Gold did not gain in the second six months of 2011. In fact it lost about $50 an ounce which is not common in bullish years.

So that leaves us guessing what’s next and what will move gold.

As I see it the European sovereign debt issues are not behind gold’s current price moves. Rather fear about what Iran might or might not do as Iran gets squeezed is what seems to be behind gold’s current rally. On January 23^rd there is a European meeting to decide if a formal embargo of Iranian oil will take place. I don’t know if Europe is ready to put further financial sanctions such as those put on Iran by the US and UK will take place, but that would be in the best interest of Western countries.

I am reading that US warships are near the Strait of Hormuz as are other NATO member warships. If Iran makes a move to close the Strait, that move will be met with a united NATO force…hopefully. The US need not do this alone and should follow the program that was used in Libya. The threat of all this is enough to enough to keep crude oil and gold prices bid higher.

There are no strong seasonal patterns in place right now, but some can argue as seen from the Seasonal Chart below that gold will move higher later this month into February. Both Silver and copper have strong a seasonal tendency to move higher into the spring.

I think the Eurocurrency has gotten a bit too cheap against the 1.2650 price level and if the March Eurocurrency contract loses its embedded Slow Stochastic reading I would expect prices in the Euro to rally towards the 1.2950 to 1.3000 price level. This implies a lower US Dollar Index which would be beneficial to gold. Keep in mind that longer term I think the Eurocurrency is going under the 1.20 level, but longer term is not what I write this report about. Therefore, gold has Iran along with a stronger Eurocurrency behind the current price rally.

At first look it would appear that prices have a seasonal tendency to rally into February. However the bottom graph on the above chart does show some discrepency with that when you compare the 5 to the 15 and the both to the 30-year pattern.

The 15 and 5-year seasonal pattern is bullish. While its nice to see the 30-year pattern, I don’t put the same weight on it as I do against the the other two patterns since these patterns are more recent and take into account more recent history and take into account the impact of increased technology in trading cash and futures markets.

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.

The odds of a market staying over a Bollinger Band Top line is 2.5%. Notice where prices rallied to and where they are stalling out on this rally. The way the bands move up or down is by prices running into them or by price action narrowing up. In this case price action is expanding.

Support come in at against that 18-Day Moving Average of Closes, which is currently 1604.8. Paying a premium against this price of nearly $43 does not make sense to me.

In additions, if you look at the Slow Stochastic reading you will see that it is overbought. When the K-Line, the red line on the bottom graph is over 80 but the D-Line, the brown like is not the market is termed overbought. Overbought conditions either turn into an embedded status whereby both the red and brown lines stay over 80 or the market corrects. Gold is now at the paint where it has to decide which of the two is going to take place.

 Very shortly, possibly as early as tonight, the 18-Day Moving Average of Closing Prices will move over the last break low, the Swingline Low, of 1605.7. This implies that until 1605.7 is broken; prices should be supported on price breaks against the 18-Day Moving Average of Closing Prices.

Slow Stochastics are not embedded, they are overbought. In order for the market to add another up leg from current prices, they need to embed or prices will most likely move down and either consolidates or breaks through 1605.7 and start a new downtrend.

Inflation is not a concern right now. Therefore gold doesn’t have an inflation story at this time. That leaves gold to be influenced by currency moves or by Iranian action. If Iran does nothing to close the Strait of Hormuz, that leaves currency action.

Given that the Eurocurrency looks poised to rally up to the 1.2950 to 1.3000 level, I think this leaves this as the only current factor driving gold higher. This factor will not be a long lasting one if Europe doesn’t convince the market place that it is making all the “right” move to contain its sovereign debt issues. Therefore, I do not recommend chasing gold prices higher at this time.

Rather, if the market corrects the Slow Stochastic reading by breaking in price and not taking out $1605.7, I will be looking at that time to consider a long position.

If the Slow Stochastic Study embeds, that would be bullish. I don’t think this will occur.

I don’t see a sell signal of any type so where this leaves me is neutral at current prices.

Keep in contact through my Twice Daily Update for my next trade recommendation.

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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, 12 January 2012 | Digg This Article