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Ira Epstein's Gold Report

 -- Published: Thursday, 9 April 2015 | Print  | Disqus 

Weíre clearly back to a world of little to no inflation.

Today Japan reported its inflation rate was zero. Switzerland became the first government to sell 10-year notes at a negative interest rate on Wednesday. Yes, investors are paying the Swiss for 10-years to just hold their funds. Mexico sold 100-year notes, priced in Euros at an interest rate yield of 4.5% yield on Wednesday.

Yesterday the Federal Reserve shook things up a bit when it released notes of its last meeting. Here are the highlights:

  • Not all members wanted to drop the word "patient" in the Fed statement, but the majority did
  • There is no criteria for timing of first rate increase
  • Rate increases could begin before seeing increasing in core inflation or wage inflation
  • Several members said economic data warrants a first rate hike in June
  • Others said that the decline in energy prices coupled with the Dollar strength pointed to a rate hike later in 2015
  • A "couple" of members suggested doing nothing until 2016
  • Foreign easing by central banks abroad will increase growth in their home economies
  • US impacted in first quarter by bad weather and West Coast port closures
  • Chinese growth slowdown, Greece's financial situation and geopolitical tensions seen as international outlook risks

Energy prices continue super volatile keeping analysts perplexed by the continued increase in production by both the Saudiís and the US even with falling prices and less oil rigs in place. Cushing Oklahoma hit 60 million barrels in storage, an all-time high.

The combination of the rising Dollar and low to falling energy prices has yet to be felt in the US in terms of a sharp increase in consumer spending. Itís likely that the driving season will set records in the US though as gasoline prices are sharply lower than they were a year ago. Airfares remain very high and planes are running very full, which makes driving this summer a smart move for those going on vacations. I only mention this since any pickup will help to draw some oil supplies out of storage.

Than we have the Dollar. While Bill Gross made some money last month betting against the Dollar, which when you look back at it was opportune as he properly bet prices werenít going to just go under parity without some consolidation of a 35-cent break, the odds of parity being seen versus the Euro still looks good.

We know that a strong Dollar is not friendly commodities priced in Dollar which gold is.

US stock indices have gone nowhere this year, but thatís not the story. The story is that almost every country thatís embarking on a stimulus package including those in Europe and Japan as seeing sharp inflows of capital from abroad, capital that competes with gold purchases.

Gold benefits when interest rates are near zero as they are in Europe since gold doesnít pay interest. Therefore, the interest rate edge is removed. In addition, if youíre not an American, the odds are your currency is falling against the Dollar, making gold a reasonable alternative investment since you get  a currency play while not losing out on interest rates. Where you lose is by not putting your funds into stock markets wherever central banks are stimulating their economies.

Gold did not benefit as many in India and abroad were hopping when a new Indian government was elected that many thought might remove the gold tariff Indian jewelers pay.

China is in an economic slump, one that is impacting where the Chinese invest their funds. Gold always has a strong demand in China and India, but that demand would be a lot more if the Chinese economy was doing better and India removed the tariff on gold.

Geopolitical tensions, especially those concerning radical Muslims continue to grow. On the other side of this, the US is talking to Iran, with both governments trying to reach an accord. If an accord is reached Iranian oil production will surely pick up, further capping gains oil might otherwise eventually see.  An accord with Iran is not bullish gold.

South African January gold production was reported down year over year by 27.5% with February gold production falling by 8%. Clearly gold isn't focused on falling production as these numbers are bullish. At the end of April, South African Unions will be submitting new wage demands, which might curtail production later in the year. A bearish factor just reported out of India is less demand for gold in agricultural areas due to low crop prices.

So where does all this leave gold. Simply put, not in the best of places. As youíll see below, gold often rallies from March into mid-April which is what I attribute this current rally to. . After that it typically slumps.  All in all, gold looks at this time like itís more of a trading affair than a trending one, but overall, I see more reasons to be bearish than bullish in the short-term. Long-term thereís economic problems brewing because investors are chasing yield over practicality. Buying 10-year notes at a negative interest rate, the bubble being seen in tech stocks, crazy stock market valuations due to investment managers chasing yield and so on will come home to roost just as Larry Fink of Blackrock expects. When that happens, gold will come aliveÖbut that time is not now.

