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Precious Points: The Final Cut?

"The rally in gold since December was almost entirely speculative, flight to quality and dollar hedging that will unwind very quickly when conditions change. If a reversal in the dollar has indeed begun, oil will move lower, but not as much as gold. Gold has now defined a clear range and taking any large positions while inside that range is no better than gambling. In the 900-955 area both counts are still valid, which suggests playing the break of the range in whichever direction." ~ Precious Points: G.O.L.D. (Gold, Oil, Dollar, Libor), April 20, 2008

Gold's march through $1000 last quarter was halted by the Fed's creative approach to increasing liquidity through its lending facilities without expanding the monetary base. Since that time this update has called for a correction in gold to about $800 while also presenting alternate, more immediately bullish counts, for verification. Now that traders have suddenly realized the Fed has little rate cutting ability left, the currency risk outlined in this update for quite some time has begun to be realized.

The notion the Fed would not cut rates at all this Wednesday all but disappeared early in the week, giving the euro an opportunity to make one last high against the dollar and giving gold a small boost. But the consensus did emerge this week's meeting could mark the final cut in the Fed's campaign to lower interest rates and that was enough to send the dollar higher and gold out of its trading range, below $900.

The last update featured the best hopes for bulls and bears on a single chart. Though last week's action favored the bearish count, above in red, the bullish blue count has not yet been invalidated. For the blue count to emerge, a five-wave move above $960 is necessary. The bearish count needs only one more new low under the April first low. An almost identical situation exists in silver, with a new low being all the more telling since the descent has now been stopped twice by a trendline from 2007.

The dollar rally and the notion commodities have cracked all seem to rest on this idea of the Fed raising interest rates again relatively soon to contain inflation. The fact, however, is there's little to suggest anyone actually wants a stronger dollar, just a stable currency that will make business more transparent. The wave of inflation triggered by the current easy money policy has only just begun to materialize and, because of the consumer's link to interest rates through their home mortgages, it will be all but impossible for the Fed to make any more than token hikes in their target rate.

What's more, because the spread between Fed funds and Libor remains stubbornly wide, it's quite possible the Fed will not be finished cutting rates this week, even if it pauses, as interbank lending continues to be fearful. As attention shifts from the credit crisis to the economy in general, the stark reality is that consumer sentiment is unlikely to improve until housing prices stabilize and buyers return to the market, a trend not supported by last week's housing data. A clear signal from the Fed that interest rates have bottomed, might bring the refis in off the sidelines, and if every potential default were to be refinanced now with fixed rates, and these mortgages could subsequently perform, some pressure would be lifted and it might be possible for the banking sector to quickly throw off its bad debt and for the Fed to fight inflation with impunity. A stable, if not exactly strong, dollar could encourage economic growth without triggering parabolic spikes in commodities.

Even so, precious metals will ultimately prosper in a period of increasing economic growth and relatively easy money, as they did in the years leading up to the current economic downturn, even among rising interest rates. Remember inflation is always the official policy of the Federal Reserve. The linchpin to the current situation is that the Fed not become too tight before the economy recovers from its ongoing slump. The debate rages on about a second half recovery, but the Fed will probably be in that camp for its statement on Wednesday. They've been wrong before and it remains to be seen if the Fed is given the leeway to fight hike rates any time soon, or if employment numbers deteriorate and panic sets in anew. Fed funds futures, however, choose the middle of the road and have rates pegged at 2% through December as the most likely path. In the meantime, it remains a trader's market in precious metals.

TTC will close soon to new membership.

We originally thought we would close the doors to new retail in June or July, but I've decided to move that up closer to May 31, Memorial Day weekend. The opportunity to join the TTC community of traders is slipping away from retail investors. If you're really serious about trading learn more about what TTC has to offer and how to join now.

So, do you want daily updates on precious metals and other markets? Do you want to learn how to trade short term time frames? Would you like access to next week's charts posted in the weekly forum right now? Ten to twenty big picture charts are posted every weekend. If you feel the resources at TTC could help make you a better trader, don't forget that TTC will be closing its doors to new retail members on May 31, 2008. Institutional traders have become a major part of our membership and we're looking forward to making them our focus.

TTC is not like other forums, and if you're a retail trader/investor looking to improve your trading, you've never seen anything like our proprietary targets, indicators, real-time chat, and open educational discussions. But the only way to get in is to join before the lockout starts - once the doors close to retail members, we'll use a waiting list to accept new members from time to time, perhaps as often as quarterly, but only as often as we're able to accommodate them. Don't get locked out later, join now.

Have a profitable and safe week trading, and remember:
"Unbiased Elliott Wave works!"

 

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