GOLDReport

September 13, 2007

I want to start today’s report off by reminding my readers that I now record two

Mid-Day Video's: 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

We will soon be recording many more, some along the theme of my past TV show called: "Stocks, Options and Futures" where I will be interviewing market technicians and offering up copies of their market letters.

Let's get down to the "nitty gritty"!

Anything I recommend or that you now end up doing between now and the FOMC Announcement next week is simply a bet on whether or not the Fed Fund Rate will be cut.

Underlying scenarios of inflation along with just how much of a rate cut was or is needed will in but a short period of time become post mortem issues. The key is simple. It is what happens once the FOMC Announcement is made as the financial world will be watching and there will be immediate ramifications.

In the end, whatever the Fed decides comes down to this.

Consumer confidence will either be hurt or boosted. It's really that simple in terms of immediate market reaction. The longer-term ramifications are a different thing. However to get to the longer-term, you first need to overcome the shorter-term ramifications and those are what we will focus on.

Impact Scenarios

Fed cuts the Fed Fund Rate: If the Fed cuts the Fed Fund Rate, I think the odds favor that over time, a sequence of cuts will take place. Should a rate cut occur, my guess is that the Fed plays it safe by instituting a 1/4 point cut. Some think a 1/2 point cut could be announced, but I think that would be a surprise and send the wrong message to the markets, as a 1/2 point cut could be interpreted by some as meaning that things in US economy are much worse than we know, which forced the Fed to be very aggressive in deciding on a 1/2 point cut. I don't see this as being the message the Fed wants to deliver, so I think that if there is a cut, it will be one of a 1/4 point.

If a rate cut is announced, I would expect the stock market's initial reaction to be bullish. The US Dollar's reaction can go either way…at least initially. In the end, the impact should be more bearish than bullish on the US Dollar. The currency markets might start out thinking that Fed is doing the "right" things and "buy" the Dollar off those thoughts. However, in the end concerns over the interest rate differentials and the reasons for the cut would surface. A bearish impact on the Dollar should ultimately ensue. Over time, the impact of a low Dollar should benefit the US economy; however that impact is over time and not an immediate benefit.

Any Fed Fund Rate cut should be bullish for gold. If so, gold prices to some degree should pull silver along.

Lower interest rates, a falling US Dollar, a rising stock market along with a general bull market in grain prices are all conducive to sharply higher gold prices. In fact, I would say that a cut in the Fed Fund Rate would so be named something along the lines of the "Perfect Inflation Storm".

Next Scenario

Fed holds steady and does not cut the Fed Fund Rate: Under this scenario I would expect stock indices to break, the US Dollar to rally and gold and silver to initially break down with the stock indices.

By not cutting the Fed Fund Rate the Fed would be telegraphing a message that inflation is still what the Fed was most concerned about. This would not be bullish gold initially. Silver should follow gold. Silver being an industrial metal would get double hit, both from the attack on inflation by the Fed and on the state of the economy. Since the markets are looking for a Fed Fund Rate cut, not getting one would be a blow to the US economy and could start a "run" on Commercial Paper. When this occurred two weeks ago, gold did poorly. It fell with stock prices.

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.

No matter what happens, I intend on using price breaks in both gold and silver to establish long positions. Yes, long positions using Call Option Spreads and futures this time.

December Gold

It's very important that you look at the chart below, that was provided to me by the Moore Research Center, Inc.

Think of the Seasonal Chart above as a "chart that measures market price momentum". Momentum is up, strongly up at this time of year. Therefore regardless of the Fed's decision, in historic terms I expect gold and silver to ultimately rally. To me it's a question of where to establish or recommend establishing a long position in gold, not if such a position should be established.

Gold has rallied nearly $70 off its mid August break low. Yes over $70.

Last week I began telling my customers, when gold was about $10 lower than it is as I am writing this report, to start taking part of their profits on the Long Gold Call Spreads I have been writing about. Some of these spreads have more than doubled since I began writing about them. When prices broke hard in mid August, I was recommending that readers use the break to put Gold Call Spreads on.

In fact on the TV show "First Business", I spoke about gold moving in $25 Dollar increments. At the time of the recording I was looking for the first of several major resistance points to be reached, up near $725. That TV show was recorded a couple of weeks back. Two-days ago December Gold made a new high of 723.8.

I don't see the Bull move in gold as being over. Rather the worst I see is the market correcting or pausing right now. Anything can happen in front and right after the FOMC Meeting.

Below is a chart of December Gold.

Conclusion and Recommendation

Those who have followed my recommendation should still be long their core position in their Gold Call Spreads. You are to hold onto those through the FOMC Announcement.

If things go badly, meaning the Fed does not cut the Fed Fund Rate and metal prices break, a pullback to $690 or lower could develop. At $690 or lower I would begin initiating new positions in Gold Call Spreads.

If the Fed does cut the Fed Fund Rate, it's conceivable that an immediate move up to $750 in December Gold takes place. I will update on my twice Daily E-Mails and market recordings what to do shortly after the Fed Announcement. However don't be scared on a large move up to take off the rest of you gold position. The strong upward seasonal influence on prices tends to peak in early October.

Silver

This is the time of year, not taking into account the FOMC Meeting and its importance that silver prices normally rally. You can see that on the chart below, provided to me by Moore Research Center, Inc.

Silver is typically weaker than gold at this time of year. Price action in December Silver contract has been weaker than that of December Gold recently, keeping this historical relationship intact. The problem with silver is that unlike gold, it tends to peak at the end of September, at least in terms of historical price momentum.

The question before me is what to do, given that silver typically rallies now. What I want to do is follow the game plan I have worked with over the past month. As readers of this report know, I have told you not to do anything recently in Silver Call Spreads. It is time to change that stance. It is time to get ready to enter Long Call Spreads.

The Matrix above was complied with the help of Mark Pasek. I instructed Mark to build me a Matrix that ran from 12.00 up to 15.00. In this way you can get an idea on the expense and potential return if silver prices move up.

You can contact Mark directly at 1-800-284-1065.

E-Mail him at Markp@iepstein.com

The "All In" price is what the spread should cost you, including reasonable commissions, Exchange, Floor Brokerage, NFA and Transaction Fees. You can visit our website at www.iepstein.comto view these costs.

Let look at the Daily Chart of December Silver below.

Support on the Daily December Silver Chart begins at 12.24.

Conclusion and Recommendation

If prices break hard right after the FOMC Announcement, I think a position in a Long Silver Call Spread is warranted. In fact, I think that you should have your orders in now to for the 13.00-13.25 spread.

Your risk is limited to what you pay in a Call Spread. The key is to NOT leg out of the spread. Put the spread on and take it off as a spread. In this way you are not exposing yourself to more risk than you need to.

No matter what the Fed does, I will comment about it in my Twice Daily Updates and write about it in my Twice Daily Market Recommendations. The odds of getting this position established should the Fed cut the Fed Fund Rate, is small. If not, the odds are good of getting it on. If given an opportunity to put it on prior to the FOMC Meeting, I would do so

 

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