Ira Epstein's Weekly Metal Report

Since my last report the US election has been decided, China completed putting its new government in place and Greece continues as an open wound. Open splits in the troika are in full view. The IMF wants to take a different path than that of the EU and European Central Bank. The IMF understands that a two year extension to Greece without deflating the base amount of debt Greece is paying interest on is a plan that will not work. The IMF wants debt to be written down and the EU and ECB are strongly against doing so.

In the US, President Obama handily won the election and control of the Senate. He doesn’t have control of the House of Representatives. The President has an agenda of taxing the rich, which he made very clear today and is going to pursue. He’s also in favor of adding more regulation and fighting spending cuts that impact the middle class. Why not, that was his winning platform.

The reality is that if he moves forward with this agenda many economists and business people think the country will go back into a recession. Obama care is here to stay, though there will likely be some tweaks in how it ultimately looks. Taxes on dividends for those with stock investments and those making over $250,000 a year will rise. The President said he’s in favor of leaving taxes on amounts of income up to $250,000 as is, but loopholes in the tax code that benefit the rich are now being targeted.

Compromise or lack of it between Congress and the President will be what captures news headlines over the next coming weeks. In his conference today the President mentioned Mitt Romney but not the most important Republican now in power and the one he has to deal with, John Boehner, the Speaker of the House. A snub? For sure!

In the end if nothing gets compromised and the mandatory budget and tax cuts kick in we’re all in trouble.

Certain things are a given. Defense spending is being cut back. Large defense contractors like Boeing immediately announced after the Obama win that Boeing began “restructuring”, which means layoffs are now taking place in the defense sector Boeings business. The trickledown effect will be seen as Boeing’s subcontractors will end up laying off workers as well.

Higher taxes are a given. Either the Republicans compromise or the mandatory tax cuts kick in. Either way, taxes go up.

I think it important to remind you again in planning gold trading that on July 26^th of this year December Gold Futures closed at 1619.8. Last year I wrote about the tendency in past years of gold closing at or above the July 26^th price in bullish years.

According to a report issued last year by USAGOLD (www.usagold.com) and updated this year by me using their data from the end of July to the end of December, the following gains and losses have been recorded since 2001.

If you average all the years together, you arrive at a past average percentage rate of return of + 10.17%. This can be interpreted to mean that gold is trading close to its average yearly gain 10.17%. Could this be why gold is having trouble adding to gains from this level? My answer is yes.

It doesn’t look to me like Spain is about to ask for funds this year since they successfully floated a large amount of debt in the past couple of weeks. Enough according to news reports to get them through the first of the year. Italy is also seeing success in selling debt on the open market.

The 15 year and 5 year historical pattern is shown on the seaonal chart above. In addition, I’ve plotted on the bottom of the chart both Bull and Bear year patterns.

I think it hard to argue that gold is so far following a “Bull Year” pattern. As such, if prices were to follow past year bull patterns, which is never a guarantee, I would expect the remainder of 2012 to have an upside bias.

The above Monthly Chart pattern remains in a bullish mode. The chart pattern is one of higher highs and higher lows. Support, according to where the 18-Month Moving Average of Closes comes in is at 1671.2. So far this month’s low is 1672.5.

If prices get over 1794.8, the most recent rally high, I would expect prices to continue up and challenge the high of 1911.6.

The Swingline Study has a clear pattern of higher lows and higher highs. I’ve shown the lows with a “red” arrow and the highs with a “blue” arrow. In addition, prices continue to trade over the 18-Month Moving Average of Closing Prices. This formation is what I term a longer term classic definition of a bull trend. Higher highs and higher lows are being made and they are taking place over the 18-Month Moving Average of Closes.

Momentum as measured by the Slow Stochastic Study continues to point upwards and is not in overbought territory.

The low of 1554.4 remains an important number in terms of a number that should not be taken out if the pattern of higher highs and higher lows is to stay in place.

The momentum as displayed by the Swingline Study, which labels previous highs and lows, is one of a higher high seen at 1794.8 and that of a lower low at 1672.5.

A large plus in favor of the bulls is that prices have been unable to close under the 18-Week Moving Average of Closes. Yes, prices did fall to this number, but that is where they basically held. I consider this very important as when trends set in, markets don’t often close under major moving averages. They use them as support or resistance points.

You might ask yourself what would damage the probability of prices moving even higher into year-end at this time of the year. I would answer by saying that should the market tick under 1672.5, the most recent break low, that that in and of itself would signal an end to the idea of higher highs this year. I say that with one key reservation, that this takes place after this Friday, November 16^th. Doing so would create a pattern of lower highs and lower lows. Because of how much time is left in the year, it would be difficult to reset a pattern of higher highs and higher lows. Therefore, I think 1672.5 is the “key” number that should not be taken out if the bull move is to continue from here.

The Slow Stochastic Study has an overbought reading. This takes place when either the K or D lines, the red or brown lines are over 70 but not both over 80. This is where the reading is now at. If this reading were to get both the K and D readings over 80 that would turn this indicator bullish.

The low of yesterday, November 13^th was 1717.6. If this low is taken out by even a tick, the chart pattern would lose its pattern of higher highs and higher lows. Interestingly, support at the 18-Day Moving Average of Closes is at 1713.5.

The cleanest pattern that could develop is to see a slight price break, not one that takes prices under 1717.5 and that allows the Slow Stochastic Study to turn bullish by embedding which means the K and D lines both get and stay over 80. Without this, I think more consolidation is needed.

Another scenario would be to see prices just move sideways to higher and not take out 1717.5, which would be an ideal case for market technicians who are bullish.

I expect to see a number of developments before my next Gold Report is published.

Israel is probably to be engaged in more warfare. Hamas declared war on Israel today after Israel targeted and killed a senior Hamas leader. Israel than published a video of the killing, which will provoke more actions by Hamas. Whether Iran somehow joins with Hamas directly on an attack against Israel is not something I think will happen, but if they did it would be bullish gold. The more likely scenario is that Iran backs Hamas in terms of missiles but not with Iranian soldiers on the ground.

Its’ very difficult to predict what’s going to happen in Congress. If the Republican’s decide to compromise, which I expect they ultimately do, they’ll most likely do so at the last minute after trying to get all the concessions they can. They won’t get many and what they get if any, won’t come quickly, or easily. The Republicans have few cards to play given the stance the President has taken and the strength of his recent election victory. If Republicans don’t bend, they will be blamed as the US economy goes south. Therefore, I expect a compromise, which is not in my opinion bullish for gold.

Greece is another issue you have to consider. The outlook is bleak but again I don’t see the IMF and the EU not being able to compromise.

This begs the question of what to do now, which isn’t easily answered as there are many crosswinds.

I am bullish, but concerned that the Daily Chart looks vulnerable to more price correction. I am also looking at the divergence between gold and stock indices, which hasn’t recently taken place but is now occurring.

Last prices can afford to break nearly $100 an ounce and still end up with gains over July 26^th.

I see gold as a fluid market, one I want to get long, but not just yet. I will announce trade recommendations in my Twice Daily Updates.

___________________________________________________________________

You can subscribe to by going to www.iraepstein.com , where you will see on the right hand side, Oral and Written Subscription Page. Simply click on and become a subscriber.

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.


	LIVE Gold Prices $ \| E-Mail Subscriptions \| Update GoldSeek \| GoldSeek Radio