The Fed is holding true to its word, continuing to buy treasuries and keeping in place its employment targets. Chairman Bernanke said on Wednesday that the Fed will continue to target the unemployment rate, looking for ways to get it down toward 6.5% from its current level of 7.8%. The Chairman stated that the Fed is watching the economy in many ways, but refused to get caught up in discussion on  the metrics of when a downtrend in unemployment would be strong enough to signal the beginning of unwinding of its QE program.

The Bank of Japan spoke today about embarking on promises made by Mr. Abe, the LGP Party candidate they got elected. In a speech reported on today by Kyodo News, Bank of Japan Governor Haruhiko Kuroda promised Prime Minister Shinzo Abe that he will do his utmost to turn around years of growth-sapping deflation. The BOJ's additional measures are likely to center on boosting the purchase of government bonds, such as buying them with longer maturities and expanding the size of its asset purchase program. It doesn't stop there as the central bank was said to be considering increasing the purchase of riskier financial assets such as corporate bonds and exchange-traded funds. The initial impact was bullish for the Yen but the medium term impact should result in a lower Yen.

What’s the common theme among larger world economies?

They’re in a Currency War!

I define a Currency War as a scenario where countries race to see who can come up with the most accommodative policy to spur their economies along. Another way of looking at this is who can print and move money through their economy the fastest. Subscribers to my twice daily updates are aware that I’ve taken an aggressive approach to making them aware of what that I think that 2013 will be looked back upon on. It will be viewed as the year major economies give up on the idea of maintaining a “strong currency” and move to weaken them. The idea of allowing currencies to enter into a “free fall” is not what I envision. Rather, controlled intervention, via a number of quantitative easing measures to keep currency values under pressure, using the guise of stimulus to publically hide from what is really being done.

The US is a prime example of having done this ever since 2009 when the US embarked on quantitative easing programs. I think the economic cycle is such that others countries are now trying to do the same via their own quantitative easing measures.

For example, The Bank of England just yesterday announced yesterday it was about to embark on a similar plan. The Bank of Japan did the same. More will surely follow as it become a race to see who can lower their currency enough to get a competitive export advantage.

When the economies heat up, inflation will show its head. At that point central bankers will most likely try to rein in the monster they have unleashed. Given all that most industrial nations have felt since 2008, inflation is probably viewed by the masses as a welcome problem.

Eventually the overall impact on gold will be highly supportive.

The problem many don’t see is that since gold priced in Dollars, it’s hard for us in the US to see that gold has been going up in terms of other currency values. If you lived in Japan, the UK or other countries that have embarked on QE programs to stimulate their country’s economy, you’d see in the value of gold versus their currency has gone up as the Dollar has been rising against these currency values.

The 5 and 15 year historical pattern shown on the Seaonal Chart above points to the likelihood that the break in gold prices has coming to an end. This Seasonal Chart uses the chart pattern for June Gold as that is the market that the trading volume and open interest will shift to in another 10-days or so. The performance of both the April and June Seasonal charts are practically identical.

If gold prices were to follow its historical pattern, there should be an upside bias that carries into spring. We know some of the reasons, given the Cyprus situation along with quantitative easing programs initiated by Japan, the UK and potentially the European Union.  

I’ve labeled previous highs and lows on the above chart. The line going through the center of the chart is the 18-Monthy Moving Average of Closing prices, which means each bar represent a month of trading with the close shown as a bar on the vertical green bar of each line. The pattern as shown the by Swingline Study which connects highs and lows in a specific manner is bullish. Each low is higher and each high is higher.

The Slow Stochastic Study continues to show that momentum has not turned up. Rather, because the red line, the “K” line with a reading of 34.3 is lower than the “D” line reading of 43.41, the momentum is still pointing down.

If prices were to rally, I would look for resistance to show up at the 18-Month Moving Average of Closes, 1667.1. Most important is that I find this chart without a trend since the Swingline is pointing up but prices remain under this key moving average.

The picture of the Weekly chart above is showing a shift out of bearish momentum to bullish momentum. In the process, the momentum indicator projects a challenge of the 18-Week Moving Average of Closes, currently shown as 1649.9 and would be confirmed as an upside target if 1615.2 is taken out.

I teach how I arrive at this in my trading course, Ira Epstein’s Charting Course. (http://www.iraepstein.com/education.html)

If you look back at the October 2012 time frame you’ll the exact opposite Slow Stochastic Reading setup. In 2012 the Slow Stochastic Reading was in a bullish phase with both the K and D lines, the red and brown lines going sideways over a reading of 80. When the red line closed under 80, upside momentum was lost. Prices began falling resulting in the 18-Week Moving Average of Closes being hit.

We’re now in the exact opposite phase, a phase where a rally is expected to carry prices up to the 18-Week Moving of Closes if the Weekly Slow Stochastic closes this way. I have specific technical rules as to when the bearish reading can be regained, and in this case it would if prices crashed enough to turn back the reading or the following week. Hitting 1615.5 today confirmed to me that the odds strongly favor a move up to the 18-Week Moving Average of Closes.

Because prices are trading under this moving average, I cannot label this a bull market run. Rather, this is the neutralizing of the bear market phase gold was in and that was confirmed when the last Swingline high of 1615.2 was taken out. At that point the chart pattern became one of higher lows and higher highs, occurring under the 18-Week Moving Average of Closes which projects resistance on the rally at the 18-Week Moving Average of Closes.

On the Daily Chart higher low and higher highs are taking place over the 18-Day Moving Average of Closes. Prices are now in position to challenge the Bollinger Band Top, at 1619.5. The last break low on the chart was 1599.6 as shown by the Swingline Study recent low.

This chart is bullish and overbought. A break down to the 18-Day Moving Average of Closes at 1589.7 would not be ideal since it would change the pattern currently in place of higher highs and higher lows. Therefore, the best thing this chart pattern could do would be to have the Slow Stochastic Study begin the conversion process from being overbought, to embedding, which means the K and D line values both get over 80 and stay there. Right now they are 89.41 and 75.49, so there is more work to be done.

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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, 21 March 2013 | Digg This Article