GOLDReport

September 6, 2007

I want to start today's report off by reminding you that I now record two Mid-Day Video's on: One on Gold and Silver along with one on Stock Indices. These are in addition to the in-depth nightly video I record that covers all the major futures markets.

The link to the Mid-Day Videos is below. Be sure to click on the RSS feeds to know when a new video is posted. I try to get these posted by 1:00 P.M. CST.

http://www.iepstein.com/videos_start.aspx

By now you're probably tiring as I am with all the rhetoric about a Fed Fund Rate Cut...or lack of one. This rhetoric is taking up financial headlines, with good reason.

I believe that Gold and Silver should be directly impacted by the Fed decision on September 18th. Think of this event as a hurricane going for a direct mainland hit. The question is which grade of hurricane will hit.

I am in the camp that does not favor a Fed cut. I don't think the Fed's role is to bail out institutions or investors that made bad investments. I am not heartless, simply realistic. The consumer is still spending as seen by today's report on "back to school" sales. Yes, the consumer is slowing their spending down, but they are still spending and at a year on year increase level. Employment levels still look good as jobless claims are not rising enough to warrant worry just yet.

Has consumer confidence been hurt? Yes, as it should be.

Let's not waste time. I prefer to right to the issue as to possible impacts on Gold and Silver as related to what the Fed does or doesn't do on September 18th.

First scenario, the Fed cuts the Fed Fund Rate: If the Fed cuts the Fed Fund Rate, as many expect, I think the odds favor more than one cut will take place unless the Fed surprises the market with a 1/2 point cut. The stock market's initial reaction would most likely be bullish to any rate cut. The US Dollar reaction might be initially bullish and I would expect a bullish reaction for both Gold and Silver. Here's my rationale.

Lower interest rates, the interest rates that really affect the general consumer would drop, putting more purchasing power in the hands of consumers. The market would most likely herald a rate cut as helpful to the economy and most importantly, consumer confidence should rise. This rise in confidence might create a brief rally in the Dollar, but I don't think a long lasting one. I say this since the marketplace would soon see the interest rate differential between the Dollar, Euro and Pound widen. The countries that use the Euro are looking for a rate hike. China's growth is a known factor and China will most likely continue to raise its interest rate for the foreseeable future. Therefore, unless these countries suddenly decide to lower their rates, the Dollar's interest rate differential would narrow in, against the Dollar. Therefore, once the rate cut euphoria wears off, I would expect Dollar to break, possibly sharply.

Gold has been in lock-step with stock indices. Unless they decouple, Gold should rally off a Fed Fund Rate Cut with stock indices. When you couple a rate cut with the action that Fed has taken at the Fed Discount Window, which has been to infuse massive liquidity into the economy to calm the commercial paper markets, the US Money Supply measured by M-1 and M-2 should swell. My guess is that savvy market analysts would soon interpret a cut in the Fed Fund Rate as the breeding ground for an inflationary storm.

Silver should also benefit from a rate cut because an easing of interest rates would lead demand for good and to more inflation. Easier money should lead to a lower Dollar and eventually the lower Dollar value leads to more demand for US goods from abroad. If silver were used in the manufacture of those goods, the increase in that demand would boost silver prices, at least in the USA.

Second scenario, the Fed holds steady and does not cut the Fed Fund Rate. Under this scenario I would expect stock indices to break, the dollar to hold or rally a bit and Gold and Silver to initially break down.

Since Gold and Silver are temporarily tied at the hip to the stock indices, I would expect Gold and Silver to break with the stock markets. Holding rates steady in this scenario is similar to raising interest rates. By the Fed not cutting rates, the Fed would not be easing credit. The issue here is that not easing could and probably will be taken by many in the press to be the event that can lead many to believe the US is on the road to a "recession".

Emotions will be high. The action will be volatile. However, in my opinion the overall effect of what the Fed decides to do will in the longer term be moderate in terms of lasting power.

If Gold or Silver falls due to no rate cut, I recommend using that price break to establish long positions in both Gold and Silver. Yes, long positions using Call Option Spreads and futures this time.

December Gold

Look at the chart below that was provided by the Moore Research Center, Inc.

Think of the above chart as a "chart that measures momentum".

Historically speaking, gold's momentum has been one that typically calls for a rally that begins in the 2nd part of August and runs up into early-September. From there history shows that the market can stall or break a bit. Once past mid-September prices have historically rallied smartly into early October.

My point here is that momentum is pointing up and often peaks in early October.

Seasonal Charts, no matter how convincing they look cannot and do not guarantee what will take place in the future. Seasonal studies are an important tool, but one with limitations as no one knows the future or how future events will unfold.

That aside, what have prices done? Prices have followed the above chart...to the letter!

Below is a chart of December Gold.

Compare the seasonal chart to the Daily Chart. I've made it easy by inserting part of the seasonal on the chart below.

Conclusion and Recommendation

Readers of this report know that for nearly 1 month I have been focused on Gold Call Spreads. For several weeks leading up to this particular report, I have recommended readers build a core position in them. Past reports provided numerous strategies and updated from which those Spreads could be entered. On each report I refreshed those matrixes.

I am now recommending that you cut your position down by cashing in and taking some profit. As I don't know which spreads you elected to put on, I can’t be more specific. What I do know is that Gold has moved up nearly $50 an ounce since mid-August. Since August 31st', December Gold Futures have moved up $23. Therefore the spreads I recommended had to move to some degree in your favor. Certain spreads have moved dramatically in your favor.

By taking partial profit now, you will be in a position on a price correction, to once again establish them. The key is to NOT give up having a core Gold Call Spread position on since no one knows what the Fed will do on September 18th. By cashing in some of your position now, you should have funds to enter again, assuming prices correct. If prices don't correct break, an event I don't foresee, by maintaining your "core" position you are still in place to participate if prices rally.

In summation, at this time I do not believe that the Fed is going to cut the Fed Fund Rate. If this proves correct, I expect stock indices and metal prices to break on the announcement that the Fed decided to hold pat. Should this occur, I want you to use that price break to re-establish your Gold Call Spreads that you take off now.

If I am proved wrong and the Fed does cut the Fed Fund Rate, metals could soar. By keeping a "core position on" in front of the FOMC Meeting you will be in a position to maneuver. You might not be able to add Call Spreads, but you would be in place for the move.

Silver

I will once again begin covering Silver in next week's report. Admittedly, I stopped covering Silver since I saw such a big opportunity in Gold. Now I think Silver is ready to come to life.

 

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