Short Term Profit Taking on Gold

If you're a long term investor in gold--and in this environment, you should consider it--just hold out.  If you need to add to your position, it appears we are about to have a short term pullback.  If you're a trader, our indicators are showing to take short term profits here.  There is a chance at an intermediate term pullback either now or in the very near future.  Support is at 1070, though we will be looking at 1040 and 1024 as likely areas for gold to touch during this move.  We will update when we believe it is time to accumulate again.

Meanwhile, expect the dollar to trade in a flat, but tight range as it has this week.  We do not expect significant dollar rise, but more sideways action--for now.

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Post FOMC Market Update

The most significant move that came out of the markets after the FOMC update was the continued weakness in equities in the face of oversold conditions and a lower dollar.

The US equity markets should be turning here.  They are oversold technically by many measures, and though they've had three up days now, given the dollar activity, the days should have been higher winners.

Either the dollar/general equity market correlation is breaking down, equities are foreshadowing a significant dollar rise, or this is a temporary situation.  A move below 1020 in the S&P, or if the next rally phase stalls before a new high (above 1102) is in place, then we should expect a larger correction and probably a breakdown in dollar/equity correlation.

The dollar continues to weaken and trade sideways, as we predicted last week.  Given that, we should see equities generally start to rise. 

Tomorrow, we'll provide a more detailed multi-market review and update.

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November 4: Technicals and Pre-FOMC Update

From our perspective, this dollar rally peaked yesterday when it made a play to break the 50 dma.

The critical question regarding future direction will be the FOMC statement.  We doubt that the Fed will actually raise rates because it would likely crash the economy immediately, and the Fed has no desire for a stronger dollar with all of the outstanding debt.  However, it does want to control the rate of decline of the dollar, so some language may be changed to allow for this.  Assuming that it's obvious that we're still playing with "Easy Ben," then this rally is over.  Look for statements regarding duration for keeping interest rates low and any changes to the quantitative easing strategy.

Finally, as of this writing, the dollar is challenging the 75.83 (76) support line again.  A close below that level should confirm that the dollar rally is over, for now.

Meanwhile, gold has gone bonkers on India's announcement yesterday:

Gold Trades Near Record as Indian Central Bank Buys From IMF
By Claudia Carpenter


Nov. 3 (Bloomberg) -- Gold traded within 0.5 percent of a record after India’s central bank bought 200 metric tons of the metal from the International Monetary Fund, heightening speculation about more official purchases.


“It’s positive in many ways,” said James Moore, an analyst at TheBullionDesk.com in London. “It suggests central banks, rather than being net sellers, are now looking at becoming net buyers. It’s a surprise because everybody was talking about China being the buyer.”


December-delivery gold climbed as much as $12.90, or 1.2 percent, to $1,066.90 an ounce on the New York Mercantile Exchange’s Comex division and was at $1,058.70 at 8:45 a.m. local time. The record was $1,072 an ounce on Oct. 14.


Gold for immediate delivery in London slipped 0.1 percent to $1,058.25 an ounce, compared with a record of $1,070.80. Prices rose to an all-time high in gold traded in Indian rupees.


The Indian transaction is “the biggest single central-bank purchase that we know about for at least 30 years in such a short period,” said Timothy Green, author of “The Ages of Gold.” “The only comparable event was the U.S.’s steady purchases in the 1930s and 1940s.”


India’s purchase, carried out from Oct. 19 to Oct. 30, buoyed gold as industrial metals slumped on concern that governments will remove economic-stimulus measures, crimping demand for raw materials. Copper and lead fell as much as 2.8 percent on the London Metal Exchange.


Ninth Place


India held 350 tons of gold at the end of 2008, making it the 12th-largest government owner, according to the GFMS Ltd. 2009 Gold Survey. The extra 200 tons propels the country past Russia into ninth place, according to GFMS figures. India is the largest buyer of gold for jewelry and investment.


“You usually associate Indian consumers buying gold more than you do the central bank in India,” said Mario Innecco, a broker at MF Global Ltd. in London. Gold averaged $1,042 an ounce over the two weeks during the IMF gold sale. Prices may rise to $1,125 an ounce by the end of the year, Innecco said.


The IMF’s executive board on Sept. 18 approved sales of 403.3 tons, pledging to avoid disrupting the market. The board last year backed the sale, about an eighth of the organization’s total stockpile, as part of a plan to shore up its finances. China increased its gold reserves by 76 percent since 2003 to 1,054 tons, the official Xinhua News reported in April.


Chinese Interest?


