Last Friday’s action in the metals was a surprise to me considering it was the end of the trading month and the fact that it was only three business days ahead of a major announcement by the Fed in regards to the upcoming QE. I would not expect to see traders getting so aggressive due to the timing of that FOMC meeting not to mention the fact that a major US election is tomorrow. Today seems to be a case of some guys have a few second thoughts about getting too overextended. If you have money on the table, it is wise to take some of it off at times. There is nothing worse than watching a profitable trade turn into a losing trade; nothing!
Personally I am always suspect of traders who make the mistake of getting a dose of bravado in front of a major expected development. They end up either being “heroes” or “zeroes”. I have been burned way too often to get reckless and now leave that to others who are more careless of their trading accounts. QE is coming – there is no doubt about that; the only thing that matters right now to the trading world is how much and how long? That will move the markets for the SHORT TERM (the long term is lots more QE) and such movements could be extremely violent so once again, be careful.
The Fed has embarked on a course of backstopping nearly everything that moves (or more properly – that looks like it might stop moving!) and that is the main feature to keep in mind when surveying the fate of the Dollar and the fate of gold (and silver for that matter). The Commercial real estate market is another disaster in waiting. Don’t forget also that Fannie and Freddie debt is getting unloaded by Foreign Central Banks. Bernanke is not going to want to preside over a deflationary downward spiral and therefore will do whatever is necessary in his view to stave off such an event and work diligently to let the inflation genie out of its bottle. That guarantees more QE; however, short term moves have become purely functions of the hedge fund trading algorithms and those things can produce violent swings so be forewarned.
Technically, gold managed another consecutive close over $1,350 but I do not like the manner in which it did so. I would prefer to see an up day. What today tells me is that some hesitancy is creeping back in and some caution in front of the FOMC. Same goes for silver. It is also evidenced in the HUI and in the rebound of the Dollar off its worst overnight levels. Same thing goes for the bonds – Up in front of the FOMC and then fading back as short term traders snatch profits before they stand the possibility of losing them. I would think that this is the norm until Wednesday. WE’ll see. In the long run, it is just noise particularly when everyone and their dog have figured out that the US wants a lower Dollar.
Guys banking on a collapse in the US equity market had also best be careful. If the Fed comes out with a real gullywasher of a QE announcement, the shorts in equities are going to feel some pain. The stock market is moving higher solely on liquidity issues in my view ( it certainly is not at current levels based on the current status of the US economy) and more liquidity is going to make it difficult for bears to push it substantially lower for the time being.
Keep some of your powder dry until Wednesday afternoon. Existing longs in the precious metals will make more profits for you if the Fed announcement engenders strong buying in that sector. If it is a temporary disappointment, you will have some cash around for buying opportunities once they present themselves.
Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini