The 5-week simple moving average in gold has been explicitly mentioned in the TTC forums and chatroom as the bare minimum for confirmation of a reversal. Without even a retest of the 5-week moving average, it's impossible to expect anything but a consolidation leading to new highs. Silver has not been reacting as closely to developments in the currencies, central banks and economic data, it's future will probably be decided by the direction gold takes, either sharply to new highs or into a much deeper retracement. With volatily again on the rise, the importance of support at about $13.25 will also be increasing. Gentle Ben is preparing the ground for another rate cut. It's difficult to imagine anything but an enthusiastic response from precious metals markets to further policy accommodations. ~ Precious Points: Cut, Bernanke, One More Time! October 20, 2007

Nothing this week contradicted our expectations the Bernanke Fed would cut at least one more time on Halloween, and so it's hardly surprising to see gold and silver putting in excellent performances and new highs. As shown in the chart below, we did see a brief retest of the 5-week simple moving average, but when this proved to be strong support, the way higher was cleared.

Despite the appearance of the chart, gold's trip to $750 in the front month futures contract corresponded exactly with the 5-week sma at that time. Given the dovish inclination of the Fed, as outlined here last week, this retest was a rather reasonable low-risk entry point for a long attempt, and anyone looking to short gold, if they maintained a stop just above that level, would have emerged relatively unscathed. But for readers of this update, the leaning should have undoubtedly been to the long side.

Silver also had a rather impressive outing last week, finally overcoming psychological resistance at $14 in the futures. Note in the chart below how silver retested the critical level from last weekend's update and, once successful, followed gold to new recent highs.

In both silver and gold, the strong move off the short term moving average leaves a lot of room for potential decline before confirmation of a reversal. But we shouldn't want it any other way. For weeks this update has described the potential for this rally in gold to be the middle part of a corrective pattern from the 2006 highs and that, if this were the case, gold would be set to take out the year's lows. This scenario has become all but invalidated, with Friday's highs scraping the upper limit for this corrective pattern. And, with the Fed looking to cut next week, it would seem the fate for that count is virtually sealed.

The one caution though, is to understand how the market's expectations can color reality. With financial markets undoubtedly improving, stocks performing reasonably well, and gold and oil at soaring, some of the impetus for a 50 bps cut may have been removed. In all likelihood, however much the Fed cuts, it is likely to cite concerns over the economy as its primary motivation, rather than the financial markets' crisis that triggered the discount rate cut a few months ago, and this alone may justify the larger, preemptive action.

Still, though a further rate cut should theoretically boost precious metals, the markets seem to already be priced for 25 bps cut and, if this is all they're given, could choose to sell the news. With the UK now starting to acknowledge the degree of damage to its own financial system, the GBP took quite a whacking on Friday and, if the ECB is forced into a similar position, the dollar could be seeing relative strength, which may cause gold to lose some upward momentum. And, once the Fed's rate cutting is seen to be working in the domestic economy and recession and financial calamity are deemed averted, it's almost certain the dollar would begin to see some resurgence and precious metals would move to consolidate.

Any of these factors, or others, could have a pop and drop effect in precious metals as the next few weeks play out, but, to a large extent, these are secondary, longer term concerns, and the path of least resistance continues for the moment to be upward. Though not yet entirely invalidated, the scenario predicting gold will take out its 50-week moving average at about $675 appears unlikely anytime soon. Do not, however, underestimate the possibility of a 5-week sma retest, now above $760, but use this important level to see past the short term wiggles and attach a direction to the larger trend, whether we are beginning a dramatic selloff that will entirely erase the year's gains, or if this is yet another consolidation before $800 and beyond. That way we'll know for sure as the days and weeks remaining in 2007 unfold, when the mighty B.B. steps to the plate, whether or not he's struck out.