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Precious Points: Fairweather Friends

"With each passing week, the pressure on the Fed threatens to bubble over, and it's becoming more and more likely the FOMC will again find itself in a position where it's obliged to cut rates or risk a huge selloff in equities markets. Silver may be the first tell for the direction of the next move. $13.50 continues to look like solid support, if we get there, and with what looks like a five-wave move down off the recent highs, silver will some work to do to avoid slipping lower before attempting new highs. Gold... having penetrated the $750-775 support area mentioned in the TTC forums, it's possible the near term bottom is in here, but... making that bet is nota high risk/reward proposition." ~ Precious Points: Bullion Bouillabaisse, November 17, 2007

This weekly update has not flinched from the view articulated a month ago, and repeated week after week, that the Fed would be cutting rates in December. And now, finally, the debate on the Street has shifted from whether the Fed will cut, to how much of a cut to expect.

Early in November this update suggested monitoring FOMC repo activity, which this week revealed a huge $8 billion Fed purchase of mortgage-backed securities for a staggering 43-day term. These are not subprime mortgages, of course, but, amongst the continued cheap loans at well below the fed funds target rate, given that all structured investment vehicles have been difficult to move, this open market activity takes a large a chunk of MBSs off of bank books through the new year must come as a godsend. Together with the fact that it gives banks cash to move around in its place, probably more than Vice-Chairman Kohn's call for a "nimble" Fed, this is what sparked the rally in financials this week and had the fair-weather friends of gold and silver liquidating the panic premium that made precious metals the talk of the town for some time.

To make matters worse, the dollar rallied against major currencies this week even as economic data and credit spreads continued to paint a bleak outlook. But, contrary to popular belief that this turn in the dollar is attributable to the Fed and its liquidity pumping, this update has been writing for weeks that it would be relative weakness in Europe that would cause exchange rates to tip in the other direction. Members at TTC will also be familiar with the technical reasons for the move. But, with the Fed closer to the end of its accommodations than the stubborn hold outs in London and at the ECB, holders of those currencies have wisely begun to suspect the ride up, for now at least, is ending. Those voices claiming the dollar will rise on a stronger economy are absolutely correct - but the simple facts we don't yet have that bottom in growth, and further rates cut cannot guarantee it, betray their explanation for current appreciation of the dollar as wishful thinking. If a hundred basis point rate cut would stimulate the economy and clear the credit markets, it's still unlikely they'll get it.

Two weeks ago it looked like silver would find support at $14, but last week's update was less optimistic. The 200-day moving average continues to look like good support, but the count in the chart below could stretch out in a more protracted sideways, but less deep consolidation.

A similar count is unfolding in gold, though the decline has probably not extended far enough to be counted complete. With the 50-week sma putting in firm support about $700, an all-out rout in gold is unlikely. Instead, a decline to about $765, or as low as about $750, in the December futures contractwould satisfy the conditions for a healthy consolidation in a bull market.

Ultimately, the Fed has shown in its rhetoric this week that it cares more about propping up the stock market and encouraging the credit market than getting a sensational response to its policy statement in December. While the dovish talk contributed to the explosive stock rally this week, bulls will almost certainly be disappointed by the Fed on December 11 if they expect an aggressive enough cut to end the credit crisis outright. In all likelihood, the Fed will probably look to keep the cut light and favor further open market activities including a possible change in the discount rate while Treasury and other government entities come to the aid of the ailing housing market that's the real source of the problem.

In the meantime, it's possible gold and silver will continue to face headwinds and lose their panic premium as investors put money back to work in financials and other stocks. And, the dollar could continue to firm against the euro and the pound, but as both currencies are debased to counter acute ongoing credit crises, neither will be increasing in terms of real purchasing power. In other words, gaining ground against these foreign currencies now is still a bit like playing musical chairs on the titanic. It's highly unlikely that we've seen the end of asset write downs and excess money creation worldwide and it's far too soon to be calling for the end of precious metals as a panic play.

Of course, as many of you know, one sure way to put aside the stresses of tracking the metals markets day to day is putting aside some of the physical metal as a long term investment. Now, whether you already own metals or are now just looking to get involved, there's a new piece of silver bullion on the market, a custom round designed in partnership between Trading the Charts and the Northwest Territorial Mint.

The design pictured above was made courtesy of Northwest Territorial mint. Impressive five-ounce .999 fine silver rounds are being made to serve as prizes for TTC's annual "Pick the Tick" contest. If you're not currently a member or subscriber, click here to participate for free in this unique opportunity to win a beautiful piece of silver bullion with no obligations. Also, if you're thinking about increasing your allocation to physical metals, or considering commissioning a custom piece of your own, visit the mint's online store for a treasure of other valuable metal collectibles and bullion. We will also be selling the above TTC bullion coin in the nearby future.


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