GOLDReport
May 29, 2008
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Gold, Silver and the US Dollar
It's been two weeks since my last report. In that period of time, energy markets have hit new all time highs but gold and silver prices have struggled to hold on. In fact, gold is in a downtrend and silver may enter one shortly.
What's going on?
What's going on is that the Dollar is stuck in a trading range bounded by a top at 74.50 with a bottom of 71.05, the US financial markets are now coming to terms with real interest climbing higher, yes higher and a "fight inflation" mentality is beginning to set in.
The Subprime mess continues, but the market is no longer reacting to financial write-offs by banks in the same way they did at the time of the Bear Sterns collapse. The market mentality has changed, which is not at this moment bullish in the short term for either gold or silver.
It's important to note that it won't take much to see new all time highs in energy prices. However, after today's announcement by the EIA that Crude Oil supplies in the US feel by 8.883 million barrels, the largest drop since September 2004, prices have fallen. Why, I ask myself. The reason has to do with market psychology as some think that higher prices will curtail demand for energy. In the long run, those who think so are wrong. In the short term, anything can occur as market psychology is ruling the day.
Oil and Metals
Over the past two weeks, many market analysts have offered their reasons as to why metals have not set new record highs along with energy prices. Reasons have centered on banks raising interest rates, holidays in India, the "rising" Dollar, a weak US economy and so on.
I've seen no one mention the fact that seasonally speaking, this is when gold and silver are at their weakest and yes, seasonal tendencies do "tend" to pan out. So let me be the first to point this out.
In my mid-day videos on our website at www.iepstein.com I have been speaking about Stochastics losing their embedded status in energy markets. I've been pointing out that when this occurs, there is a very high probability that prices return to neutral ground. I define "Neutral Ground" as the 18-Day Moving Average of Closes. I have been telling customers to buy "Puts".
Run a chart on the energy markets. You will see that the prices are breaking down as the Stochastic Study is moving down. My objective is the 18-Day Moving Average of Closes.
As prices in energy markets break down, pressure is put on gold and silver to break, since the main current reason for inflation, high energy prices, are in fact breaking. Lower energy prices seem to be supporting the Dollar and stock indices. Therefore, liquidation in taking place in metals, just as the Seasonal Trends point out, is now taking place.
Take a look at the Seasonal Gold chart below, to us by the Moore Research Center...www.mrci.com
The Seasonal Chart below shows what Gold has done over both a 15 and 34-year time span in term of price momentum. I use the comparison to view and compare longer-term historical data versus shorter-term, more recent data.
Five days ago the current rally peaked, which coincided nicely with the seasonal play to the downside. The weakest time frame lies directly in front of us, which often leads to a price bottom in early July, from which prices move up nicely into year end.
So what does this mean?
It means that a downtrend or at least historic downward pressure on price is likely over the next 30-40 days. After that I look for a bottom to form, one that could carry price up to new highs by year end. Yes by year end.
August Gold
Let's look at a Daily Chart of June Gold.
Today's large break fits in well with my overall downside market call. It's possible that prices will work there way down to the Bollinger Band Bottom, labeled in "White" above as 857.3. Keep in mind that the Bollinger Band value will change daily. Right now it is moving up about $3 a day.
Stochastics are "not" oversold, which to me means more downside is immediately ahead. Resistance should be seen at the 18-Day Moving Average of Closes, shown as the "red line", which has a current value of $897.5.
Conclusion and Recommendation
I see the $860 level as being the next downside target. Currently the "short side" of the market seems the place to be. I do not expect to see energy prices support gold in the near term. Longer-term I do.
The issue now is one of a lack of fundamental support for gold with the Bears in control for the near term. I expect rallies back up to the 18-Day Moving Average of Closes, near 897.5 to be short sale opportunities with the Bollinger Band Bottom to be the initial downside target.
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Silver
Silver has been moving up and down in a broad price range with little in the way of interim corrections. However, before we go down that road, let's see what the Seasonal Tendency of Silver is.
Historically speaking according to the Seasonal Silver Chart, Silver prices often peak at the middle of May and break down until the end of June. A retest of lows often occurs at the end of August and prices risk into the end of the year.
The most current top did not occur in mid-May. Rather it occurred two days ago, May 27, 2009. I am not certain the exact date matters as much as the overall picture which is to expect downside pressure through June.
July Silver
Today's break in prices turned the trend of July Silver down. This occurred when prices broke through the last low made on May 14, 2008 at 16.55. This leaves the Bollinger Band Bottom, 16.14 as the next downside target.
Rallies back to the 18-Day Moving Average of Closes, 17.175 as the resistance zone. However, it is very important to keep you eye on the Stochastic reading. Should the "K" line, the "red" line that makes up the Stochastic reading get under 30, the market will become oversold. Until that occurs, rallies back to the 18-Day Moving Average of Closes should be sold.
Caveat: Due to the vertical moves Silver is experiencing, the Stop Orders needed to trade futures contracts are too large. I would consider Puts or Put Spreads on rallies, but not futures contracts given the Dollar risk.
When prices clear 18.375, the Bull Trend will be back in place. Until than, I think the short side of this market makes sense with the Bollinger Band Bottom the immediate price target.
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