Bite the silver bullet

There's been a succession of breakouts during the past week (crude, gold, yen...), but silver has yet to join the party. I think it's almost time for silver to shine, especially if we're entering the next up leg in precious metals. Silver tends to outperform gold during strong bull runs, and I plan to be slightly overweight silver. A healthy pullback would provide a nice opportunity to re-shuffle my gold and silver position.

Silver: imminent breakout


3-year silver:gold ratio

Yen Carry unwinding...look out below

Last week, the Dow broke through key long term support...



...as a result, yen carry trades have begun to unwind. When the Dow was at this level back in March, USD/JPY was in double digits and gold was at 1000. BOOYAH~

Iran Watch Part I

Buzz and banter about the possibility of an Israeli/US attack on Iran has escalated during the past few weeks. There is also an Iran War Resolution that is most likely to be approved in Congress before the fourth of July. I'm not a fear-mongerer (though fear is good for gold and silver), but I do believe that the manner in which this possible war with Iran unfolds will have a significant impact on US markets, and especially politics. With markets puking and a historical presidential election in several months, it will be interesting to see how everything ties in together with the Iran situation (maybe nothing will happen). I decided to maintain an "Iran Watch" update to keep track of anything significant that comes up.

Update on 7/1/08: OK...maybe I got a little carried away here heh~ PEACE

Interpreting FOMC Statement and New Gold Target

I'm a little busy studying for the NY bar (...yeah~), so my posts will be more short and infrequent until the end of July. There's no need to dissect every word on today's fairly bland FOMC statement, but I think there are two important takeaways: (1) the statement was not hawkish; and (2) the statement mentioned that "the committee expects inflation to moderate later this year." Despite the neutral stance, I think the statement, taken as a whole, should be interpreted as dovish. According to interest rate futures, there's a 75% chance the the Fed will raise rates 50bp by December, but I strongly believe that such expectations will reverse as the economy and stock market weaken into Q3 and Q4.

This morning's positive crude inventory numbers sold off crude, which pulled down gold as well. But following the FOMC statement, gold quickly rebounded to form a big hammer for the day. The euro closed above $1.56, and it should continue to rise and test $1.60. Gold is going through a pretty complex and prolonged consolidation, but it will come to an end fairly soon. At this point, I would like to make an important forecast for gold: a break above 920 by the end of next week. If this forecast doesn't materialize, I might have to reconsider gold's outlook for the next couple of months.

Gold: dissecting today's sell-off

Before y'all put your bear hats on, allow me to drop a couple cents for the bulls (across all time-frame). Just because we had a $25+ sell-off doesn't mean the fundamental picture for gold has changed one bit (see below). I love short-term technical trading, but fundamentals provide a floor to the market, and it's what drives the market in the end, especially for an asset like gold (that's right Gartman, gold is an ASSET). So I must disagree with any calls for a drop below 850. I'd go as far as to say that gold will not go below today's low (875), but hey...if it does, then the strong hands will be backing up the truck. Mining stocks seem to support my view, as they actually posted a gain for the day.

Again...before putting on your bear hats, let's dissect what led to the "big" sell-off in gold this morning. It was initially triggered by a very weak manufacturing data release in Europe, which led to a sell-off in EUR/USD. This led to a sell-off in gold, which accelerated/exaggerated as stop-loss orders were hit with no buyers to be found. Moreover, today's drop may have also been nudged a little harder by those who are massively short 900 calls that expire this Wednesday.

I attached a chart to depict the vacuum that gold fell through this morning. The chart shows the volume traded at each price level since last Thursday's close at (898). I chose this time-frame because Thursday's breach through the down-trendline (since the end of May) attracted some fresh longs (of course, these longs are now out of the market). Indeed, we can see a decent volume of fresh longs (above 900) made across the global market up until Friday's close. But the up volume was by no means significant, because the strong hands are waiting for the FOMC meeting, and that's also why gold fell through a vacuum this morning.



Wrapping everything together, I think today's sell-off was a re-test of last Thursday's breakout. A re-test is always healthy for a significant breakout, and a break above the infamous 910 resistance level, and ultimately the larger down-trendline since mid-April, should confirm a new medium/long term up-leg.



Fundamentals, fundamentals, fundamentals...why buy gold?

1. Oil: Peak oil is here, and here to stay.
2. Dollar: Forget about raising rates...Fed may have to cut even more.
3. Money Supply (i.e. inflation): Gold is rising against all currencies because all central banks are printing fiat like there is no tomorrow.
4. Safe haven: US treasuries will soon lose its status as an "artificial" safe haven due to rampant inflation. Gold has been a safe haven for 5000 years.
5. BRIC: Don't underestimate gold demand from BRIC and the Middle East.
6. Supply: On top of rising production costs for gold producers, there hasn't been any new major discoveries...hence the coming merger boom in the mining sector. Got junior?
7. Insert obvious gold fundamental here.

