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Precious Points: G.O.L.D. (Gold, Oil, Libor, Dollar)

"Support and resistance at the moving averages has so far contained the rallies in gold, but prevented new lows. This situation may be about to change." ~ Precious Points: The Power to Move You, April 13, 2008

For weeks and months this update has been describing the potential risk to precious metals should the dollar gain strength, particularly against the euro. The March 29 update specifically stated, "have no illusions about the fact gold and silver could be decimated virtually overnight", which is exactly what happened Friday morning as currency traders priced in the possibility the Fed is done cutting interest rates.

Last week's update showed the potential for a bullish count in gold, shown above in blue. Even with the whacking it received on Friday, the count is not yet invalidated. The red count, suggesting a deeper correction within the bull market, is consistent with an ending diagonal having terminated into Friday's selloff and a wave 3 down having now begun. Notice in the 900-955 area both counts are still valid, which suggests playing the break of the range in whichever direction.

Crude, like the precious metals, was markedly lower Friday morning on the dollar strength, but Nigerian rebels never seem to attack mines - only oil got the boost from the supply fears. And unlike silver, which seems to be experiencing modest but genuine supply shortages, the rally in gold since December was almost entirely speculative, flight to quality and dollar hedging that will unwind very quickly when conditions change. If a reversal in the dollar has indeed begun, oil will move lower, but not as much as gold.

So, as usual, the question for gold is where the dollar goes next, and specifically now, whether expectations the Fed won't cut again in two weeks are in fact overdone. If the less than stellar earnings reports from financials last week are any indication, and the widely overlooked capital raising announced by JP Morgan, the Fed may be justified in ongoing accommodation to spur about interbank lending. We're not likely to receive any explicit clarification on the hushed controversy surrounding the sudden lurches higher in Libor from this week's BoA earnings report, but the certainly the rising interbank lending rate suggests the credit picture is not as rosy as the stock market would have us believe.

Looking ahead to the Fed meeting, it's equally likely they will stand pat as cut another quarter point - and guessing isn't the way to plan a good trade. But in either outcome, it's certain the Fed is growing very close to the end of its rate cutting, which suggests two possible future scenarios: 1) if the economy rebounds, meaning housing prices stabilize before consumer spending creates a deep recession, then the Fed starts to inch rates higher as demand for money increases and, absent rate cuts in Europe, gold can rise as it did in 2005-6. Or 2) the current positive economic outlook is based on Q1 earnings and therefore backward looking as the economy only now reaches the edge of the consumer spending precipice, in which case the performance of gold is uncertain, but probably positive based on its performance since December.

The bottom line is gold has now defined a clear range and taking any large positions while inside that range is no better than gambling. This update has recommended patience and it may be only a little while longer before it pays off big.

TTC will close soon to new membership.

We originally thought we would close the doors to new retail in June or July, but I've decided to move that up closer to May 31, Memorial Day weekend. The opportunity to join the TTC community of traders is slipping away from retail investors. If you're really serious about trading learn more about what TTC has to offer and how to join now.

So, do you want to learn how to trade short term time frames? Would you like access to next week's charts posted in the weekly forum right now? Ten to twenty big picture charts are posted every weekend. If you feel the resources at TTC could help make you a better trader, don't forget that TTC will be closing its doors to new retail members on May 31, 2008. Institutional traders have become a major part of our membership and we're looking forward to making them our focus.

TTC is not like other forums, and if you're a retail trader/investor looking to improve your trading, you've never seen anything like our proprietary targets, indicators, real-time chat, and open educational discussions. But the only way to get in is to join before the lockout starts - once the doors close to retail members, we'll use a waiting list to accept new members from time to time, perhaps as often as quarterly, but only as often as we're able to accommodate them. Don't get locked out later, join now.

Have a profitable and safe week trading, and remember:
"Unbiased Elliott Wave works!"

 

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