Ira Epstein's Gold Report

Gold bulls have a lot to consider; given the poor reaction gold is having to the Ukrainian situation and slowdown in the Chinese economy.

Last night the US announced that it is sending paratroopers for training exercises to Poland, Latvia, Estonia and Lithuania. The amount of troops is small, approximately 100 to each country. The announcement both of this and counter announcement by Russia today that said that any attack on pro-Russian protesters will be interpreted as an attack on Russia has moved gold….barely.

I just don’t get President Obama’s message on the Ukraine. Europe’s I understand as Europe doesn’t want to go to war over the Ukraine and doesn’t want to have its energy supplies shut off without having a substitute in place first. We on the other hand do little to no business with Russia and have been snubbed by Mr. Putin at every twist and turn he can conjure up. Think Edward Snowden and Syria.

China is still in the midst of growth, but not in double digits as seen in past years. China’s current growth is forecast to be somewhere between 7 to 7.5%, a nice growth rate by most standards, but simply not as large as many had hoped for.

Europe, the US and Japan are still grappling with deflation, not inflation. The goal is 2% inflation, which is so far elusive. Seeing the Dollar fall, which is what has been going on when looking at the Dollar versus the Yen or Eurocurrency is not an inflationary sign.

Therefore, gold lacks a bull story from which to launch itself higher. This leaves open bearish influences, which might drive gold down to where it began trading in 2014, the $1190 level.

Gold is following its seasonal pattern. Look at the top part of the graph. Whether this year turns out to be a bull or bearish year doesn’t matter given that prices tend to slip down starting in the March-April time frame.

The $200 an ounce rally that began on Jan 1, 2014 certainly doesn’t allow for calling what’s gone so far bearish. If anything, the bulls have controlled price action up until recently, so while those who follow my twice daily recommendations just banked nice profits, this doesn’t mean that 2014 will stay in the bear camp. The current break fit in nicely with both the chart action shown below and the start of this leg of a seasonal decline. You did well by being short and cashed in, but now the question is “what next”?

The Swingline pattern on this chart is one of lower highs and higher lows. The Slow Stochastic Study remains in oversold territory with a reading of 21.94 and 19.4. Resistance is up at 1391.4, the last Swingline High.

Notice also that prices have not been able to get back to the long term moving average of closes, 1139.1.

It’s hard to trade off of Monthly Charts due to risk, but that doesn’t mean they don’t have importance. They do and the fact that prices are still over the 100-Month Moving Average of Closes is a long term bullish sign. In the short term it’s not overly important since prices are under the 18-Month Moving Average of Closes.

This means current long term momentum remains down, but oversold. The correction has not had enough momentum to break down to longer term support, the 100-Day Moving Average of Closes.

Focus on the arrows on the above weekly gold chart. The placement of each arrow is determined by the Swingline Study, an indicator I created that displays in a specific manner previous highs and lows.

The Swingline Study pattern is bearish since the pattern is one of lower highs and lower lows. Today’s low of 1272.4 on the Weekly chart is lower than 1277.3. The current rally high is 1330. Therefore you have lower lows and lower highs with prices trading at the 18-Week Moving Average of Closes, which comes in tonight at 1291.

The 100-Week Moving Average of Closes is way up at 1470.8 and the 18-Week Moving Average of Closes is under the 100-Week’s at 1291. The Swingline is in a downtrend.

I interpret this chart as neutral to bearish. I say neutral because prices are trading slightly over the 18-Week Moving Average of Closes and bearish because the Swingline and Slow Stochastic readings both have downside momentum.

Today saw chart action that is commonly labeled an “Outside Day Up”. This occurs when the chart action takes out the prior trading day’s low and high and the market closes higher on the day. Some even use the opening as a filter saying when the above occurs in order to further qualify as an Outside Day Up the market must also close over the current day’s opening price. All of these terms were seen today.

In today’s case, the rally was enough to also change the Swingline pattern that was in place coming into today. The pattern was one of lower highs and lows taking place under the 18-Day Moving Average of Closes. Today saw the recent Swingline High penetrated, which neutralized the Swingline’s downtrend.

Last week I instructed my subscribers to cover their short positions against the 100-Day Moving Average of Closes. My coverage point was proven correct today as once again prices hit this moving average but couldn’t stay under it.

In technical terms another key item that offered support was the Lower Bollinger Band. The market hit it for the first time in long time, since March and reversed off it. Prices trade within Bollinger Bands 95% of the time. This means that only for short periods of time does the market trade outside the bands, which is where the theory of covering some of one’s longs or shorts against the bands comes from.

The question now is whether or not things heat up enough in the Ukraine to move gold higher.

I think most would agree that inflation in most developed countries is a non-issue. In fact deflation is what the central banks are fighting off.

I don’t see the world going to war over the Ukraine, especially when Europe has no appetite to put its energy supplies from Russia at risk. They might change their stance when other energy of energy are available, but that’s a ways off.

Stock indices remain in the bull camp which is a detriment to higher gold prices.

World economies are on the mend as seen just recently by the success of Greece’s debt offering.

The Dollar remains on the defensive against all the major currencies expect the Yuan.

Therefore, I remain in the bear camp, but without a bear position in place.

Look for me a new trade signal shortly. I will send these out to my subscribers via my twice daily updates. My guess is that at this time it will be another sell signal.

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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.


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