GOLDReport
April 10, 2008
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The state of the US Economy...
I am of the belief that economically speaking, the USA is making economic headway. "Headway" however is a relative term.
First, I think that if there were a way to measure where we are now in terms of where this whole mess ultimately ends up, we would see that in historical terms, where we now are will prove to be beyond 50% of what we will ultimately experience. In other words, the worst is behind us. Second, I think more bad news is yet to come. So, am I am speaking in a double tongue? I don't think so.
What I am saying is this. Let me make an analogy. Think in combat terms. Think of a combat soldier and think of that solider as the US economy. He, sorry ladies, he was out on a non-warfare maneuver and was attacked by an enemy he didn't think existed. He was severely wounded, but is alive. He is in the hospital, recovering. He has both good days and bad days. The doctors have determined he will live, but not sure how long the recovery period will last.
Got it?
The USA is in a recession. How deep and how it will run, no one knows. However, the Fed, US Citizens and US Businesses are aware of what is going on and are doing their best to weather the storm by taking whatever protective action they can. Expecting more than that is expecting too much.
Inflation has a way to go and will get worse!
I see no way around it. Inflation is going to get worse. Worldwide, we are probably the weakest of large Western economies. Europe is doing well, as is Asia and many South American economies.
Demand for all types of commodities is strong. Worldwide demand for Crude Oil is very strong, as is demand for raw materials like Copper. Worldwide, food prices are higher than ever experienced.
Expecting this to change is something I do not see. In fact, when the US recovers, I expect this recovery to lead to an increase in inflation, as demand from the US, which has been at best anemic, picks up. As this happens, it will lead to a chase for commodities.
I see no chance of the Fed raising interest rates prior to the US recovery gaining "traction". To do so would kill the recovery. Yes, kill it. However, the Fed will eventually reach a point where the Fed begins to test water by standing stand pat on Fed Fund Rate cuts, especially if their "Creative Windows of Borrowing" as I like to call them, work.
The Fed will keep the financial system working, even if that means allowing inflation to expand.
June Gold
I think gold is bottoming. In my opinion it is in the first stage of basing out once again. This time near the $900 level. There will be starts and stops, but I suspect the current low of $876.30 will hold.
The overall chart pattern in June Gold changed on Wednesday, April 9, 2008. Gold began the process of making higher highs, something not seen since June Gold Futures peaked out on March 17th at $1038.60. It's possible that the recent low of $906.60 is tested or broken. However, if my inflation scenario is correct, I seriously doubt the recent low of $876.30 will be tested before we test the high.
Let's look at a chart of June Gold.
Now lets look at a Seasonal Chart of Gold provided to you by the Moore Research Center...www.mrci.com
Seasonal Chart of June Gold
From time to time I like to show what Gold has done over both a 15 and 34-year time span. The reason for the comparison is to "weight" more current events against events with a time span nearly double the "current event" time span.
The caveat with Seasonal Charts is this. They don't always work. For that matter, little "always" works. That doesn't mean that there isn't a place for this type of analysis. There clearly is.
It's how you use this type of chart that is what is important.
Looking back in time allows you to see what has occurred. By weighting or combining years together you get to see a Historical or Seasonal Pattern. Of course you can look back and dissect things even further. You can look for examples when the US was in a recession, had high inflation and so on. The point being made here is that I like to use Seasonal Charts as part of my trading arsenal.
As seen on the above chart, gold often bottoms out in March and rallies back into April. The April 1st low in Gold at $876.3 was lower than the mid-month low of $909 made on March 20th, as displayed on the Daily June Gold Chart. The upswing time frame also became skewed, as such; it's easy to see why Seasonal charts are not perfect and are but a historical reference as to what occurred in the past.
In looking at the past 15-years, as displayed in red, upside momentum is to be expected going into May. Later in the year, momentum again picks up.
Given the high price of Crude Oil, the sagging US Dollar and the strength in outside world economies, I like the prospect of higher gold prices this year.
Conclusion and Recommendation
I think it time to get ready to become a buyer.
My guess is that one prices get over today's high of 943.4 you should get long. The only question will be whether you use Futures or Options on Futures Contracts. What will determine the vehicle to use will be "risk". If I see a way to limit your risk to under $400 or so, I will most likely recommend that use Futures. If not, Options on Futures will be the way to go.
The key is to get ready to buy long once again. Because the price of gold has risen, margins have risen as well. If prices do as I expect, margins will go higher, so you might want to make sure your account can handle the margin.
I will issue the signal in my Twice Daily Updates, which you can find out more about by reading below.
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Silver
I was out of the office a good part of the morning and simply don't have the time today to write on silver today. I will do so next week.
I am as bullish on silver as I am on gold if that helps. Silver historically runs out of upside momentum in mid-may and often slips from that time until the end of May. The question will be from what price the slip begins or if it takes place. There will be more on this next week.
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