Ira Epstein's Gold Report

I’ve been giving a lot of thought as to what will be the next big catalyst that moves gold prices. I’ve come up with what I think is a logical conclusion…based on no new ultra surprising world events.

Given that war in the Ukraine and Iraq haven’t been able to influence gold prices in any meaningful manner, I think it fair to say you pay attention to these event, don’t expect them to have a lasting impact on gold prices going forward.

Inflation as reported both in the US and Europe hasn’t been a market concern either. Just yesterday Richmond Federal Reserve President said inflation has bottomed out but remains in check. After reading the FOMC Meeting notes today I’m not sure that’s the Fed’s official stance. Regardless, in Europe deflation, not inflation is a big concern and will continue to be for a long time.

Deflation in a roundabout way has supported gold. What you want to look at is the rally in gold versus the price action of the US Dollar Index versus other currencies. As the Dollar’s gone sideways this year, it’s been accompanied by an overall rise in the Euro, Yen, British Pound, New Zealand Dollar, Aussie Dollar and other major currencies. Some currencies like the New Zealand Dollar have had stellar performance while others which have had upside bias, haven’t soared.

Currency rotation has helped as different currencies have had the opportunity to lead the charge against the US Dollar. The overall impact has been that the Dollar has declined since the beginning of the year but is now in a trading range with downside bias. The range as can be seen for the chart of the Dollar Index below is just over 250-points, which in currency lingo isn’t all that large.

In searching for what may be the next catalyst for gold prices to move off of, I’m coming to the conclusion that in the end it will be a rising Dollar. I’m reaching, not yet having reached that conclusion by looking at two events that haven’t yet occurred. I’ve limited myself to two events simply because war, economic catastrophe and the like have already occurred. What’s left is inflation and higher, yes higher interest rates.

Inflation is very subdued in the US and will likely remain that way until the labor market tightens up, which in turn will drive wages higher and will ultimately be accompanied by increasing inflation. I’m not forgetting that higher wages could also come about by enactment of a higher minimum wage law which some states are now placing on mid-term referendum ballots and will likely pass in some states even without a federal mandate.

However, the more likely catalyst for the next move in gold will be rising interest rates in the US. The historic low interest rates in the US are going to come to an end. Whether interest rates up in mid-2015, late 2015 or sometime in 2016 is pretty much a given, especially by analysts with a lot more data at their disposal than I have. I can’t pinpoint when the change will take place, but as long as the economy improves I think it’s simply a question of when, not if they go up.

When interest rates start to trend higher, which hasn’t yet gained sustainable traction; it’s likely to be accompanied because of lower bank standards to get loans. This is already underway.

I don’t know about you, but my mailbox is getting flooded with offers on new interest rate cards, transferring current credit account balances and the like. I’ve used my unsolicited postal mail as a source when trying to figure out trends and found it pretty reliable. Therefore, I think in a sneaky way, credit standards must be changing by credit card issuers. Interest on credit card balances is very high and probably very profitable. Five years ago the standards tightened but now they’re changing.

Through regional Fed Presidents, the Fed testing sending messages via speeches to financial institutions, business and the public at large to prepare for higher interest rates to take place within a year or so. The Fed is clearly sensitive about how this message gets interpreted as due to some poor wording in the past shocks went through the stock market, sending the indices down sharply, without much of an overall rally in gold.

Therefore in looking at what might be a new catalyst, I’m left thinking that what the markets haven’t seen in a long time is a strong Dollar.

If the Dollar rallies, my guess is that gold will follow the 11-year bear pattern, the red line seen on the lower portion of the above chart. Without a Dollar rally, the odds strongly favor more upside as the July-August time frame in bullish years is often where gold prices on an overall basis tend to firm.

QT PriceCounts are a unique study included in our MarketCenter charts. You’re welcome to sign up for a free trial to MarketCenter Charts by clicking on the link below or copying this link it into your web browser and signing up that way.

QT PriceCounts are a price projection tool. The theory behind QT PriceCounts is not difficult to understand. QT PriceCount objectives are calculated off an initial leg of a new trend, and assume that the initial leg of a new trend by itself can project one or more objectives in the direction of the new trend. There are specific rules that tell you when the objectives are nullified, which we want to send you.

We have a very helpful information sheet on this study. It’s full of chart examples and rules that explain in detail the theory and use of this study. To receive a free copy, simply e-mail us back by clicking on the link below.

As you can see on the Monthly Chart, the first leg down began on September 11, 2011. The first leg was completed when prices recently dropped to 1241.7, the first downside target. It remains to be seen if other legs will be met, but given that this study resembles Swingline’s, until 1392.6 on this chart is taken out, the remaining PriceCounts remain active.

The Swingline Study chart pattern is now bullish on the above Weekly Chart as it shows that the Swingline Study, which is unique to charting services we offer, has a pattern of higher lows and higher highs. If the 1333.1 level is taken out, it would add to this charts bullishness.

The primary indicator is the Slow Stochastic Study which has a bullish embedded Slow Stochastic reading. The 1334.9 level needs to be taken out to get the Swingline Study to neutralize its current trendless reading. I label the Swingline Study as trendless because the chart pattern is one in which the current low of 1309.4 was lower than the previous low of 1311.00.

You might wonder why I label the chart as bullish when the Swingline Study is trendless and the reason has to do with my hierarchy of indicator importance. In my charting course I teach that an embedded Slow Stochastic Study, when it develops rules the chart. It doesn’t care when embedded what Swingline’s do. All that is important is that it stays embedded, which it currently is.

When an embedded Slow Stochastic reading is present, as it is in gold, you wait for that reading to be lost before confirming that a downtrend has been lost.

Gold is not at this point yet, so I consider the downtrend weakened but still intact.

The idea of this particular report is to set you up with what I think the next catalyst behind the next “big” move in gold.

Simply put, as long as the Dollar stays under selling pressure I favor looking for gold to try to maintain an overall bullish stance. If the Dollar breaks out of its current trading range to the upside, look for gold to lose value. If the Dollar breaks out the downside, look for gold prices to increase.

The anticipation that the Fed would not change their interest rate stance saved the day today for gold as the anticipation capped the rally in the Dollar. After 1:00 PM CDT, when the FOMC Minutes of last month’s meeting were release gold spurted higher. The question is whether or not Asia and Europe will interpret the action in US markets to be correction as most of those traders were not at work due to time zones.

Subscribers to my Daly Market Updates have been long gold going into today. I wish today saw more follow through in terms of making a new high for this leg of the up move, but until the bullish embedded reading is lost, there’s plenty of reason to maintain the current bullish stance, which I’ve done.

The next resistance point is the upper Bollinger Band which has a current value of 1350.6. Keep in mind that Bollinger Band numbers shift according to the formula they are based on so it’s important to take a glance at its value every now and then.

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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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