-- Posted Wednesday, 28 August 2013 | | Disqus
Events in Syria and Egypt rescued the day for the bulls in the gold market over the past two weeks. Adding to an already bullish gold environment was news yesterday of an improvement Germany’s Ifo business confidence index, which rose for the fourth consecutive month to a reading of 107.5 in August from 106.2 in July. Further enticing was a rise to 107.0 in the Ifo sub-index, another index which measures companies' expectations for the next six months rose to 103.3 in August from 102.4 in July.
Lurking in the background is the US Budget. In October, 33-days from today, the US budget will have been spent all its budgeted funds and in theory, the government will have to shut down. You can never be sure what “running out of funds” in the US means, but it always adds an element of drama, often ending with extensions, political bashing and more spending. Keep in mind that we have a new Secretary of the Treasury and that Fed Chairman Bernanke is about to retire so new players have to deal with the mess.
Chinese leaders have announced that a major meeting will take place in November. The exact meeting date is not yet finalized, but the agenda has been leaked. The meeting is set to discuss reforms on prices for resources, urbanization and an easing of the household registration system that currently limits rural migration to the cities. The Chinese leadership has stated that it wants to move forward with financial reforms such as allowing more market-based interest rates and easing capital controls. Vice Finance Minister Zhu Guangyao said Chinese officials are confident of reaching their target of 7.5% growth this year and will be prudent in the use of stimulus to achieve this.
US war machinery is in place and ready to begin missile strikes against Syria as early as tomorrow. The US won’t be going this alone. Just like in Libya, participation from the UK and France will be there. How long this mission goes is an unknown as is its goal.
A problem in striking Syria is defining the mission’s goal. The US had made it clear today that overturning Mr. Assad’s regime is not the goal, as the US says it doesn’t overthrow regimes. Sure, does anyone honestly believe that? Assuming we’re all that gullible, that leaves punishing the Assad regime for use of Sarin gas, which is politically speaking much easier to sell to the US public.
Not knowing anything about Sarin gas, I looked it up in Wikipedia. Here’s what I found. “Sarin degrades after a period of several weeks to several months. The shelf life can be shortened by impurities in precursor materials. According to the CIA, some Iraqi Sarin had a shelf life of only a few weeks, owing mostly to impure precursors.
Its otherwise short shelf life can be extended by increasing the purity of the precursor and intermediates and incorporating stabilizers such as tributylamine. In some formulations, tributylamine is replaced by diisopropylcarbodiimide (DIC), allowing Sarin to be stored in aluminiumcasings. In binary chemical weapons, the two precursors are stored separately in the same shell and mixed to form the agent immediately before or when the shell is in flight. This approach has the dual benefit of solving the stability issue and increasing the safety of Sarin munitions.”
Sarin gas is reportedly 500 times more potent than Cyanide, so how one destroys it if where its stored or processed via missile strikes while not allowing it to spread is a really good question. My guess is that the way to avoid this is to have the missiles target army and air force sites that don’t contain Sarin. That requires really good intelligence information, something we’ve lacked in past conflicts.
Another bullish factor for gold is doubt by many analysts that the Fed is going to begin tapering in September. The longer the Fed delays the tapering process, the more likely we’ll continue to see an overall weak Dollar, which is supportive to gold prices. It’s clear that once lower unemployment rates trend down, the tapering will begin. Once begun, it would take a financial shock for the Fed to retreat. The best to hope when tapering begins is that the Fed implements it gradually, sending a message to the market that the Fed is not intending on raising interest rates until 2015 or even later, depending on economic data. The problem with this is that financial markets will not wait for what ultimately happens as they’ll be or will already have priced in higher interest rates.
As long as world economies stay on the mend, many governments want to see controlled inflation, not deflation, as inflation allows for pricing power. Chairman Bernanke regularly makes the point that inflation is not yet where the Fed wants to see it. He’s not talking about low inflation; he’s talking of the need for a bit higher inflation. If inflation numbers drop too much, you get into deflation which is what Japan has been experiencing for a very long period of time. It’s much worse and harder to control than inflation.
As interest rates in the US move higher, funds invested in emerging world economies are pulling out and investing elsewhere. Examples include; India, Thailand and, Indonesia who are caught up in this as investors move funds to invest in better developed countries without the risk inherent in emerging market investments. This is putting serious pressure on emerging markets. So much so bailouts by the IMF are already being discussed. It’s another bullish event waiting to take center stage.
As China, Europe and the US grow their economies; eventually inflation will increase, adding to gold’s value.
So with all this having been said, what’ the bear case for gold? In a nutshell it’s that gold has already rallied sharply. This past June 28th December Gold Futures hit a low of $1182.6. Prices today hit 1423.4. That’s a gain of nearly $241 or 20% in just under 9-weeks.
