Mixed data + low holiday volume

After news of Bhutto's assassination sparked a rally in gold, crude, and bonds, we saw lower than expected durable goods orders and higher than expected consumer confidence numbers, providing a mixed view of the U.S. economy. Considering the seasonally low volume across all markets (happy holidays!), I must assume that any market movement right now is just noise. I don't know why I'm looking at markets when I should be getting wasted instead!

Gold breakout not confirmed by volume

For those following the gold market, the ultimate question has been whether the current triangular formation will result in a breakout to the upside or the downside. Indeed, the two-month consolidation in gold is very near its end, and we will probably see a breakout by the end of the year (or early January). Considering the recent dollar rally, along with seasonal factors supporting the dollar during the months of December and January, I have been anticipating a breakout to the downside for gold: a drop to $760-$775 would be a great buying opportunity for gold's ultimate ride to $1,000 and beyond. During the past week, however, gold has seen a strong rally from $790 to $830.



Although the triangular formation for Feb. Gold futures (shown above) seems to be intact despite the current rally, other gold charts such as GLD and Gold EOD (shown below) are showing signs of a breakout to the upside. Such breakout to the upside, however, should be dealt with caution. This is mainly because the current rally has not been supported by volume. I would expect a breakout from a two-month consolidation to be confirmed by well-above-normal volume, but this is not the case.





So...with the consolidation near its end, is gold going up or down? I think gold will cool off from its current rally (perhaps we will see positive durable goods and consumer confidence numbers today), and eventually break to the downside during the first week of January when we get an onslaught of economic numbers: manufacturing, FOMC minutes, employment, ECB rate decision. If not, we should see gold shoot above $850...hopefully with some strong volume!

Chart of the month: euro sell-off

The chart below (March EUR) really sums it up. Once again, the Economist cover contrarian trade prevails. With models and rappers talking up the euro, a dollar counter-rally makes sense. Euro has sold off to my initial estimate around $1.43 (post below), and it may continue to sell off, pending future data. But I'm expecting not much action until year-end, at least not until we get US payroll data and ECB rate decision during the first half of Jan. 2008.

Dollar is bid...euro, gold, silver under pressure

Yesterday we got big retail numbers and the dollar rallied hard, causing euro, gold, and silver to sell off. Today's inflation numbers diminished rate cut expectations, and intensified the dollar rally. Although the Fed has dropped its previous language of balance between growth risk and inflation risk, the Fed has not given the market a clear signal that it will give priority to growth risk. Instead, the Fed has unveiled a new plan to soothe global liquidity problems. The response from the stock market was temporarily bullish, but short lived as doubts were raised as to the plans novelty and its ability help resolve the real underlying issues of inter-bank liquidity: housing and credit crisis. What we really need is for the Fed to break out of its "gradualism" and be more aggressive. Of course, the Fed will eventually have to resort to aggressive measures...it's just a matter of time before we see more pain in the US economy.

In the meantime, looking at the euro, the big question is how far will it drop. My guess is around $1.43, and then I think it will range until early next year, or at least until we see more pain in the US.

Euro/$ puts pressure on gold and silver

Weakness in the European economy, especially the money market, seems to be intensifying. Yesterday's global central bank coordination announcement revealed more serious liquidity problems (or as some say, insolvency) among banks in Europe. So I think this announcement may have created more fear, at least in Europe, rather than soothe the markets. Consequently, the euro is currently under a lot of pressure (shown below), which is also having an impact on gold and silver. Despite yesterday's rally, sparked by the Fed's new plans for capital injection, it is important to remember that the Fed still disappointed market expectations concerning the fed funds rate. A euro sell-off may very well bring gold and silver down to $760 and $13.5. Retail sales are expected to come out strong, while inflation numbers are expected to come out high. So watch out for a sell-off in euro, gold, and silver!

Has crude bottomed?

With inventory numbers coming out today, I need not explain how important they will be for crude: just look at the chart below. I think crude has bottomed, and a clear break above 90.625 would be very bullish. We may very well see $100 traded by the end of the month.

Gold and Silver: Post-FOMC (what were they thinking?)

First, a comment on yesterday's Fed decision: what were they thinking? Ohhh...so this is what they had in mind: a new money pumping machine! Indeed, markets have reversed sharply overnight.

An important debate in recent weeks has been whether gold would correct to $780 or break below $780 to pre-October levels of $740-$760. Similarly, traders debated whether silver would correct to $14 or break below $14 to pre-October levels of $13.25-$13.50. Indeed, the recent volatility in the gold market (silver has been less volatile, surprise) has made it impossible to find a clear direction. Two weeks ago, gold went from $780 to $845, and then back down to $780 in just matter of ten trading days!



Despite all the noise during the past month, gold and silver seem to have slowly consolidated above $780 and $14. I think we will see a rally to re-test November highs.

One caveat would be the the impact of the euro on precious metals, as investors see gold as a hedge against weakening dollar. Both the dollar and the euro are depreciating due to excessive money supply, and the euro/dollar exchange rate has become a function of which central banks inflates the most. So precious metals should eventually decouple from its relationship with euro/dollar, because gold has been, and will continue to, appreciate against all major currencies. For now though, it seems like the recent dollar rally has come to an end (shown below).