Rising metals prices ... tend to erode the credibility of fractional reserve lending and fiat currency. In all likelihood the FOMC would lower rates again if further calamity befell financial markets or the larger economy, but in the near term at least ... a battle being waged between anti-inflationary forces with the Fed in one camp, and broker/banker forces allied with major media attempting to force another cut on the other could talk down commodities. Currency arbitrage that lifts the dollar off its lows for a time might give the precious metals rally a breather. Targets in gold now range up to $845, and $15.80 in silver. In the interest of sustainable gains, perhaps a little retesting might be in order, at least the $800 level, to check for a possible floor there. ~ Precious Points: It's A Hit! November 03, 2007
With all the cross-currents in this market it's become a bit difficult to say how the weeks will unfold, which forces will become material first and to what extent. So, though the Bernanke Fed continued to wage its rhetorical war against inflation last week, writedowns for the major banks took center stage and wielded a larger megaphone cramping stocks and raising December rate cut odds to 98% from 68%, consistent with the view outlined here last week. Central bank meetings in London and Frankfurt left interest rates steady and managed to continue a hawkish tone that kept the dollar in the basement despite growing concern about a looming trade war.
But, though these anti-gold forces now stand as ready as ever to force a consolidation in precious metals, gold and silver, among the confusion, made a quick sprint to my targets last week, as seen in the charts below.
Despite the gains early in the week, the metals consolidated in a triangle as the selloff in stocks ensued, and as mentioned in the previous update, anything that flattens out the parabolic rise in these metals builds a base and adds to its sustainability. The resolution of the triangle suggests new highs could be ahead, tempting in a week that brings inflation data and possible banking calamity that could get the Fed back into the accommodation game.
But, at the same time, with markets again intent on seeing a cut in December, any disappointment could have metals being sold sharply. There's also a rising probability that the dollar will at last see at least a relief rally, which could have metals trading weaker in the days or weeks ahead. A few weeks ago this outlook mentioned what appeared to be Bernanke toying with the idea of a floating interest rate, a shift in policy recently called for by none less than Steve Forbes in the November 12 issue of his eponymous magazine. The power of the Fed to literally change the game if metals force the issue cannot be ignored.
So, the forces at work in these markets are the same as those outlined last week, so the game plan continues to be resisting the temptation to short without confirmation and using the 5-week sma in gold and the 5-day sma in silver to signal a major reversal. And, as always, expect parabolic rises to collapse dramatically unless they take periodic breaks to recoup. Curiously, a 38.2% Fibonacci retrace of the move off the summer '06 lows in gold would bring us back to the May '06 highs. Not that this is the expected move, but it should put into perspective how far these metals have come over a short period and that rather than being greedy, long term holders of physical metals should, at this point, welcome temporary sale prices towards the long term sustainability of these advances.