GOLDReport
6-12-2008
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The Fed is Making Changes
Interest rates around the globe are rising. India was the latest major country to raise them. Canada did not lower theirs as many expected and Europe has clearly stated that theirs are going up.
This leaves Chairman Bernanke is a hard place. The US economy unlike Europe's or India's is fragile. Our unemployment rate is soaring and our financial institutions remain under siege.
Lehman Brother is the latest casualty with short-sellers hitting this market hard. Some question their ability to survive. Not knowing all the facts, I have no comment other to say that as long as companies like Lehman don't quickly get the subprime mess behind them, those companies will face investor wrath and threat in turn the fragility of our banking system.
Inflation is not going to subdue before the next FOMC Meeting. Commodity-prices prices have gone to all time highs in the past week in a number of core commodity markets. Since Chairman Bernanke has stated this is not going unnoticed by the Fed and that the Fed feels the need to fight inflation he has but two choices. They are leave interest rates where they are or raise them.
He has to leave open the "new" Fed Windows just created to provide liquidity to banks and investment banks. He might tinker with those rates a bit and leave the Fed Fund Rate where it is. I am simply not sure what he will do other than betting that further immediate rate cuts are off the table.
This means to me that the Dollar has most likely bottomed!
The Dollar and Precious Metals
If the Dollar has bottomed, as I think it has, gold and silver traditionally come under selling pressure as this occurs. This is as things seem to now be working. I call this the adjustment period.
Periods of adjustment don't take long to adjust to. Yes the initial reaction is to say that a rising Dollar combats inflation and therefore precious and semi-precious metals come under selling pressure. However, once gold and silver adjust to the concept of a rising Dollar, the underlying inflation pressures may remain strong enough to move the psychology away from a stable or rising Dollar back to inflation and hedges against it.
Therefore, while the rise in the Dollar back to 74.00 in the June Dollar Index is certainly a blow to gold and silver, it is not the end the bull market in either in my opinion. Rather, it is a hurdle that needs to be overcome. Time and inflationary pressures will be the undoing of the Dollar keeping gold and silver down as long as world growth stays on track and energy prices continue to stay strong.
The Gold Seasonal Story
This story and the historical momentum of gold is shown on the Seasonal Gold chart displayed below, provided 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.
On a multi-decade basis, gold often struggles in the summer. It goes sideways to lower. Momentum picks up at the end of August as prices tend to strengthen into year end. Unless for some reason I don't know, energy prices collapse, I don't see this seasonal scenario changing.
Yes we should expect to see both rallies and breaks throughout the summer. No we should not expect a dramatic move up to begin before the fall months arrive and during all of this, I expect the Dollar to maintain an upside bias unless something negative happens to either our banking system or energy prices. It's that simple.
August Gold
August Gold is in a short-term downtrend. Look at the chart below.
The Slow Stochastic Study is clearly oversold with a reading in the low 20's. Unless this components of this study, the "K" and "D" line as show in red and yellow both get under 20 for 3-days in a row, gold is simply oversold with a downside bias.
Gold flirted with the 850 level back on May 2. From there prices moved up to the 840 level and back down to today's low of 859.6 Most of this time gold has gone basically sideways.
Prices are trading under the 18-Day Moving Average of Closes. Even a move over the most recent rally high of 885.9 would mean that prices in doing so would be under this moving average which is not how Bull Markets develop. Bull Markets develop when prices are over key moving averages and prices are making a pattern of higher highs and higher lows. Therefore until this pattern develops, the trend in Down, but the market is oversold.
Conclusion and Recommendation
Given the oversold condition of the Bear Trend at work, you should do nothing at this time. I don't know if the market will make lower lows or not, but I do expect attempts at such until we get out of June.
Rallies in Crude Oil and other energy markets to all time highs have not been able to ignite a Bull Market in Gold. I see no reason right now for this to change. Sure the rallies in energies cushion the breaks in Gold, but they don't seem to be able to ignite the start of a new refreshed Bull Market. The best I would look for is a move back to the 18-Day Moving Average of Closes, near the $900 price level.
At some point the market needs to work off its oversold condition or have Stochastics embed. Embedding means the "K" and "D" lines are both under a 20 reading for 3 or more days. If "embedding" develops, a sustained drop in prices often, but not always develops.
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Silver
Like Gold, Silver often breaks into late June, but unlike Gold, Silver often bounces hard in July. Look below at the Seasonal Tendency of Silver.
July Silver
The story around Silver is identical to that of Gold. The impact of inflation on world economies often forces interest rates to rise, which impacts silver a lot more than Gold due to Silver's industrial use. On the other hand, if the manufacturing sector of world economies holds up with rising inflation and rising interest rates, Silver benefits both from industrial demand and form its role as a semi-precious metal.
As you can see on the chart below, Silver has been flirting with the 16.46 level. In fact today the market finally broke through 16.50 and ran stop orders down to the 16.25 level. By day's end, silver closed sharply lower but over the 16.46 support.
Without doubt the current short-term trend is down and oversold. Stochastics are oversold at 17.48.
The initial downside target is the Bollinger Band Study displayed as the "white bands" on the Daily Chart below. The support number is 16.18.
Conclusion and Recommendation
Last week I said; "Should prices drop and close under 16.46, a "Head and Shoulder" chart formation will have occurred, which would be very bearish for Silver prices. Given the seasonal weakness Silver often displays in June, I am sitting on the sidelines until I see more proof that Silver has a base from which to work higher."
My bias has not changed in terms of entering the market on a trading basis. Prices for the first time since my last letter did get under the 16.46 price level and dropped down to 16.25. I think prices will work lower, but until Stochastics either embed or correct, my recommendation is to simply sit on the sidelines, patiently waiting for something to do.
I will update my thoughts in my twice daily market reports which I speak about access to in this market report.
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