The following was originally published on July 15 at www.tradingthecharts.com.
My initial rationale for seeing a top in gold earlier this year was the announcement of the taf and other subsequent lending facilities which seemed to put some teeth in bernanke's inflation-fighting rhetoric by giving the fed a more precise tool in targeting the credit crisis without the blunt force trauma of significantly lower interest rates -- even if the effective rate was frequently below the target. With the extent of the damage to the real economy uncertain and potentially benign, a hawkish central bank was reasonably credible given the actions they'd taken.
But, after an initial decline, gold remained strong as risks to the banking system seemed to persist, risks that seemed, at the time, to culminate in the failure of bear sterns and yet another targeted fed action in its deal with JP Morgan. Even as the fed did ultimately take down its target rate, the perception was that steepening the yield curve would help financials recapitalize and create earnings so that renewed systemic risks were dampened. At the same time, gold was being overlooked in favor of oil, with its clear demand growth and real supply shortfalls; but as shoes continued to drop in financials gold would not, could not crash.
More recently, expectations for a lower low in gold were motivated by fears the fed would actually hike rates by a quarter point at its last meeting, an outcome that seemed plausible given the rise in bond yields and an environment of surprises out of the central bank. The Fed's easing hadn't made a significant dent in mortgage rates or the foreclosure rate. A quarter-point hike might have broken oil and commodity prices, enticed foreign investment, and actually drawn in home buyers looking to lock in low rates.
And yet, despite alarmist statements about the damage a fed "tightening" would cause to stocks, we've seen a significant decline in major indices across the board since the last meeting, which suggests cooler heads maybe should have prevailed in June. Instead, fears of systemic risk are as high as ever and the fed's fledgling inflation-fighting credibility is reduced to nil. The Fed's actions in concert with treasury no longer instill confidence, but are openly described as a "power grab" in the mainstream press. the president, seemingly omnipotent in the realms of wire-tapping, trade negotiation, and preemptive military strikes, is powerless in the face of a high oil prices so long as they can be used as political leverage against congress to grant further concessions from the national trust in benefit of oil companies.
Perhaps the lesson of the past few weeks and today especially is that if real relief is not coming from Washington, it must come from traders themselves. As anyone can tell you, gold's recent climb has been on the back of a renewed decline in the dollar, rising inflation in all major currencies, and heightened sensitivity to a possible financial collapse on a global scale. And though housing is obviously at the center of everything crisis-related, from a trading perspective, oil continues to be the crucial market. Only a break in the price of oil, even more so than was seen today, can begin to create confidence, stave off catastrophe in the credit card and commercial real estate industries, and provide a rationale for owning stocks.
I can't see the impulsive structure in the recent gains. I'm hesitant to put it in context of a larger count, but the series of three wave moves continue to suggest a correction within a correction, possibly having culminated today in a 5 of c as shown. Of note is that the major fib retrace levels, if today's high is the top of the move, correspond nicely with existing resistance/support at 935, 920 and 900. The 5-d sma about 960 would also be a potential support area on any move lower.
Every day the Fed's current policy is maintained only compounds the inflation entering the economy, keeping the likelihood of a catastrophic washout in gold unlikely and the long term bullish prospects very good. That said, in the words of a great contributor to this board, regression is healthy and, if we do get follow-through on this move down in oil and commodities we'll have to judge then how much of a regression we get. Given the environment outlined above, it's doubtful traders will want to take the lead and sell down inflation hedges if Washington doesn't take the lead. In my book, shorting gold is always and everywhere an attempt to offset devaluation in physical. But, as oil showed today, selling begets selling and this continues to be a trader's market.
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In the meantime, be careful out there. Be aware of what the charts are saying in multiple markets and tune out the TV. Don't be afraid to take high risk/reward trades, but be ready to cut your losses quickly if it's wrong. But most of all, be unbiased.