Below is an extract from a commentary available to subscribers at www.goldenbar.com on 13th December2005.
13-Dec-05: The FOMC raised the Fed Funds rate by another ¼, as expected, but withdrew the phrase that says it is still accommodative, supporting the recent easing speculations that the campaign has nearly finished.
A stock market accident would confirm them.
Monday saw a classic reversal day in gold prices to top off a mini buying climax.
Following the US$23 point gain last week, gold jumped another US$14 to touch an intraday high of US$544.50 on the front month (February) COMEX contract in Asian trading Monday before closing on its lows, continuing lower in aftermarket trade to below US$520 at the time of writing. Combined with the lackluster performance of the gold shares throughout the 20 point catapult to new 25 year highs as well as similar behaviors in the other metals - silver, copper, platinum and palladium - the chalk marks suggest that it's correction, or resting, time.
Interestingly, but not surprisingly, it is correlating with a downturn in the USd index this week.
The question now is, a correction of what significance: short, intermediate, or long term?
A short term top (lasting 2 - 8 weeks) would imply support between US$505 and US$514; an intermediate term top or consolidation (like the one during the first half 2005) would imply support above US$465. If the final move of the five year sequence beginning in 2001 has now completed, which I don't believe it has quite yet even if my original targets have been passed, a typical correction to the primary trend (based on the data from the last bull market in gold) would approximate 30%, or about twice the size of the four intermediate corrections that have averaged 13% (from peak to trough) in the bull market so far... implying a downside target to about US$400/oz.
The relative behavior of gold shares during the pullback could be decisive - if they continue to hold up well (as they had Tuesday for instance, and as they did during the October correction) it would bode well for the bullish short term outlook, because it would suggest that they were merely shy about rallying on a spike in gold prices.
Maybe the smart (or long term) money is still in control of this thing.
I tried to get this report out Monday morning but the market was changing too fast, and there was no action that I preferred - either buying or selling. It looked like a mini blow off but not necessarily a tradable one... just a little pent up steam, and I think precursor of things to come. In my December 7th issue I listed two scenarios that I thought were likely. Both of them were bullish. But the more conservative one saw gold peak at US$525 then fall into a two or three month correction with a low of around US$495; the more aggressive one saw the HUI break out and lead gold up to US$600 or so over the next few months. It's still not clear which one is unfolding.
It's short of the kind of climax I had in mind and too bullish for the conservative view. But as long as we stay above the US$502 handle in gold and the HUI break out doesn't clearly fail, the bullish scenario is still in play.
Chief reasons for my bullish short term outlook:
- Gold still undervalued with respect to the monetary fundamentals as represented in platinum & silver
- Bearish stock market and USd outlooks
- New easing cycle may come before current inflation risks even contained
- Potential unknown news catalyst around the corner, only partly foretold by recent spike in gold
- General hypothesis or model for the current stage of the bull market cycle, and the primary sequence
- The trend is your friend!
Obviously gold is undervalued in the long term.
In any case, we fully expect the short term two way volatility to increase for the remainder of the current move to our new target, for reasons I'll elucidate below. Suffice to say that I believe the move will get underway again by the New Year, if not earlier, and that the bulls simply need to test the newly established support handle above US$500 before finishing this move to US$633 plus or minus 50 points before spring breaks next year - the breaks through US$502 and US$514 last week marked new technical milestones in gold's bull market and old resistance points tend to become support points in the new trend; BUT this is a hypothetical truth until it's tested.
[Note: sometimes the tests briefly break through support, sometimes they don't come near it; a failure occurs if the market breaks that support and demonstrates that it intends to sustain below it.]
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