Gold: potential negative gamma environment

I made a chart (below) showing the concentration of gold call options that expire by December 2008. Notice the large concentration of open interests at $900, $950, and $1,000 - a potential negative gamma environment. The impact of the negative gamma effect will be significant if the calls were predominantly sold by financial traders rather than producers (because producers usually don't delta hedge). The former seems more likely, considering the fact that many gold producers have been abandoning their hedging programs as of late. If the correction/consolidation is near its end, and gold is about to move higher, a rally from $900 to $950 (even $1,000) could happen very fast. This scenario seems similar to the negative gamma effect in crude last year.

Source: COMEX


Let's just hope that last week marked the end of gold's correction. But what about seasonal factors? I'm tired of hearing about seasonal weakness in gold during the summer...this market is different than any other from the past; gold is not going to wait for you to vacation on the beach and come back in August. But what about potential deflation? I'm also tired of hearing about deflation killing gold...during deflation, cash/money is king, and GOLD IS MONEY. For now, the focus should be on INFLATION, even though deflation may set in later as we face a potential great depression.

Gold: 6-month

Gold: nice breakout, but not enough

The chart below speaks for itself. The spike came while eur/usd and crude were down, making it even more impressive. But crude continued to sell off on news that the Chinese government will be raising fuel prices, which would curb demand. Nice sounding headline, but it's meaningless, and I'm not even going to explain why. Today's crude action is most likely due to contract expiration, if anything, but it did put pressure on gold, which trickled down to close below $900. Gold needs to finish strong tomorrow to wrap up a nice week for bulls.

Yamana: back up the truck

I'm starting to like these diamond patterns...



Update: because diamond reversals are rare, and frankly I've never heard of the pattern until recently, I'm putting up a historic example of a diamond reversal that worked out well for bulls.

Dow breakout to all time high last year:

A diamond lasts forever...

Gold: imminent breakout?

This consolidation is really testing my patience, especially last week when gold traded below $875 following a $50 sell off in less than two trading sessions. But I've held on, and good things come to those who wait.

The chart below is the best I can make of what's been going on: two small falling wedges within one large falling wedge. The first small falling wedge broke on 6/6 by Trichet's speech during the ECB meeting, and the second small falling wedge broke yesterday following a disappointing (for dollar bulls) G8 meeting and a crude rally to $140. Yesterday's gold rally stopped dead at the upper boundary of the large falling wedge.

Gold: 1-month


So what's next? Gold is either going to violently break out of the large falling wedge or fall to the lower boundary. Fundamentally, we have a shift in Fed tone (slightly dovish), and tomorrow we have crude supply data coming out. Another bullish factor is that the GLD trust has been slowly increasing its gold bullion inventory. Although this probably doesn't matter much in the short term, the GLD trust bought 12.27 tonnes of gold, TODAY ALONE: look at the last two lines on the table below.

Shift in Fed tone: slightly dovish

It's about midnight right now, and euro/usd has rallied more than 70 pips since today's NY close. The catalyst seems to be a shift in the Fed's hawkishness, with some senior Fed officials worried that the market has overreacted on Bernanke's dollar jawboning.

To put this in poker context:

Market: call...
Fed (trying to bluff): raise 25bp...
Market: re-raise 75bp!
Fed: uhhh...I fold

Violent shakeout continues

What a volatile day! Crude traded a couple cents from $140 before plunging $7, but still closed in the green...wow. Gold tested the upper boundary of the falling wedge, but failed to break out. Gold fell more than $10 from the day's high, but still closed in the green. Silver took a peak above the water, and remained quite stable throughout the volatile action in crude and gold. With contract expirations around the corner, there's a violent battle going on between commodities bulls and bears right now. We will see who emerges from the dust very soon.

Crude: 1-month


Gold: 1-month


Silver: 2-week

Expcet rise in volatility

Volatility across macro markets should increase even more as we approach Fed day on 6/25. Especially, I expect wild moves in crude, gold, and silver, which should provide an opportunity to cover some longs. I also expect the markets to set up for a real test of Bernanke's recent open mouth operations (i.e. dollar down and commodities up). Come Fed day, things might get ugly as Bernanke re-emphasizes his hawkishness and support for the dollar. But this will only provide more buying opportunities for commodities bulls.

Smile from ear to ear

Almost!

