of words between Iran, Israel and the western developed countries of the world. Even the storming of the British embassy in Tehran had little impact on gold prices. So what’s obvious is that gold needs a new story if it’s to mount another leg up.

I’ve been saying in interviews and in my market commentaries that inflation is likely to be that “new story” given that sovereign debt default threats and threat of recession have recently led to falling, not rising gold prices as investors moved to cash.

Is this the point where change takes place? It has the look of it as long as Europe embarks on the “right” moves. Austerity and QE at the same time? It could happen given the change of heads of governments in Europe and what the upcoming election in the US produces.

I like the better US economic data numbers. Things are not getting worse, holiday spending is up and employment is getting better. Housing remains in a slump but time will help that along. Have you looked at the cost of rentals? In some markets owning is becoming a better alternative. In Miami, many of the “deals” are no longer to be had and the amount of property on the market has come down sharply. I’m not yet saying it’s a real estate turnaround, but am saying the real estate market is starting to function again.

I realize I am a broken record on this subject, but I think it’s very important given the importance it may have next and following years.  

As regular readers of this report know, I have been making mention since this past summer on how prices over the past ten years have done from July 31^st to December 31^st, on a closing price basis. The year isn’t over, but it sure looks like it’s going to be another year in the positive column. Prices on July 31^st closed at $1621.7. They’re about 6-7% higher right now. Will the year end up with double digit gains? I’m now thinking it a good possibility given the actions taken by China and Central Banks to protect world economies.

·         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%     

The above chart shows that prices in early December can drift lower, but often end the the year with an upward thrust. If that holds true this year, an nice year end gain from current price levels may be in store.

November did end up with a month end thrust as prices gained about $23 from the end of October to the end of November. According to the historical chart provided by the Moore Research Center, Inc., it’s not uncommon for prices to pull back at the beginning of the month, or at lose upside momentum and regain that momentum going into month end.

Keep in mind the limitations that historical charts inately have. They show what occurred, not what’s necessarily going to occur.

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. 

Bollinger Bands are displayed as “Black Dashed Lines”.

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

I’ve used line in the “dark red” to display the close of gold prices, using the December contract, as of July 31^st on the above chart. You can of course use the close of the February contract to see what occurs from the same time frame.

Prices are currently trading against the 18-Day Moving Average of Closes and the Swingline Study is in a bullish configuration since prices are making higher highs and higher lows. I think prices need to consolidate a bit now given that they just moved up from the $1704.3 level.  I mention this number because it is the most recent Swingline low and if the price pattern of higher highs and higher lows is going to hold up, this is “the” number that should not be taken out.

My expectation is that what Europe does at their upcoming meeting will be the catalyst that moves gold higher into month end. I admit that I am having tunnel vision in terms of my expectation that gold will move higher because I think the EU knows the pain the financial markets will exert if they don’t do the “right thing”.  

To me yesterday’s price action confirmed my idea that gold needs an inflation theme to move higher. Iran nuclear stance, the attack on the British embassy in Tehran, interest rates over 7% in Italy, talk of recession in the US and even lowering of credit ratings did not move gold higher. In fact these items actually caused selling as investors moved into cash.

I think it’s clear that those themes wore themselves out as props for gold. Yesterday, when China lowered the bank reserve ratio, commodities including gold, silver and copper jumped higher.  Why?  I think because of “hope” for inflation.

China has come to the conclusion that easy money is the way to spur on their economy. In one manner or more, Europe is going to reach that conclusion. The ECB has already begun the process of lowering interest rates. Now they need to expand in some manner money supply in order to enable growth in stagnant EU economies. That will eventually lead to inflation.  Inflation will be gold’s next reason to rally.

Let’s assume I’m wrong.

If I am wrong about Europe, investors will probably sell everything. Yes, everything but US treasuries. Stock markets would fall and gold would most likely sell off as investors move into cash because they’d believe that 2008 is again at their doorstep.

How low gold would go I don’t know, but the recent low of $1535 is a logical point.

Given that I think Europe will do the right thing, I am looking for a buy signal to occur at any point now. The longer gold trades against its 18-Day Moving Average of Closes the better. A bit of consolidation now would be nice if my scenario of prices rallying at the end of December is going to be correct.

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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 December 2011 | Digg This Article