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Precious Points: A Matter of Credibility

"The rising trendline from the May low will be a crucial support... with the 50-day sma continuing its decline, the convergence at the trendline will create a crucial decision area that could lead to the new lows mentioned here for weeks. Some Fed members have indicated a desire to reverse their rate cuts aggressively, which seems an optimistic outlook. Greenspan's assurances notwithstanding, the possibility remains of the entire mess devolving into a deep recession." ~ Precious Points: Confirmation, June 02, 2008

Gold moved squarely into last week's target box, meeting strong resistance at the 50-day sma. We have yet to see a failure, however, and higher targets for this move exist. Breaking back below the trendline and seeing the 50-day sma following lower as well, would be a good indication for the impulse down.

It's quite likely the gold takes this week will be at least influenced, if not determined, by action in the eur/usd and oil. It's been much discussed already how last week began with Ben Bernanke's pro-dollar rhetoric and enhanced expectations for rate hikes later this year. This update has been consistent, however, in saying rate hikes from the Fed are simply not credible at this point and that their rhetoric is aimed more at anchoring long term inflation expectations than at any specific piece of data. In other words, it's just talk.

When Trichet and the ECB threaten rate hikes, however, the world takes notice. That's inflation fighting credibility. The timing of the statements is curious, though - if the European ministers really wanted a stronger dollar they could have achieved it by simply remaining silent on the issue of hikes. Instead, their consistent undermining of the dollar makes a bid for the euro as the world's next reserve currency increasingly more, well, credible.

And as for oil, President Bush had the opportunity Friday afternoon to put the sword in the oil bulls with even the slightest implication of a possible release from the SPR. But since high oil prices are his leverage against Congress to coerce permission to drill domestically, and a slow economy his argument for making his tax cuts permanent, Bush didn't and won't provide even the jawboning relief Bernanke attempted. Instead, he called on lawmakers to "put partisanship aside" as if his image as an apolitical champion for the common man is the slightest bit credible. His willingness to use American people and wealth as collateral against pursuing his wildest ambitions, however, unfortunately is.

But it was the threat of "inevitable" attacks on Iran from the Israeli transportation minister that sent oil to record levels last week. The fact Mr. Mofaz is originally an Iranian Jew is supposed to make his opinion particularly credible, as if the proposition of military violence from Israel in defense against its perceived threats needed any more credibility. Ask Iraq, ask Syria. Israel is the quintessence of credibility in this regard.

Still, after the dramatic reaction on Friday in both oil and the dollar, it's not unrealistic to expect some softening if not outright reversal of these trends in the days to come if the conditions that created them are not exacerbated. As credible as that might be.

Last week's update described first resistance in silver at about $17.25. As shown in the chart above, this represented a convergence of previous highs and lows with a trendline from early May and the 50-day sma. After initially being rejected by this area, silver was able to break through and closed just above this new support area on the strength of Friday's action. Watching this area in silver could be an excellent way to gauge price action in the days to come.

 

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