“This is positive for the gold market,” said David Barclay, a commodity strategist with Standard Chartered Bank in Hong Kong. “Bilateral sales which avoid the open spot market will avoid adding to marginal physical supply.”


China, Russia and Brazil may be interested in the rest of the IMF gold for sale, TheBullionDesk.com’s Moore said.


Bullion fell to $1,058 an ounce in the London morning “fixing,” used by some mining companies to sell production, from yesterday’s afternoon record fixing of $1,062 an ounce.


Gold has gained 20 percent this year as the Dollar Index, which tracks the greenback’s performance against six major currencies, slumped 5.7 percent. The dollar rose 0.8 percent against the euro today.


Among other precious metals, silver for December delivery rose 0.1 percent to $16.46 an ounce, and platinum for January delivery dropped 0.1 percent to $1,336.30 an ounce. Palladium declined 1.5 percent to $321.50 an ounce.

Taking a look at yesterday's gold chart,we can see the massive move breaking through resistance at 1070, which will now serve as support (note that the recent sell off pulled back to the 1025 range, which our direct subscribers knew was the target price for a buy.  Send us an email if you're interested in direct information).
We anticipate a consolidation at 1100, which could be touched today with the Fed announcement.  If you're trading gold, we would consider taking some profits here since it's likely that we will consolidate again soon.  New purchases should wait a bit until a consolidation occurs, and long term investors should just hold--gold is going much higher over time, though this next consolidation is likely going to be more substantial than those since September. 

We also believe that most equities have seen their lows or very close to them.  Gold miners have been on a tear, but will sell off if gold sells off.  There is resistance just ahead.

One final note, it is not uncommon for FOMC announcement days to be "buy the rumor, sell the news" days.  This morning, it's clear that the expectation is for a weaker dollar and an easy Fed.  We believe that will also be the case.  However, don't be surprised if after "Easy Ben" makes an announcement, that the markets reverse, the dollar rises this afternoon, and assets sell off--notably gold.  It's a temporary condition where the pros take money from the retail investors on common news.  Just wait until all of the announcement gets dissected--we don't make big moves on FOMC announcement days for that reason.  Trends will return to true in a day or so.

More updates after the FOMC announcement.

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November 2: Major or Minor Correction Underway?

Given today's huge down move in stocks, there's panic everywhere.  The fear that this is the start of another down leg is everywhere.  The deflationists are giddy with glee that the dollar is finally strengthening!

We believe that they're in for a rude awakening.  Of course, anything can happen at any time, but not only was this correction expected, but it's just what we've been waiting for...

 At this stage, we believe that this is simply another short term pullback, and that after this week--give or take a few days--the dollar decline will continue and asset prices will rise again.  As of end of day Friday, the dollar appears to have fallen out of another flag, which implies that the downside may have already begun again.  Fast moving traders could buy positions now in key assets, notably gold, and add to them when the dollar breaks 75.83.  The more prudent trader may want to wait for a confirmed break below that level, and longer term investors should be accumulating now.  Be prepared to exit positions if the dollar breaks above the 50 dma.

So, why all of the sudden concern in the financial media about this being the beginning of another major leg down?  On October 22 we showed a long term S&P chart with Fibonacci retracements:

Note that we listed the following key resistance levels:

- 1100 (round number, not marked on the chart)
- 1124 50% retracement from the lows.  This is a key level of possible failure in the rally.
- 1230 61.8% retracement from the lows.  This is, in our belief, the most likely failure point before 1350.
- 1350 (red horizontal line) Target of the inverse head and shoulders pattern

Note that the decline in equities started the general asset decline as the EURUSD cross failed to hold 1.50.  At the same time, the S&P was just over 1100, which is round number resistance that is relatively close to the 50% retracement level of 1124.  In essence, the S&P has hit a strong "zone of resistance" while being very overbought and the dollar being very oversold.  This appears to be a short correction, though we'll watch the 1124 level on the S&P closely.  Since that level is on a weekly chart and is a major Fibonacci retracement level, it appears market traders have opted to sell out here.  We do not believe that this will be an intermediate top--only a short term correction that may already be reversing.

Take a look at the VIX vs. the S&P for the last three years:

 Note that almost every spike on the VIX leads to a short term bottom in the S&P.  On Friday, October 30, the VIX spiked to 30.69.  We believe that will be the bottom, or very close to it (we may retest it this week), in the short term.

On a short term basis, all major asset classes are oversold.  On an intermediate term basis, they still have upside room, and early bullish patterns (like the inverse head and shoulders in the S&P chart above) still have upside potential.

By all indications, this is a buying opportunity with a bit more room to run before a major consolidation that will occur at the 70-72 USDX level.

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