Another potentially bearish factor is the price of Crude Oil. Gold is following oil prices as show in a chart seen later in the report. Crude oil has built in a large premium due to concerns about Egypt’s ability to control oil flow through the Suez Canal if civil war there escalates and what happens in Syria once Syria is attacked by the US, France and the UK.
If crude corrects, expect gold to follow. A chart showing an overlay of the two is show below.
As subscribers to my Twice Daily Update know, I recommended and those who followed my recommendation got long on August 22nd, in gold, silver and platinum.
I also instructed my subscribers to cut their long positions down in gold and silver as prices rallied. Today my subscribers took final profit on the platinum recommendation, but remain long silver and gold.
What to do with the open gold position is the subject of the rest of this letter.
In my last Gold Report, I pointed out the likelihood of a rally in gold about to occur. That’s now past tense and yes, the subscribers to my report issued buy signals that if they took them got filled.
As shown on the above chart, gold rallied nicely, in line with past historical patterns in August. As we enter September, when gold is in a Bear Market Year, prices tend to turn down. I realize that gold has rallied 20% since making its recent low, but prices were at $1655.9 in January 2013. Therefore, even with this rally, prices remain approximately $275 off its high. The interesting thing is that for the year, this rally puts the market back about halfway into this year’s trading range.
In summary, the tricky part is ahead as in bear years gold tends to break and fall into year end. In bull years gold rallies overall into year end. Gold has been in a bear phase for over two years now. September is likely to be a pivot month that defines if gold is still in an overall bear phase or not.
When you take the emotion out of the current rally and just look at the numbers, you see on the above chart that prices have rallied close to the 50% point of a normal Fibonacci retracement, which is often where prices run into resistance. That’s what’s taking place today.
The wild card is once Syria is attacked, what their method of defense will be. An attack on Israel is not out of the question, but unlikely unless Syria wants another war front. That leave the problem is that any type of retaliation by Syria, if it’s just moderately effective is probably initially bullish for gold and oil prices.
Look at the Gold-Brent Crude Oil correlation chart below to see for yourself how gold and Brent Crude Oil are tracking.
Once missiles are fired, the question is whether or not the “buy the rumor-sell the fact mentality” kicks in, meaning lower prices kicks in. If Syria puts up a strong defense, forcing even more confrontation, the odds would favor that a move to even higher energy prices due to uncertainty in the region takes place. Obviously I don’t know the impact on terrorist groups once missiles start flying, but that uncertainty is one of the elements behind the current rally in gold and energy prices.
Daily Chart with just Slow Stochastic Reading
As can be seen the above chart, gold prices are both hugging the Bollinger Band Top and staying “embedded” in terms of its Slow Stochastic reading. Both events are bullish.
Given that you’ve already taken 50% profit on my recommended long positions last week and that subscribers who follow my recommendations via my Twice Daily Updates have a lead of nearly $70 a contract on their remaining open position, you have room to watch events unfold.
Oil prices might tip off what is going to happen more than gold, as I think gold is following crude oil’s lead. It’s impossible for me to predict what occurs if or when Syria gets attacked. While today’s news if filled with getting the Western coalition together for a strike, I can’t help but wonder if there isn’t serious politicking going on to avoid it. No government can get away with use of Sarin. The issue is how to punish, not how to resolve, which from my point of view leaves me wondering what’s being accomplished.
As a chartist, which is how I think, the chart remains bullish and that’s what I make recommendations off.
Giving up your long position in front of what’s going on makes no sense to me. Yes, prices are overextended, but that means little if the Syrian conflict brings in Iran, Saudi Arabia and Israel in any manner. Things can quickly get out of control.
Trying to figure out if the Syrian public will be used as human shields as took place in Iraq is a possibility. Seeing missiles fired by Syria hitting any of coalition attackers will fuel further fighting.
This leaves you at the mercy of the events you can’t control.
On the bull side, imagine if energy supply routes or facilities get attacked in counter attacks. I did my best to explain that gold seems to be tracking oil prices. If oil shoots higher, gold isn’t going to stand still.
So what about a stop on remaining long position or adding new longs?
At this point buying a new position is hard. The risk is just immense.
You can consider selling a Call or buying a Put against long positions to cut down risk.
You can watch what the Slow Stochastic readings do in both gold or Brent Crude Oil. Both have bullish embedded readings. Once lost, the market will be in a downside corrective mode.
Or better yet, keep up with my Twice Daily Updates and Webinars where I keep my subscribers updated. If additional updates are warranted, which they often do, I put out more than two updates a day.
Keep in mind that when prices correct, it’s likely to be very nasty.
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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 Wednesday, 28 August 2013 | Digg This Article
| Source: GoldSeek.com
