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Precious Points: Approaching the Moment of Truth

There can easily still be a higher high before this move is done. Silver could also easily see an extension of this move, probably as high as $14.20... if investor sentiment and underlying economic conditions continue to drive money toward inflation safe havens. Caution requires we not ignore ... the certainty of increased housing defaults, the ongoing uncertainty of toxic asset ownership, the (un)health of the American consumer as assessed based on outstanding credit instead of retail sales, and now the pessimism of the Fed. Blowoffs end ugly for everyone except those who are forearmed with the knowledge they are taking short term positions and choose their trade vehicles appropriately. ~ Precious Points: Is This the Big One, September 23, 2007

As anticipated by last week's update, precious metals flexed their muscle again this week even as economic data came in mixed and a Fed president tried to put the genie back in the bottle by saying additional rate cuts are not guaranteed. Though for months this space has lauded the policy of the Bernanke Fed and the likelihood that it would preside over record high metals prices, it's important to remember the 50 basis point cut in the overnight target rate simply reset the 100 basis point penalty for discount window borrowing and doesn't represent a commitment to further accommodation - though it's fair to say the outlook would have been downright pessimistic without it. That the heralded repo injections last Thursday didn't even total the amount maturing that day may appear to signal that the Fed is trying to scale back from its liquidity pumping, but for the week total sloshing funds increased by about $10 billion. So, with money supply in fact expanding at a rapid pace, we're now approaching the moment of truth when we'll finally learn whether the economy rebounds in the fourth quarter or if Bernanke will have to cut again.

In the meantime, new highs appeared in gold again last week as the European Central Bank is expected it would stay on hold at their October 4 meeting and not follow the Fed down the path of rate cuts... yet. Of course, this propelled the dollar index to all time lows, as the Euro whooshed to record highs, with gold also a primary beneficiary. And without giving away the target for this move, available only to TTC members, it's clear this now parabolic move in precious metals can have further upside next week. With the RSI now reaching overbought levels, though, it would irresponsible to dispense with the caution preached here for the last few weeks as bullish investors looking for sustainable gains would be better served with either a stratospheric leap to almost $800 in the short term, or else some consolidation and base-building.

Silver finally had all the right moves this week, successfully retesting the 5-day simple moving average early in the week and vibrating around it before breaking higher to end close to psychological resistance at $14.

The weekly chart looks even more optimistic for silver, with an RSI still not reaching overbought levels and a positive crossover in the 5- and 50-week moving averages now looking inevitable. Last week's target at $14.20 is still operative and, now that gold has convincingly taken out its May 2006 highs, silver could be looking to do the same - meaning a potential move over $15 in the front month futures contract that would be powerfully bullish for all precious metals if it occurs.

The biggest threat to metals right now is still the May 2006 highs and the perception that we could still be in a corrective pattern from those levels. If so, the summer's lows in gold would have to be taken out, though probably not by much given the strength of the underlying fundamentals and the beginning of positive seasonality. A move through $15 in silver could be the nail in the coffin of that analysis, but it would be unwise to ignore it without confirmation. Either way, precious metals themselves are approaching a moment of truth.

Metals were able to move higher despite tame inflation readings last week on the back of a sinking dollar. But even members of the dollar-going-to-zero camp probably don't expect complete annihilation of the greenback to occur this week, this month, or even this year. And now that the market may have priced in a further domestic rate cut while the ECB holds steady, any change in this perception (not to mention technical factors) could have the Euro topping and the dollar finding support. In fact, Deutsche Bank added its name this week to the growing list of firms expecting cuts from the ECB in 2008 as signs of subprime contagion continue to appear in Europe and London. And, if the dollar rallies on Euro weakness as global money supply continues to swell, this only further supports the idea that any selloff in metals will still retain historically high prices with the next sustainable bull leg in metals still around the corner, only after a bit more weakness first.

There should now be little if any doubt the Bernanke Fed will cut if economic or financial conditions deteriorate. Though spending and income data bought a little more time and again staved off the notion that the American consumer is completely spent, at least for now, the smart money still seems to think the wolf may be at the door. If the Fed is forced to cut October, it's hard to imagine precious metals getting stuck in any sort of serious decline. But though it's too soon to predict what horrors may emerge from the Halloween meeting, betting on another cut now is risky to say the least. Therefore, the note of caution should continue to play, meaning tight stops for the traders and only small, tentative purchases for the physical buyers. The market's response to a busy week for economic data, including ISM figures, auto and truck sales, and employment reports, and the ECB meeting, will give a clearer picture by next weekend.


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