Gold and Silver Daily Charts

Gold broke out of its trend channel today on the same monetary euphoria that seemed to drive US equities.

Prior resistance is now support, so we would look for the top of the trend channel to provide some level of potential lift in the case of a consolidation or pullback around the 1325-1330 level. Breakouts from cup and handle formations can be violent, and it would not surprise this chartist to see that run to the first target of 1375 before gold consolidates properly. I would hope gold would take a more leisurely route higher to that second target of 1455 and beyond, our long term minimum objective for the cup and handle, since the big parabolic peaks are almost always followed by deep corrections.

This gold chart gave us a 'buy or die' signal at 1,156 which was an almost perfect 50% retracement of the big rally off the bottom. That buy signal now shifts to 'neutral' as we approach the intermediate objective of the breakout which is 1375 before a consolidation or a pullback. Keep in mind that the minimum measuring objective of 1450 was set in May 2010 although the details are periodically revised as new data is obtained from the chart. It has been a long road since then. Now things get a little more complicated.

Ben Davies' Interview on King World News is a credible hypothesis into what may be happening over the next two years or so. I always assume these large macro changes take time, but there are periods when they reach a tipping point or a sea change and the progress of such changes can accelerate significantly. The markets may be signaling such a major development.

One thing I am sure of is that as this situation plays out and as gold and silver rally higher, the reasons given by some as to why the precious metals should not be doing what they are doing, rising higher in price, will become increasingly strident, insistent, and at times unintentionally funny because they are so disconnected and inappropriate compared to reality.

It requires intelligence and maturity to realize when you are wrong, but it is a mark of character to be able to admit it, gather yourself together, and go forward again successfully, dealing with things as they are. Self-deception is a powerful ally to failure, and rationalization can be remarkably inventive and seemingly inexhaustible. Everyone is admittedly wrong sometimes, except for the deluded, the naive, the con-man, and the narcissist.

Silver is 'taking no prisoners' from the bear camp in its own powerful breakout that continues to extend beyond our expectations. I am of a mind to take some profits off the table for the short term trades, but I certainly would not get in front of this juggernaut just yet, or more seriously hedge the long term positions. That time may come, and the market will let us all know when.

The Guardians of the Realm

How's Your Confidence Now?

 

How About Now?

SP 500 and NDX December Futures Daily Charts

The ISM Services Index came in at 53.2 versus an expected 51.8 and it was off to the races with a day long short squeeze in US equities.

Tomorrow is the ADP report, with expectations of 18-20,000 jobs added in the private sector, a possible peek ahead at the big non-Farm Payrolls Report for September which carries expectations of flat jobs growth.

Personally I think the markets are starting to price in a QE2 stimulus and a whiff of inflation to go with it, with additional inspiration from the example of Japan, which is approaching a level of debt to GDP that generally begins to approach the threshold of hyperinflation to come.

However it develops, I doubt this will end well and remain very cautious of equities, leaving the day with a new small short position. We all have to be mindful of the Fed's ability to blow another asset bubble, more generally in equities. Difficult times to be an investor or a saver indeed.

Gold and Silver Daily Charts

SP 500 and NDX December Futures Daily Charts

Gold Daily Chart and a Comparison of the 2009 and 2010 Gold Rallies

If the 2010 gold rally lasts 98 calendar days, or approximately three months, that targets October 31.

If the 2010 gold rally results in a price increase of 27% that projects a target of $1,480.

St. Crispin's Day is 25 October.



The Battle of Agincourt

SP 500 and NDX December Futures Daily Charts

US Dollar Weekly Chart

The dollar appears to be headed lower to test the next level of support on the weekly chart. A target for the euro might be closer to the 150 level but probably not much higher, as foreign central banks continue to shift reserve from the dollar into other stores of wealth.

Gold Daily Chart

Another range day in which the Comex tested the limits of the large open interest in holders of October futures coming into the delivery process. The speculative shorts who got excited and jumped on at the bottom of the range got stuffed on the snapback rally later in the day.

Learning to wait for the moment when the odds are in your favor is the great lesson of trading. Life truly is a school of probability.

SP 500 and NDX December Futures Daily Chart

End of quarter. Book it, Dano.

Net Asset Value of Certain Precious Metal Trusts and Funds and the Odd Performance of PHYS

I am finding this contraction in the premiums of the gold-only trusts GTU and PHYS to be extremely interesting. Both followed an expansion of the fund's units and large sales of overallocations to the underwriters, providing liquidity not only to expand the trust but also to game the shares.

This expansion facilitates an arbitrage on the premium in which one sells the trust and buys GLD for example. And the holding of units by the underwriters assures a ready supply of shares for shorting, if one assumes that the big punters even bother with the nicety of borrowing shares.

While the premiums remain uniform it does not matter since the NAV will track the bullion holdings, but it does create a sort of retrograde phenomenon in which the funds will briefly underperform bullion due to the contraction of their premium, especially in the case of PHYS, from the lofty 8% to the lowly 2%. It will be interesting to see if this holds, or if the range of premium reasserts on a new leg up in bullion, and the 'kick' of a possible short squeeze.

In the past a contraction of the premiums was often a signal of bearish sentiment, that the speculators were not willing to pay a premium because they felt that the move was nearing a top. One also has to wonder if this is the case once again.

Who can say? As Robbie Burns once observed:

But, Mousie, thou art no thy lane,
In proving foresight may be vain;
The best-laid schemes o' mice an 'men
Gang aft agley,
An' lea'e us nought but grief an' pain,
For promis'd joy!

Still thou art blest, compar'd wi' me
The present only toucheth thee:
But, Och! I backward cast my e'e.
On prospects drear!
An' forward, tho' I canna see,
I guess an' fear!

If you are trading for the shorter term, one needs to be aware of things like premiums and arbitrage. If you are buying and holding as an investor short term fluctuations become much less of an issue as other things increase in importance. You have to understand why you are buying something and what your own objectives are with it, and then be guided by them.

As in the case of the trusts, there are 'premiums' on stocks and options for example, that are not so readily determined because the exact valuations are not so simple and explicit.

This is why trading for the shorter term is a highly specialized craft and is not suitable for any but a few who have the time and knowledge to attempt it. I have been at it for many years, and still learn new things almost every day, all too often the hard way.

You may wish to keep this in mind if and when Mr. Sprott introduces his Physical Silver Trust.

Here is what the NAVs looked like in early September 2010. One 'benefit' of the added liquidity is that the spreads on the Buy - Ask for these trusts has narrowed significantly.