Last line of defense for gold: falling wedge

We're either at the cusp of the next bull leg or a total break down of gold in the medium term. This week's extreme dollar jawboning has severely ruptured the right shoulder of the inverse H&S reversal I've been anticipating. Despite heavy selling in gold, downward pressure seems to be losing momentum, and the bears could be setting themselves into a trap. My new call is a for a falling wedge reversal, with strong support at the 200-day SMA. I hope to see a break to the upside within the next week...the market needs to wake up and call Bernanke's bluff!

Medium term falling wedge (1 month chart)


Long term falling wedge (8 month chart)

Tough week for dollar shorts

Despite ugly job numbers last Friday, the dollar quickly reversed to the upside on the back of dollar jawboning. I'm surprised at how much impact the open mouth operation has had on the markets. The yield curve has flattened significantly with short term yields shooting to the sky...this can't be good for banks. The dollar rally must stop.

Precious metals technical update

Gold: There is a potential inverse head and shoulders reversal, and a break above the neckline with strong volume will be very bullish. I made a premature call on an inverse head and shoulders at the end of April, and the problem was that there was no prior downtrend to reverse. This time, there is a clear prior downtrend to reverse.



Silver: I think the range-bound consolidation during the past few months is coming to an end. A break above $18.5 with strong volume will be very bullish.

Unemployment rate 5.5%, gold up $20+

I thought BLS would be a bit more creative with their hedonic adjustments, but job numbers came out pretty bad. Also, please spare me the lame excuse on student unemployment; the impact of teens is de minimis.



Dollar bashing continues from yesterday, and gold is up more than $20. Gold spot is facing resistance at $900, and it would be reassuring if gold closed above $900 ($903 for August futures) to finish a roller coaster week in markets.

Contrarian view...it's HAMMER time!

So many people are bearish on gold right now! Setting aside the usual haters, even gold bulls are betting that gold will "retest $850." What is the basis for this "retest" other than sheer disappointment for missing the boat when gold hit $850 on 5/1. Is it fundamentals? Is the credit crunch and recession over? Or is it what elliot wave counts are signaling?

In today's Gartman Letter, Gartmam recommended that everyone should "sell gold short immediately upon receipt of this commentary." Well, I bought gold immediately upon receipt of his commentary. Why? Because I think it's time to take a contrarian view on gold...and honestly, with the overnight reversal on the the dollar and crude rallying almost $7 today, I don't think my view is contrarian anymore.

I must say I was a bit disappointed that gold did not participate in today's dollar bashing (euro and crude) as much as I would've liked, but I think gold may have been under some pressure due to short covering in stocks and a sell off in bonds. Tomorrow's job numbers will make things really choppy, and we may even see a better number than the estimated -60k. I mean it's clear that people are losing jobs, and I think the market is pretty well aware of the fallacy behind the BLS birth/death model. At the end of the day, a gold rally regardless of a good or bad job number will signal a significant defeat of the gold bears for the medium term.

Gold did sell off to about $865 early this morning, but the bulls charged back to form a sizable hammer for the day.
Gotta believe in the hammer!

What dollar rally? Trichet crushes Bernanke

This week, Bernanke stepped up his support for the greenback during a conference in Spain and a class day speech at Harvard's graduation ceremony. Stating "significant concern" over the falling dollar's impact on inflation, Bernanke made it clear that the Fed is done cutting rates. His remarks sparked a sharp sell off in bonds and commodities, with crude falling about $8 and gold falling about $30. However, all of Bernanke's efforts became undone overnight when Trichet of the ECB explicitly opened the possibility of a rate hike during the ECB's next meeting in July. The dramatic reversal is evident in the charts of EUR/USD and crude below. This is truly: in your face. The Fed might as well stop talking about holding/raising rates because we are about to see Credit Crisis Part II, while the housing market continues to derail in a slow motion train wreck.

EUR/USD


Crude


Below is a three-year chart of the USD index. Do you see the dollar rally everyone's been talking about?

Update on gold: bottom for real

I mentioned on Monday that gold was looking a bit shaky, and with a one-two punch by Bernanke, gold sold off by about $30 during the past few days. I did have an opportunity to short gold at about $890, but I reversed my position this morning at $875. I hate being short gold, and I'm relieved to be long again. The bottom might be for real this time.

From my post on Monday...


At today's close: possible bear trap...

Revised gold outlook: neutral/bearish

This is a very short term outlook (few days), but I am neutral/bearish on gold. I covered my long at today's close, and I am even considering shorting if gold goes below 890. Despite today's ugly news from financials (UK's Bradford & Bingley and S&P downgrade fest), gold action was FAR from satisfactory. Gold could not penetrate 900 with convincing momentum...very pathetic. If gold can't clear 900 tomorrow, I think it will sell off to about 870-875 this week.