From my point of view, nothing has changed that has impacted gold in a bullish manner since my last report.

Over the past few months I have continually pointed out that news events and financial data that some, not me, might have expected to have a bullish impact on gold simply hasn’t done so. That continues today.

Europe remains embedded in sovereign debt issues that some fear will lead to a breakup of the Eurozone as we know it today. Ireland has a vote that takes place today to ratify a treaty with the EU. I don’t expect it to go poorly, but even if it did, the way gold is acting I wouldn’t expect the impact to have more than a fleeting bullish moment. I say this as investors are running to US Treasuries and German Bunds for protection, not gold. The US Dollar and Japanese Yen are clear benefactors of investor distrust of events going on in the Eurozone and as such, have made gold higher in priced in foreign currencies.

China’s economy has been contracting for months. Just this week we heard of stimulus packages that might be offered to select groups in China, such as their automotive industry. That initially propped up copper prices since a lot of is used in the building of cars and trucks. The next day the media printed a rebuttal.

Crude oil prices are falling sharply. Corn prices in the US are at 17-month lows. Gasoline prices are not rallying as summer driving picks up steam. Inflation…well right now it’s a non-event.

Today’s US data showed growth, but at a much slower pace. US GDP is now expected to be 1.9%, not 2.2%.

What this means is that prices are not inflationary, which removes another potential reason for gold to rally. We’ve already witnessed gold fall from nearly $1800 an ounce in late February to the $1530 level.

So this leaves me with a few questions. Has gold been sold off due to some central banks need for cash? Did the IMF sell off any gold to finance their operations? When will central banks decide that gold is a Tier 1 asset, not a Tier 3 which changes in a major way the gold is valued on their balance sheets. Instead of a haircut of 50%, gold would be valued at its full price.

The chart below is published with permission of the Moore Research Center, Inc.

For simplicity purposes, I have published below the 15 and 30-year seasonal patterns. As you can see, they are very similar and show that gold prices tend to decline into July.

Keep in mind the date of July 26^th. If this is going to be a bullish year, that price will become important going forward as I would expect that number to become what prices in the second part of the year fight to stay over. The lower prices go now, the better the odds for a rally after July.

The Monthly chart pattern above is bearish as the Swingline Study continues to make lower highs (red arrows) and lower lows (yellow arrow). Now that prices are under the 18-Month Moving Average of Closes, 1591.9, that number becomes a resistance point. The dotted black lines are Bollinger Bands. If the market were to grab even further downside traction, 1328.7 would be a potential downside objective.

On this chart prices have fallen from 1790.4 to the current monthly low of 1526.7, without have an “up month”. Stochastic readings however are not oversold, so while the break has been impressive, the overall chart pattern still looks bearish.

The Weekly Chart, once again hit one of its major downside objectives, the Bollinger Band Bottom of 1545.8. Slow Stochastic readings remain oversold, but in the first stage of embedding. Embedding occurs when both the K and D lines (the red and green lines) stay under a 20 reading for several bars of time. The first bar is now occurring, so at this time all that can be said is that the Slow Stochastic reading is oversold, but may give way to locking in an even more sever downtrend in prices.  

Prices remain in Bearish formation, one of lower highs, lower lows with prices under the 18-Week Moving Average of Closes.  However this week’s low has so for a not taken out last week’s low. As long as 1599.0, last week’s high is not taken out, the Swingline Study remains bearish with prices tracking the Bollinger Band down.

At this point the Bollinger Band is acting as support. Yes it was penetrated two weeks ago and prices snapped back over it. That however is bearish. By prices getting to the right hand side of the band, they remain bearish. On this chart the taking out of the 1599 could lead to a rally near 1662, the 18-Day Moving Average of Weekly Closes. However, until taking out 1599 occurs, I remain in the bear camp.

The Slow Stochastic study is no longer in oversold territory as I consider a reading under 30 to be oversold. Neither the K nor D lines, the red and brown lines are under 30, so prices are not oversold.

The Swingline Study, which is labeled above is above has as its last high 1585.7.  As long as 1585.7 is not taken out, I see rallies up to the 18-Day Moving Average of Closes as a short sale. Ideally prices fail on this rally and the market drops down to attack the Bollinger Band, which is at 1529.9, represented by the dashed black line on the above chart.

In terms of Dollar risk, you’re talking about approximately $8 an ounce, which can be cut down ever further by using mini or e-micro gold contracts. The mini contract is 33 ounces and the e-micro contract is 10 ounces in size.

While I remain in the bear camp now, I look forward to the end of July when I expect prices to begin moving higher off of seasonal considerations. If you don’t like playing the short side of gold, get ready for July. However, until things change, the trend as of the writing of this letter remains bearish.

A question is whether or not the triple bottom in the 1530 price level was enough for the market to have already formed a trading bottom. I don’t know at this time. Should prices get over 1600 the odds favor a trading bottom formed.

All of the above charts continue to look bearish.

I think you’d agree that at least so far, news of sovereign debt issues in Europe, change of heads of governments in Europe and news about Iran have not moved gold higher.

I suggest going short on rallies against the 1577 level in the August contract, with stops over the 1585.8 level. Price objective would be another test of the 1530 level.

I am very specific on entry and exit points in my twice daily updates, which you are invited to subscribe to by going to www.iraepstein.com   You will see on the right hand side, Oral and Written Subscription Page.

I try to do at least two updates a day, sometimes more so entry and exit points do change with market conditions. Trades are also covering in my Video Webinars where I cover not only metals, but most major commodities practically every day.

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

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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, 31 May 2012 | Digg This Article