Gold – 19 Oct

Gold was hammered early after being up in Asia, big surprise, but rallied hard on news that the CFTC has instituted position limits on both gold and silver. This is actually a non-event for gold IMO because most of the manipulation in gold is conducted in the Hong Kong and London markets where liquidity is greatly reduced (and the effect of naked short selling is greatly amplified) as compared to New York. The position limits will only apply in New York, leaving all other global markets available for reindeer games. Silver is another thing altogether and I expect silver will eventually react higher but will be held in check by increasing margin requirements. I expect that the current 6:1 leverage ration will fall towards 1:1, essentially a cash market. The CME will have to do this to protect themselves against a run on physical silver where contract holders stand for delivery rather than rolling over or settling in cash.

Technically speaking, gold appears to be in a holding pattern waiting for resolution of the debt contagion problem the EU is experiencing. Until the EU is given a clear mandate to fire up the paper printer, gold waits. I find this silly, but I am also not trading gold at this point. I am a buyer, period. There is other no solution, including busting up the EU, that will solve the debt issues they face. The banks, the politicians, and the spenders are served by inflating debt away. The only ones harmed are the savers. Last time I checked in this country, there are very few savers. Most people that claim to be savers are actually in the red when considering what they have set aside as compared to what they owe. The EU is worse shape than America! No, there are actually very few that will be harmed by a concerted inflation designed to facilitate full nominal repayment of debt. Therefore inflating is the most reasonable, the most tolerable, the most demanded solution and will be implemented both in the EU and here in America.

As far as the chart goes, the uptrend has now given way to a neutral chart by virtue of a lower low made on the chart. Both the 18 and 45 day moving averages are supporting price around 1650. The cap and resistance is holding firm around 1680. The lower boundary of the recent trading range off the big swing low is 1600 and appears to be where the market will want to go if 1650 fails to hold. Stochastic has hooked and is headed lower from oversold territory. RSI is neutral. The most interesting thing on the chart is the contracting Bollinger bands indicating a dramatic decrease in volatility. As with very wide Bollinger bands, this situation isn’t likely to last much longer. A break in the low volatility pattern is more likely than not and will accompany prices either to the upside or downside. The sideways action is getting played out in other words. A break lower will almost certainly test the 200 day moving average near 1544, a rare occurrence for gold during this 10 plus year bull market. A break higher almost certainly brings 1775 into play.

To reiterate, gold is waiting for another clean shot of monetary stimulus/debt monetization before it resumes the long term trend. In the meantime, it is correlating more with the risk trade and stock markets than it with the dollar or as a safe haven. The next move higher in gold will built on the foundational belief that it offers an alternative to the dollar as a safe store of value, a reserve asset if you will.

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