10 Year US Notes overlaid on Gold Chart

On the above chart Iíve overlaid one chart over the other. What are they?

Itís the June 10-Year Notes overlaying the June Gold contract.  This past November the two markets went into synch.  Keep in mind that when interest rate futures rally, real interest rate yields drop. When the Fed raises interest rates, expect the 10-Year Note contract to fall. Itís possible the two will go back to the relationship of inversion of that time, but right now, theyíre clearly in synch.

Price Count

As many of our customers know, we offer a proprietary tool called Price Counts. If you donít know what Price Counts are, how to use them, how to set them up on charts we have a PDF file explaining this in detail and can provide use of our charting software that contains this study.

To obtain this, simply click here and fill out your information.

Until and unless 1178.2 under the chart formation is hit, should gold prices stay in the current bullish pattern, The Price Count Study has an upside target of 1276.5. Take out the most recent Swingline Low of 1194.8 could negate this count.

Weekly Chart

The Weekly Chart has no trend.

Currently prices are trading under the 18-Week Moving Average of Closes, which provides the market with a downside bias.

The brown line over connecting tops and bottoms is the Swingline Study, which is another indicator unique to the charting software we provide to our clientele. What a Swingline does is provide you with analysis concerning if a market is trending and what the risk is before the trend is broke. Itís based on the concept that higher highs and higher lows are what make up an Uptrend. In this case, the Swingline is in an Uptrend. The Uptrend pattern would be broken if prices got under the most recent low of 1178.2.

When the Swingline is in an Uptrend, but prices are under the 18-Week Moving Average of Closes, the downside price bias nullifies the upside bias of the Swingline. In other words the two cancel each other out.  That would change if prices close back over 1213.1 without first getting under 1178.2.

Momentum as measured by the Slow Stochastic indicator is flat.

Daily Gold Chart

Adding to goldís complex technical picture is the setup on the Daily Chart.

First, the Swingline Study has a higher high and with todayís action, a lower low. In other words, the Swingline has no trend.

Second, the market has an upside bias since prices are trading over the 18-Day Moving Average of Closes.

Third, momentum as measured by the Slow Stochastics reading is overbought.

Nothing is in synch and hasnít been in since for most of March.

Price did challenge the longer term 100-Day Moving Average of Closes and found that resistance point difficult to overcome. Two distinct tests were made in the past 4-weeks, each resulting in a price pullback.  Now the US Dollar is again on the move up, which should restrain gold once again.

US Bonds and Notes are breaking down. As you know from above, when the notes break, gold has been following suit. Once real interest rates start moving up and hold that move, the futures contract in notes will break. If the gold-note relationship holds, gold will begin a new concerted fall off that.


As stated throughout this letter, thereís a lot of confusion impacting gold. It runs from when the US embarks on raising interest rates, the pace of the rise(s), a decline in gold production, the Greek situation, the impact of low oil prices on inflation, Iranís potential treaty with the P5+1, Chinaís economic slowdown, Indiaís not removing gold tariffs and an upcoming labor demand from unions in South Africa.

One of my favorite trading vehicles, right behind currencies is gold. But you have to know when to ďholdíem and when to foldíemĒ. This is neither. You have no position via my recommendations and Iím pleased with that due to lack of market trend.

A trend will kick in very soon.  Which way it goes I canít tell due to everything covered in this report. My instinct is that prices are going to work lower, not higher due to low inflation and the determination of the US Federal Reserve to find a reason to raise interest rates. The combination of a rising Dollar and low inflation should not act a prop for higher gold prices.

Geopolitical events, not including ISIS, are down. Africa is up for grabs, but unless that chaos were to move to gold producing areas itís more of a humane issue, not an economic one.

Therefore, I wait. When I see a trade, it will be issued to my subscribers.


Price Count Offer

If you havenít had the opportunity to obtain our Price Count write up, please click here and include your name, mailing address and phone number. Weíll get this out to you and can also set you up for a Free Trial to Market Center where you can apply the study. Our staff will even setup a Join.Me Meeting to teach you how to apply and use the study in Market Center.

You can call us at 1-866 973 2077 or simply click here and include the information in the e-mail message. Be sure to include your phone number in the e-mail as we need it to setup your Free Trial to Market Center.


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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