GOLDReport

December 20, 2007

I would like to wish one and all the Happiest of Holidays and a Prosperous New Year. This report will be the last one of 2007. The next will be written no later than January 10th, 2008.

Please try to make a habit of viewing the two Mid-Day Video's I record: One on Gold and Silver along with the one on Stock Indices. These videos are in addition to the in-depth Nightly Video I record that specifically covers charts and my market opinions on all the major futures markets.

The link to the Mid-Day Videos is below. Be sure to click on the RSS feed to be alerted to when a new video is posted. I do my best to record and get these posted by 1:00 P.M. CST.

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

In early 2008, we will begin making many more daily video's available including daily videos with content on:

• Opening Calls
• Intraday Market Commentaries
• Day End Wrap Up
• Interviews with market technicians, floor traders and industry experts

The Dollar...

As the year comes to an end, the US Dollar is seeing fresh buying lift it towards the 78.00 level. In early November prices in the March Dollar Index got down as low as 74.975, so seeing a 3 cent move in the face of the Subprime mess is impressive.

Today China once again raised their interest rates. The Bank of Canada, The Bank of England and the ECB look poised to lower their respective interest rates in early 2008, which is helping to prop up the US Dollar.

Gold's issue now is one of a rising Dollar. In my opinion Silver does not have the same issue since anything that benefits the US economy should provide a prop for silver prices.

Over my many years of market analysis, I learned that one of the elements that make futures trading so fascinating to me the effort I put in; trying to figure out the "character" of the market I am dealing with in terms of market mentality. Right now gold is looking not at energy prices stuck near $90 a barrel. Nor is gold being viewed as a safe haven from the subprime mess. Nor are falling stock market prices propping up gold prices. Rather, traders seem singularly focused on the value of the Dollar. Rallies in the Dollar are viewed as being bearish gold and to a degree, silver. How long this will last is not as important as understanding that the market seems fixated on Dollar price movement.

Inflation

I see inflation as the big issue that will consume the markets in early 2008. As I see it, economic growth looks anemic but inflation is picking up growth. Stagflation? Sure looks like it the beginning of it.

As most students of the markets know, the Fed's primary goal is to keep the economy growing and to provide employment. In the past they did so by their use of interest rates. Because of the subprime mess, the Fed has to become "inventive". Hence the new "Auctions" that are now taking place. Expect more inventiveness as this mess has to remind many of the Savings and Loan mess that took place nearly 20 years ago. That mess was also created by housing. The way out proved to be a Fed bailout. I look for the Subprime mess to end up with the same result, a Fed bailout.

Many market analysts are calling for the Fed Fund Rate to be cut to 3% by June of 2008. That is about 25% lower than it now sits. If the Fed decides to make further rate cuts, I see no way to tame inflation readings. In addition, further rate cuts may not materially affect the Dollar is they are in lock step with rising Chinese and falling European Interest Rates.

The Fed is using their new Auctions, another term for another form of the Discount Window, to provide institutions with liquidity. US institutions did not overwhelm the market for funds at the first Auction. In fact, the bids and coverage were under what many experts expected them to be. It may mean that our banking system is not in the dire straights that many thought, or it might simply be a delayed reaction and stronger bids and coverage will be seen in the remaining Auctions. I simply don't know.

Seasonal Chart

Look at the Seasonal Chart of Gold, which covers the last 15 and 33-years respectively. It was provided to us by the Moore Research Center, Inc.

As you can see, from a historical perspective we are at the point in time where this chart historically turns breaks and ultimately turns up.

Now let's look at a Daily Chart of February Gold. On this week's chart I have included in "red", the 18-Day Moving Average of Closes along with a proprietary study I teach in my Futures Academy Course called Swinglines. Access to the Swingline Study is available in our Futures Academy Course which you can read more about by going to http://www.iepstein.com/MainAcademy.aspx.

The "Yellow Lines" displayed on the above chart show the proprietary "Swingline Study" that I use to teach trend trading in The Futures Academy (www.iepstein.com/MainAcademy.aspx). Swinglines define Trend and the Dollar Risk associated in being with the trend.

As you can see on the above chart, the most recent low of 789.6 is lower than the previous low of 790.0. The key to getting this market into an Uptrend now is to get prices over 811.4, which is the most recent high.

The current short term trend is down because prices are making lower lows and lower highs. Resistance is now the 18-Day Moving Average of Closes, displayed as a "red line" which as of this writing is near 805.4. Until prices get over the most recent high of 811.4, the current short-term trend in this market remains down. It remains to be seen if prices will get back under 789.6, given the Seasonal Tendency of this market to perk up going into December's end. January often produces a move upward.

 

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Conclusion and Recommendation

As I stated last week, I like the holding onto the February Gold 830-850 Call Spread, which should have been put on a couple of weeks ago at 6.00.

I will update my thoughts on this spread regularly, in my twice daily written updates and in my nightly video's, which all are invited to try.

Silver

As I have been mentioning for the past month, this is the time of year where silver often displays a tendency to be stronger than gold. I see that now taking place. Spend a moment or two looking at the Silver Seasonal Chart provided by Moore Research (MRCI).

As you can see on the above chart, silver often breaks into mid-December, which it has done and than moves higher into late December. In fact, there is a strong tendency for prices to historically continue to move higher from now into February, a tendency that gold does not have.

Let's look at a Daily Chart of March Silver.

Like gold, silver is in a short-term downtrend. Unlike gold, even if silver takes out the most recent high of 14.290, prices will remain under the 18-Day Moving Average of Closes, which on this chart is at 14.411. Therefore, even if the pattern changes to an Uptrend where the market makes higher highs and higher lows, you still have to wait for a close over 14.411 for upside momentum to gain traction.

I like using Seasonal Charts in combination with Daily Charts, especially when the two reinforce each other. We don't have that reinforcement in place just yet. A close over the 18-Day Moving Average of Closes will be that signal. Until this takes place, prices will be on the defensive.

Recommendation

Those who follow my recommendations are now long the March Silver 1525-1600 Call Spread at 24 and again at 15 or less. I will update this regularly in my Twice Daily Market Updates.

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Disclaimer: This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is taken from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures trading involve risk. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from Ira Epstein & Company or Shatkin Arbor, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are no indication of future performance.