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Precious Points: T-minus five, four, three ...

The biggest threat to metals right now is still the May 2006 highs and the perception that we could 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. 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. ~ Precious Points: Approaching the Moment of Truth, September 30, 2007

The chart above is an updated version of one posted on the TTC forums and in this newsletter for over a month. As you can see, gold overshot its initial target, and may be currently putting in the anticipated consolidation. The ultimate target for the move, however, though the exact range is reserved for TTC members only, is higher still. As hinted at in previous updates and finally made explicit last weekend, the chart above shows an ongoing correction pattern since the May 2006 highs. If this proves to be the case, gold will have to plunge at least to the 50-week moving average and quite possibly lower. Hence the caution expressed in the newsletter recently.

But because it appears some traders are getting antsy about wanting to short gold, caution now requires mention of the alternate to the count described above. If the gains in precious metals are not corrective and in fact are already the start of a truly impulsive bullish wave, then not only will the target for the corrective wave be exceeded, we could easily see gold move over $800 and challenge nominal all time highs. Without confirmation of which outcome is unfolding, shorting here on a hope is inadvisable.

Last week's update promised a clearer view and though gold has not yet tipped its hand as to which count we should be following, there were some indications about what forces have been at work driving this rally. The first and perhaps strongest, as suggested last week, is the currency trade. Silver, which has been notoriously underperforming this year, has not been seeing the direct benefits of dollar weakness as it appears those hedges have moved directly into gold and other currencies. As a result, however, silver actually led on Tuesday as gold sold off ahead of reasonable expectation of a steady rate in Frankfurt. As the charts below reveal, gold found support precisely at the 5-week simple moving average at the end of Tuesday's session, only to gap lower on the news of the ECB meeting.

Though the ECB non-action should have had negative consequences for the dollar in a rate-cutting environment, the decision was widely anticipated and already priced into the markets. But unlike the Fed, who was forced to do a 180 degree about face from inflation fighting to growth stimulating one week to the next, the European Central Bank has chosen a more graceful approach, with Trichet's concerns over economic weakness signaling a gradual shift toward what is already mounting expectation of a rate cut early next year. But really it was weak factory orders data in the U.S. that tipped the scales against the dollar and sent metals upward again Tuesday morning. TTC members were notified in advance to the move below the 5-week moving average and buying the break back above would have been a profitable trade.

For the week, however, precious metals were unable to make up all their lost ground and closed down for the first time since mid-August. All the economic data, especially outstanding corporate paper and, of course, jobless claims, tended to be positive in the last half of the week, and this tended to slow the momentum of precious metals' advance. Silver, in particular, which had not been seeing much of the trade anyway, fell well short of retesting $14, where it had scratched its nose last week. The 200-day moving average proved strong support in the generally favorable environment, but the advance stopped squarely just below the 5-day moving average. If silver cannot get back above $13.55 quickly next week, there should be more concern over whether it will hold $13.25.

Make no mistake, the corrective wave pattern continues to be the primary expectation until it's disproven, but its target has not yet been reached and this newsletter has not suggested any selling or shorting of precious metals - only caution appropriate to the situation. The only specific action this update has strongly suggested is buying gold at the 50-week moving average, in the face of gut-wrenching declines, which has proved itself with a gain of over $100 per ounce of gold since June and even more since January. With the full expectation of seeing $1000 gold in my lifetime, though not necessarily this year or next, I doubt I would ever be net short the only inherently valuable global currency, real money, precious metal.

In the meantime, consider that entirely founding hopes of an economic recovery on the famously inaccurate and perpetually revised jobless claims report seems incredibly foolish. But since this is exactly what's occurred, the environment has shifted to where we're increasingly unlikely to see further accommodation from the Fed. The markets could feign weakness in an attempt to entice another cut, but this is unlikely in the corporate paper market, ground zero of the last crisis, where most of the bad actors have already been driven out. Instead, we may see the domestic economy sputter but not fail as the entire CDO problem shifts overseas, ushering in an era of steady domestic rates and falling European rates. Though this relative dollar strength shouldn't actually translate into weakness for gold, it would undoubtedly take the hot money out and probably return gold and silver to the roughly analogous relationship they've maintained for most of the past five years.

Again, until there's confirmation, it's dangerous to do anything more than short term trading or small purchasing in precious metals, and those long from January can simply sit on their profits and let it ride if they choose. But soon we'll know for sure and the next move for the metals, whichever direction, is going to be like a rocket.


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