TRADING THOUGHTS is about what the name in implies, is to promote timely and profitable trading of precious metals. We do not believe every turn in the market can be called. Our goal is that our recommendations should be profitable. These goals are not the same. Profits are the goals. Trades are not the goals. Do not expect all recommendations to be profitable. No system can achieve that lofty goal. TRADING THOUGHTS is not intended to be a lengthy news letter filled with witty comments. The goal is simply to state whether conditions in the precious metal’s market are favorable or not. Traders are advised that unless they have exceptional experience not to trade against the basic trend. Trading against a market trend is not wise.

On Friday, the markets took control of the markets. The Federal Reserve lost control of the financial markets that day. When you woke on Friday, the 30 year fixed rate mortgage, assuming you could qualify, was at 6.7/8%. At lunch time, that rate was at 8%. In the afternoon, they began executing the remaining live part of the U.S. housing market. The markets are ignoring the Fed.

Some are calling for the Federal Reserve to lower rates on Tuesday. Why? Bear Stearns needs their sympathy and help. Managers at hedge funds might not be able to make their Porsche payments. A lot is already broke, though. And all the central bankers cannot put Humpty Mortgage back together again.

Regardless of what FOMC does on Tuesday, they cannot force investors to buy mortgages or garbage debt for LBOs. Pushing on a string still does not work. Markets are now in control, not deluded strategists at Fed or Street.

Basic Trend: $Gold Up. Investors should focus on Buy signals. Strategy: Positive, per Investment Policy of Oct 2004. Investment Policy: Act on buy signals. Hold long-term core position.

$Gold had a good week while the hedge funds were hemorrhaging and the U.S. mortgage market was collapsing. That set of circumstances suggests most of the negative impact of deleveraging by hedge funds on the Gold market has probably passed. As the unwinding continues some selling could develop, but that move down from $690 to $640 would seem to encompass most of it.

Using the top chart, note that move down from $690. Move was composed of sharp up moves followed by longer down periods. That is a typical set of bearish moves. Since $640 a more bullish pattern has developed. Long period of up followed by sharp down move. That action is highlighted by arrow. Given that and that $Gold is over sold, conditions exist for an up move that will take out $690. That will bring on some excitement.

Basic Trend: $Silver: Up Investors should focus on Buy signals. Strategy: Positive, Per Investment Policy of October 2004 Investment Policy: Emphasize Buys

Silver has developed a similar set of patterns as those in Gold. In the bottom chart is also drawn a long down trend line across the top of that set of bearish patterns. Silver seems to be prepared to move up and through that line. The over sold condition supports that possibility.

An interesting set of circumstances may be developing with Chinese central bank. They own $100 billion of U.S. mortgage debt. How much they have lost on that is unknown. They have lost more than $400 million on their purchase of Blackstone Group, the hedge fund IPO. (NY Times, 3 Aug 2007) Might they have had enough of U.S. paper?

Recommendations: Hold existing Gold and Silver positions for higher prices, and further profits! Add to positions on buy signals.

CN$’s momentum has been broken. The currency was being used as a proxy for oil and other commodity prices by hedge funds. That group, as you might have guessed by now, is in the process of liquidating many holdings. CN$ will likely be one of them. And somehow, we must convey to CN readers the seriousness of the credit and mortgage meltdown in the U.S. Your biggest customer is seriously ill. CN$Gold seems to have bottomed, also.

Recommendation: Use strength in CN$ and buy signals to add to holdings. CN$ long-term sell.

EU€Gold: €487.9 + 5.9

EU€ has benefitted from the dedollaring of the world. Iran has nearly completed the move out of dollars into Euros. Iran has moved significantly to holding the Euro rather than the dollar. Impact of those actions is now past. Gold is likely to appreciate in Euros as the dollar price of Gold likely to move up faster than Euro. EU€Gold has bottomed.

EU€Gold Recommendation: EU€ investors can hold Gold for long-term. EU€ likely to appreciate against US$.

GBP £GOLD: £329.4 +6.4

GB£ has been a safe haven currency recently. Maybe the world just feels warm and cuddly holding the mother currency. That said, GB£Gold seems to have bottomed in early July. Gold’s price likely to appreciate faster than value of pound. Hold your Gold.

Recommendation: GB£ now in long -term bear market. Add to Gold positions.

GDM: 1071 , + 3, + 0.3%

Gold stock investors might seem a little frustrated this week. With the financial world hemorrhaging, one would think Gold stocks would have done better. What seems to be happening is that a more serious over sold condition was necessary after the strong run from 1000 to about 1,170. That was a 17% move, which is very strong. Short-term buy on Friday. Oversold condition building fuel necessary for a run to a new high. Buy your favorites.

U.S. DOLLAR:

In the second chart is plotted the Median Dollar Index and the oscillator for it. Have extended it out one more week in order to see how the oscillator might develop. Rapidly moving toward over bought without a move above the previous short-term high. That set of conditions suggests that while the dollar might rally on technical conditions over next two weeks the ultimate direction for the U.S. dollar is down. Combination of financial meltdown in U.S. and over bought dollar, technically, could push Gold to new cycle high in weeks ahead.

PAPER ASSET MARKETS:

Last week per Barron’s:

U.S. stocks at 52 week highs: 292

U.S. stocks at 52 week lows: 1,733

Hedge funds are being forced to reduce their debts, just as the case with home owners. Selling pressure has not reached climax stage. Will likely be greatest margin call in history. Will Federal Reserve attempt to save them? Doubt it. Greed drove the investment in and the management of the hedge fund mania. Saving greedy investors and managers is not one of the mandates of the Federal Reserve.

Your Eternal Optimist;

 Ned W. Schmidt,CFA,CEBS

Click to email me: nwschmidt@earthlink.net

-- Posted Sunday, 5 August 2007 | Digg This Article