Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold and Silver Analysis - Precious Metals Take Less of a Beating than Stocks

Commodities / Gold & Silver Jul 29, 2007 - 10:05 AM GMT

By: Joe_Nicholson

Commodities

“The Fed's approach to monetary policy may force it to cut rates if the subprime and credit issues reduce overall demand for base money… In addition to the technical indicator provided by the 5-week and 5-day moving averages shown above, the fundamental outlook for the intermediate term is based on this potential devaluation of the dollar if the Fed is forced by credit issues to intervene.” ~ Precious Points: Good as Gold , July 21, 2007

“Bernanke's speech was exactly the sort of rhetoric you'd expect from a man prepared to undertake a massive devaluation to try and stave off a credit crisis.” ~ Precious Points: Are Metals Next , July 14, 2007


“It's a safe bet to expect the Fed to do what it always does in times of crisis, allowing the credit markets to inflate the money supply and stimulate the economy, even if it is only an economy of debt.” ~ Precious Points , June 24, 207

Given the beating taken by the major stock indices last week, metals fared somewhat better even though gold closed back under the 5-week moving average and silver back under the 5-day average. Two consecutive closes above these levels has been a useful indicator of the short term rally in these metals and, though the recent weakness dampens the signal's suggestion of new highs, the extension of the bull market in precious metals may very well still be preparing to get underway.

Volatility was always expected as a component of this new up move. The chart above in gold shows a break below the 5-week moving average that often signals a retest of the 50-week moving average. If the heavy selling pressure that some are beginning to fear does in fact materialize, a trendline test at $620 is likely. The shorter time frame daily chart below shows gold approaching oversold levels on the RSI and first support at the 200-day moving average, currently about $651.35, with the 50-day average also serving as a key level. An upward move faces overhead resistance at the 5-week moving average, about $664, and the 5-day average at $672.

Silver has frankly been a mess lately, testing the resolve of precious metals investors. The convergence of the 5-, 50-, and 200-day simple moving averages prompted a technical breakout, which has now failed and produced negative crossovers. It may very well, however, also provide a relative equilibrium point around which the white metal may remain bound until the fundamental undercurrents suggesting a new surge in metals are realized.

Beyond seasonal factors that tend to increase demand for precious metals near the end of the year, the intermediate outlook for metals is inextricably linked with the dollar, interest rates, and the housing related credit issues that have dogged the stock market lately and tried lesser men's souls. Rate cut expectations were low or nonexistent when hints of the emerging credit market seizure were appearing in the form of rising bond yields back in June. Of course, at that time, this space was bringing attention to the fact that the Fed's rate targeting regime would force a cut if demand for money waned while credit conditions worsened. The previous update called attention to the fact that rate cut expectations had significantly increased since that time. Rate cut expectations leapt dramatically higher again last week, nearly tripling to 96% by year end and 100% by the end of 2008 Q1.

This update has long called Chairman Bernanke's obsession with containing core inflation a necessary smokescreen, a pretext that would seem to permit and justify policy accommodation if needed, and we now seem to be nearing the threshold. If this is so, and the Fed is in fact preparing to prop up the banking system with a massive influx of new money and/or an interest rate cut, then the likely intermediate to long term effects on precious metals are obvious. Weakness in the metals last week, though, in the face of the looming crisis, provides an important reminder that metals initially suffer as liquidity wanes and policy accommodations are enacted. Remember that gold fell along with interest rates in 2002 and did not begin it's now famous bull run until Greenspan signaled the all-clear and began hiking rates to stem the tide of what was an obvious dollar devaluation.

Last week, then, was somewhat of a return to the low inflation expectations that took root in the spring when core inflation decreased in successive months. A low PCE deflator component in the initial GDP estimate helped to solidify the contained inflation thesis and encourage the rate cut camp. This very intentional consequence of the highly dubious government statistics has been a major headwind for metals over the last several months. The other chief contributor to metals' inability to build on their gains last week was relative strength in the dollar. As it seems London and Frankfurt will take a break from their rate hiking campaigns, the dollar has stabilized against these currencies and slightly rebounded from multi-year lows. As mentioned last week, though this may have a psychological impact on traders, it's largely irrelevant to the value of a dollar relative to gold and silver. Still, the dollar's relationship to other depreciating currencies is also a likely misdirection in the case of a Fed cut.

Early signs of the Fed's eagerness to inject liquidity, and of broker/dealers to accept it, appeared as an additional $8.25 billion in sloshing repo funds last week, $6.25 billion of which was added Thursday alone. If anything like this trend continues, a new leg in the gold bull market seems inevitable. In the short term, though, it's quite possible there will be a recovery in overall outlook, a proverbial calm before the storm that may or may not translate into further advances in precious metals. But certainly if and when the crisis strikes, metals will not be immune from selling pressure.

Bernanke's ambiguous assertion to Rep. Ron Paul that he is confident he can avoid a 1979/80-style dollar deflation – and its effect on trader psychology – should not be taken lightly, particularly given the profound fluctuations his rate targeting policy can produce in money supply. But if this is the start of another 2002-style period that tests the mettle of gold and silver investors, well-timed purchases, and the promise of a new 2005/06-style bull run once the billions (trillions?) of new dollars work their way through the credit markets and into the metals, can be the soothing counterpoint to Bernanke's beautiful, if unsettling, devaluation tune.

by Joe Nicholson (oroborean)

www.tradingthecharts.com

This update is provided as general information and is not an investment recommendation. TTC accepts no liability whatsoever for any losses resulting from action taken based on the contents of its charts,, commentaries, or price data. Securities and commodities markets involve inherent risk and not all positions are suitable for each individual.  Check with your licensed financial advisor or broker prior to taking any action.

Joe Nicholson Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in