Gold Hanging Tough

December 12, 2008 Inflation, Market Updates, Politics No Comments

The pull back in the markets was not nearly as severe as the futures indicated before the opening. The foreign markets tanked after the “Big Three Auto Bailout” was rejected by the Senate and it looked like the DOW was going to open down in the 300 range but apparently the markets were not that shocked by the the Senate’s rejection of the auto “nationalization” bill. Maybe the markets realize what’s at stake here. Do we let the free markets work out their own problems or do we have the government take over and run the markets with their subtle handed brilliance? I guess after all these years of “superior” leadership in Congress these clowns are ready to be captains of industry!

The DOW is currently down 91 at 8,473, the NAS down 1.40 at 1,506 and gold has recovered from it’s opening drop of .9% ($7.52 at $813.80), to $822.30 up $2.60. Not bad on a day when the dollar is down as well as oil. Staying above the $808 level is critical to this up leg as support with resistance at the $830 level.

Gold Has A Bout With Profit Taking

Yesterday gold was pushed down at the close as profit taking set in and the shorts unleashed their magic to try and stop this leg up from gaining any momentum.

Comex Gold Surges As Dollar Falls, Oil Soars
Thu, Dec 11 2008, 19:38 GMT
By Allen Sykora

Gold futures hit a seven-week high Thursday as the dollar tumbled, crude oil rallied sharply and investors turned to the metal as an alternative to low or non-existent yields in the Treasury markets, analysts said.

Nevertheless, gold stalled around chart resistance and some profit-taking set in after a sharp run-up in recent days.

February gold rose $17.80 to $826.60 an ounce on the Comex division of the New York Mercantile Exchange.

“We broke some major technical levels on the dollar index, which is going to be supportive for gold going forward,” said Rob Kurzatkowski, futures analyst with optionsXpress.

The dollar index fell as far as 83.282, its weakest level since Oct. 30. And the euro hit a high of $1.3403 that was its strongest level against the greenback since Oct. 20. Traders often turn to gold as a hedge against dollar weakness.

“The dollar looks like it has broken out of its trading range and we may have seen a top in the dollar for a while,” said Bill O’Neill, one of the principals with LOGIC Advisors.”

Let’s hope so on that last note. The dollar is one sick puppy and it’s outlook for the future looks bleak at best. Once the deficit spending ramps up we will be seeing a new version of “dead man walking”. I think the dollar needs a new descriptive phrase for the phase it is entering. Let’s call this new phase “Dollar Decomposition”. It’s sad to say it, but that is what is coming.

This next comment from George Goncalves, the chief Treasury and agency strategist at Morgan Stanley says it all!

Instead of swapping assets in the banking system, the Fed started buying them. The Fed bought $5 billion of Freddie Mac, Fannie Mae, and Federal Home Loan Bank corporate debt. The New York Fed’s website says the purchases are being “financed through the creation of additional bank reserves.” The Fed has finally started to create money out of thin air.

In other words, to pay for its purchases, the Fed opened new bank accounts for its commercial bank customers, struck a couple of computer keys, and filled the accounts with money. The Fed hopes the banks lend this money out. If they do, it will add credit to the marketplace… That’s inflation.

The idea behind this new strategy is to help homeowners refinance their debts at lower interest rates. A purchase of $5 billion is a tiny amount for the Fed, but think of it as a test. The Fed wanted to make sure the market wouldn’t flip out over this new ultra-inflationary strategy.

The market didn’t flip out. And the strategy worked. The average rate on a 30-year fixed-rate mortgage fell from 5.97% to 5.53%… the largest weekly drop in 27 years.

Now that the Fed sees how successful this strategy was, we can expect the government to continue with it. This is great news if you own investments that respond well to inflation, like gold, silver, and other commodities.

Just think, all of this is happening before the next administration even begins to put $1.5 trillion (and most likely way more than that), into new infrastructure spending. These numbers are mind boggling and they are going to jump start inflation and the price of gold.

I Know This One Is Hard To See, Bit It Is Explained Below!

This chart tells us a lot. The price of gold is now above an important support channel line and is within the longer, continuation triangle from 807 to 907. Minor resistance at 830, with stronger resistance at 850, 865, and 907. The PMO (momentum averages in lower box) is basing after being strongly oversold. The longer the price is held back in an over sold position the stronger the reaction to the upside will be when it corrects.

It looks like things are beginning to change in the gold markets. There is the possibility that this is another head fake before gold takes off, but with the dollar beginning to roll over and oil struggling today, this looks like the move just may have legs.

Till next time, good luck and good trading!