Gold – 20 Oct

A new short term downtrend is now in place on the gold chart, defined by a lower high and a lower low. Price fell all the way to the Bollinger band, just above chart support at 1600, and then bounced higher for the close. I believe a violation of 1600 on a close sets up a run to the 200 day moving average, currently at 1546. The 18 day moving average will serve as resistance, now at 1649. For now a trading range is in place between 1680 and 1600. The market is still trying to figure out what is going to happen in Europe and more sideways chop appears to be the most likely outcome with a reversal here and movement back to the 18 day moving average. A waterfall will result if the EU stumbles badly and sets off a panic and I will be borrowing to buy physical at the 200 day moving average.

A test of the 200 day moving average would be a rare event and has happened only a few times since 2008, back in August of 2010 and most recently last month at 1535. I believe 1555 will hold for support and would be an awesome buying opportunity. The following chart shows the 40 week moving average which equals the 200 day moving average.

The weekly chart shows RSI and stochastic at levels that have proven to be reversal points. However, price could fall all the way down to 1536 and still remain inside the primary trend channel. Ultimately what powers this chart back to new highs is the inevitable fix to the Eurozone’s crisis, the formation of a unified debt structure through a Eurobond that is swapped at face value for failing debt of individual Eurozone members. These Eurobonds will be utilized as reserve assets at banks, freeing up individual members to enter the debt markets as able to sell their own debt that will not be held as reserve assets. This set up will be similar to what the US has, where States can sell debt that does not effect the dollar and US as a whole. Of course Greece will not be the only one that essentially has their debt socialized by the rest of the EU. Portugal, Spain, and Italy will also be swapping.

The effect of this will be an inflation of the supply of Euros as the ECB buys the bonds and places them on their balance sheet. Of course the Euros come from the same place where Fed generated dollars come from, from thin air. The ECB’s balance sheet will then be comprised of primarily gold, Eurobonds, and foreign currency. Gold will rise in terms of the Euro in response to the newly injected currency. This inflation will give the Fed the green light for its next QE adventure which according to some Fed members might be the monetization of Mortgage Backed Securities.

The ECB and the Euro have a unique structure where gold is held on the balance sheet of the central bank, marked to market each quarter. It acts as a balance and can absorb the inflation generated in the Euro with no limit. The Fed on the other hand only has paper that can absorb a limited amount of inflation equal to what the market is willing to buy from their balance sheet. Given the choice between real physical gold and MBS paper, which would you choose? The ECB will be able to sell their gold for Euros to adjust Euro supply. The Fed cannot sell their gold because technically it doesn’t even belong to them and it isn’t marked to market. It is a dead asset on its balance sheet. The Euro and the Eurozone will survive this crisis. The real crisis is coming to the Fed and the dollar. Read FOFOA for more on Freegold and the structure of the Euro and the ECB.

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