Wednesday, October 3, 2007

Ben And The Beanstalk



The reaction/consolidation we have discussed for Gold and Silver the past several posts has come to pass. We are presently in the midst of it...and only the beginning of it at that. Silver rests on it's uptrend line off the August low. And Gold, though not pictured above, has broken it's steepest trendline off the August low already. We should welcome this opportunity to grab some profits, and make plans to position ourselves for the next leg up.

The US Dollar chart above has played a role of it's own in this reaction in Gold. We mentioned a few days ago that the Dollar was VERY oversold, and may even become more so, but to expect a bounce soon. That bounce has arrived. Interestingly it has coincided with a near record high in the commercial shorts on the COT report this past week for Gold. A high in shorts last seen in early October 2005. And what followed the October 2005 consolidation? All at once now class: A 60% run up in the price of Gold! Very good, you have been paying attention.

The following essay by Steve Saville, The Speculative Investor, speaks to this very issue and lends some weight to my thesis that Gold in October 2007 is setting up much like it did in October 2005.

Gold Risks: The COT and the Dollar

The Commercial net-short position in COMEX gold futures was 208K contracts as at Tuesday 25th September (the cut-off date for the latest COT report), which roughly matches the all-time high reached in early October of 2005. This Commercial net-short position is, of course, balanced by an equally large speculative net-long position.

Although it reveals unbridled optimism on the part of speculators in gold futures, the current COT situation is not a reason, in and of itself, to expect anything more than a routine pullback in the gold price. That this is the case becomes evident when we look at the following chart showing the performances of gold and gold stocks (as represented by the HUI) during the second half of 2005. Note, in particular, that after the Commercial net-short position peaked in early October of 2005 the gold market began to work its way back towards its 50-day moving average. Following a test of this moving average in early November, another strong rally got underway.

The weakness of the Dollar here at this juncture will only benefit Gold, if it weakens further. A sustained bounce in the Dollar here could hold Gold back a bit longer than anticipated. But I suspect that people are beginning to buy Gold for more reasons than "just the falling dollar". As a matter of fact, through much of the Fall of 2005 Gold and the Dollar rose in tandem, and Gold did not really explode in price until the Dollar rolled over and crapped out in late December 2005. I maintain my contention that Gold is merely going to pause and consolidate for the balance of this October before it's next leg up begins in early to mid November.

Looking at the Silver chart above we find Silver sitting right on the uptrend line off of the August low. RSI has broken down already and we should expect price to soon follow. The first line of defense should the uptrend give way would be 12.89, the 38% retracement of the February 2007 high. Just below that is the 38% retracement of this present leg in Gold off the August low at 12.78. 12.47 is the 50% retracement of both "tops" and would appear as a "line in the sand" for Silver. 12.13 is the 61% retracement of last weeks 13.79 high. I don't expect to see Silver that low, but If it were to venture down that low I'd be backing up the truck. The MACD on the chart can give you some clues as to Silver's potential during this reaction. Prudent traders will not enter Silver until both the RSI and Stochastic reach their oversold lines marked in blue and subsequently cross over into a bullish posture. Look for clues to silver "bottoming" at any of these support lines by what the "internal indicators" [RSI MACD and Stochastic] are telling you at the time Silver comes in contact with one of them. A perfect scenario would find Silver consolidating between 12.47 and 12.79 for several days until the internals give the OK to throw long again for the next ride up.

The Dollar chart posted above speaks for itself, and MUST be respected. None of the Central Banks wants to see the Dollar go into a free fall. And the ECB is certainly becoming alarmed with the rapid rise of the Euro. A strong Euro threatens European exports and Eurozone economic growth. Expect the banks to collude in an effort to slow the Dollars slide. All recognize that the Dollars demise is inevitable, none wish to see it happen overnight. And frankly, as much as I'd love to see Gold and Silver blast towards the Moon and beyond, I don't think my current income would withstand the tsunami of inflation that would be inflicted on us all here in America should the Dollar plummet like a stone in the ocean.

Just this morning I was doing price changes in the produce department I manage for a local retail food chain. The price of fresh green beans rose from 1.79 a pound to 2.29 a pound. Tomorrow is senior citizen discount day. I am certain one of my customers will ask me if those beans are made of Gold. I will of course reply, "You're money would be better spent buying Gold." I wonder if Ben Bernake does his own grocery shopping?

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