GOLDReport
January 17, 2008
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The Economy...
If you watch my mid-day videos, I think you'll see that the stock market is on the ropes. Ropes I've been lucky enough to call and track.
The Fed is well behind the curve and is doing little to get ahead of it. I have no confidence at this time the Chairman Bernanke understands how to use the media. Therefore the psychology behind the market is one of doom and gloom. Fed action with a rate cut prior to the next FOMC Meeting would have helped things, but frankly would not have solved them.
My Take on Things...
I know this will sound a bit strange, but the "right" things are starting to occur. Today Merrill Lynch finally wrote down an amount large enough to convince me that the psychology in taking write downs has changed. New management is taking the reins and slashing where they have to. Why not, they're not to blame for past management's decisions.
By doing so, the markets are well into washing out the market excesses. Once done, a large "pop" to the upside will occur as investors realize what lies ahead is better news. Neither the markets nor the news events are there yet. Rather, both are still caught up in write down process and the fear and doom that goes hand in hand with this process.
However, for the very first time, I see light...far down the tunnel indeed, but a dimmer of light beginning to shine.
Seasonal Chart
Below is a "new" Seasonal Chart of Gold, which covers the last 15 and 34-years respectively. It was just created and provided to us by the Moore Research Center, Inc.
In the above Gold Seasonal Chart, I've highlighted the seasonal January action that has taken place over the past 15 and 34 years respectively. The "Blue Line" represents the 34-year line and the "Red Line" represents the most current 15-year years. What is striking is that by month's end, prices tend to peak out, at least historically speaking and rally back in early February.
What no one knows is the impact we will see from the current financial mess we are now in. Today our nation's two largest private bond insurers saw the value of their stock shares plummet. As of the time of this writing, Ambac saw their shares fall 50%. MBIA's saw theirs fall by 30%. What if they go out of business? What happens? Even if they don't go out of business, do they have the ability to pay off what they've insured? These questions are important. Should events unfold where they have to pay off the insured, a huge flight to quality could occur, one the likes you haven't seen the like of yet.
I bring this up only because of the confluence of bad things going on in our economy continues. Today Merrill Lynch bit the bullet, writing off another $14 billion in losses. The good news is that they're getting this behind them. However it does leave me worrying about what is still out there, waiting to be announced by others.
Let's look at a daily chart of February Gold.
The first thing I notice is that upside momentum is waning. Stochastics have turned down. I interpret this as meaning that rallies will be met with selling until Stochastics get back under a 70 reading.
When Stochastics break down like they have, typically markets in which this event occurs have problems holding onto intraday gains. This is symptomatic of prices wanting to work sideways to lower due to the influence of Stochastics turning down.
The coupling of Stochastics breaking down along with the seasonal tendency of gold to peak out in mid-January and weaken into month end is enough of an event to keep me out of this market, at least temporarily.
Does this mean I am bearish or have lost my enthusiasm for gold? No it doesn't. It simply means that "timing", at least as I interpret timing, says to wait for a better entry, ideally at a lower price. Gold's upside loss of momentum along with its historical seasonal influences "say" to me to stand aside. By month's end I will most likely look to be a buyer, but not right now.
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Conclusion and Recommendation
As regular readers of my report already know, I recommended that those that had followed my recommendation took full profit on their Call Spreads on the rally up to $900 an ounce.
I am now looking for a price break to once again establish a long position. I may use futures this time, not Call Spreads. No matter since at this time the "timing" isn't right at this moment to enter gold from the long side. Given the seasonal trend, I may be looking to do so by next week, but not right now.
Silver holds a bit more interest right now for me than gold does. Read below to see why.
Silver
Spend a moment or two looking at the updated Silver Seasonal Chart below provided to me by Moore Research (MRCI). Afterwards refer back to the Gold Seasonal Chart above and you will see that this is "seasonal time" of year where silver often displays a tendency to be stronger than gold.
Based on seasonal factors alone I look for silver prices to continue up into the February-March time frame and am recommending being in a Long Silver Call Spread Position. There's more about this in the Silver Recommendation Section below.
Let's spend a moment or tow looking at a Daily Chart of March Silver.
Silver made new highs of is zeroing in on resistance of $16.715 and sold off nearly a full dollar an ounce since doing so but 3-days ago. At the same time, like gold, Stochastics have turned down which means upside momentum, for at least the near term, seems to have been lost.
Should prices break under 15.77, I would expect a challenge of the 18-Day Moving Average of Closes, currently displayed at 15.504. The 18-Day Moving Average of Closes is moving up at a rate approximating $9 a day, so it won't take much of a price break for silver to hit it.
There's nothing magical about hitting the 18-Day Moving Average of Closes. What is important is that prices when they reach down to it, prices often begin the process of consolidating. That fits in with the sideways action that the Seasonal Silver Chart calls for from mid to late January.
Recommendation
Today I recommended taking profit on the long March Silver 1525-1600 Call Spread that my customer own at .15. The spread finished the day at .412. Take profit on this now.
Yesterday I recommended putting on the long March Silver 1625-1675 Call Spread. It closed today at .163. If you haven't put it on, I recommend doing so now. You might want to put part on right here, at 18 or better and 50% more if prices break down to 13 or so. As we are in a sideways time frame, I don't feel the need to "run" at the spread, but do want a position in it.
I will update this recommendation in my twice daily written updates and in my nightly reports.
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