Gold Market Update

Last week was a momentous one when the financial world passed the point of no return. Right after a German court cleared the way for massive European QE to get underway, steamrollering opposition from German politicians and the German public in the process, the Fed announced not just QE3, which was expected, but open-ended and unlimited QE and suppression of interest rates over a longer timeframe. The Fed has declared open warfare not just against the dollar and savers in general, but against the entire American middle and lower classes, who will be progressively stripped of their assets and impoverished, the better to serve the interests of the banking class and the elites at large.

It is interesting that the Fed fired its biggest guns right after the German courts cleared the way for Europe to do QE on a grand scale in a similar manner. This means that the dollar and euro are going to go down in value pretty much in lockstep, so we are going to have to take this into account when looking at dollar index charts, which have a very heavy euro weighting, as going forward the dollar index chart may partially mask the ensuing dollar collapse. This brings us to another point - is the rest of the world going to stand by and watch and do nothing as the dollar accelerates into a downward slide, which will have the advantage for the US of devaluing its huge debts in real terms and increasing its competitive advantage re exports? - the answer to that is no - everybody is going to be in on the game and the fiat race to the bottom will intensify fuelling accelerating global inflation even as economies shrivel.

Last week also signaled that we are entering the endgame stage - where the accelerating demise of fiat leads first to rampant inflation and then hyperinflation, devastating global economies and leaving them a smoking ruin, at which point, finally stripped of their comfy sofa and TV set and other essentials of life like food and power, the masses go on the rampage, and "do an Iceland" on the bankers and politicians who brought them to this pass. Then and only then can we start over.

The Fed is playing a very dangerous game. While it is, or should be, hard for any person of even moderate intelligence to understand why anyone would want to invest in either the US bondmarket or the dollar, given the hopeless debt problems afflicting the US, there are still a lot of investors out there who haven't given up faith. These latest cavalier actions by the Fed have essentially given a 2 fingered salute to investors in US dollar assets, and could be the last straw that brings out a wave of dumping of US assets, especially as the effects of this policy become more and more apparent with passing time.

From all of the foregoing it should be obvious that with the starting gun having been fired last week on the fiat endgame, where wave of wave of money creation drives the value of fiat lower and lower, not just in the US and Europe, but around the world, the price of anything with real or intrinsic value is going to go up and up and up - the most obvious beneficiaries being gold and silver.

The predictions made in the last Gold and Silver Market updates turned out to be correct. A pause was predicted, which we got and then a breakout and strong run, which also duly occurred. We were wrong last week, however, in predicting a "sell on the news" reaction to the outcome of the Fed meeting. This was based on markets front running the news from the German courts and the Fed, but even we did not expect such unashamed generosity from the Fed - it's easy to be generous with other peoples' money, or rather money you yourself create out of thin air - we didn't just get QE3, which was largely expected and discounted, but open-ended QE, along with an extended commitment to hold rates close to zero. This is what ignited further strong gains in the Precious Metals and the broad stockmarket.

So what does all this mean for the Precious Metals, and for gold in particular? It means that they are to go up and up and up and not just against the dollar but against most other currencies, and as the fight to preserve wealth from the depredations of inflation intensifies, the scarcity value of gold and silver should guarantee gains that more than compensate for the loss in value of currencies - in other words their gains should more than offset inflation. If, late in the endgame, as the increasingly desperate Fed and other Central Banks accelerate their already discredited policies to put off the day of reckoning by heaping still more debt on debt, inflation morphs into hyperinflation, then of course gold and silver will go parabolic and ultimately arrive at prices that would even impress that great Keynesian Robert Mugabe of Zimbabwe who took Keynesianism to exalted heights that most of its proponents can only dream about.

Let's now look at the charts to see how gold is shaping up. On the long-term 12-year log chart we can see that gold remains in a fine and orderly long-term uptrend that has been in force from mid-2005. In a freak move occasioned by the 2008 crash, gold broke down from this uptrend briefly, late in 2008, but its decline stopped at a classic support level and it quite quickly repaired the damage by hopping back into the uptrend, and it has been a case of onward and upward ever since.

We can see that gold has begun a major new uptrend in recent weeks, but is still some way from taking out its highs of August. It should have little trouble doing so before much longer, and given what went down last week, the chances of it double topping with those highs is now rated as close to zero. Once new highs are attained it should accelerate away to the upside, with the Fed graciously providing a monthly reminder of why it should do so. Before leaving this long-term chart we should note how it shows that the new uptrend is still in its infancy, and that the projected upper boundary of the uptrend allows us to estimate a target for this move in the $2400 area.

Those old boys who openly lusted after the likes of Brigitte Bardot, showing commendable taste, even if it resulted in them being chased down by their wives with a frying pan or rolling pin, will surely appreciate the curvaceous nature of gold's ascent shown on its 12-year arithmetic chart. This is the chart of a commodity that is clearly accelerating into a spectacular parabolic blowoff move that could take it much, much higher than current levels.

The 2-year chart shows that we now have a clear and decisive breakout from the lengthy 3-arc Fan Correction. Moving averages are swinging into bullish alignment, with the 50-day about to rise up through the 200-day and in so doing confirm the birth of a new uptrend. Gold is now extremely overbought on its short-term RSI, shown at the top of the chart, but not so overbought on its MACD, which shows that there is room for further upside before it pauses for a while to rest. So it looks likely that it will run at the resistance at about $1800 and stop and rest to digest its gains at about this level, and there is some chance that it could press on as far as the highs of last August at over $1900 before consolidation set in.

The 6-month chart shows recent action in more detail. On this chart we can see that gold is now super critically overbought on its RSI indicator, and and it can continue higher in this overbought state for some time, the chances of a consolidation/reaction setting in soon are now quite high, the reading of this indicator puts us on notice to expect consolidation/correction soon, even if it continues higher for a little while first, and this would make sense given that all the "good news" with respect to EU and Fed largesse is now common knowledge.

The latest gold COT are showing quite extreme readings so we may see gold pause to consolidate its gains soon, and maybe react somewhat, and it is appropriate that it should do so here having almost arrived at the first resistance level shown on its 2-year chart above. Here we should note, however, that these COT readings could "fly off the scale" during a particularly dynamic uptrend, as we have seen happen with Crude Oil and the Euro fx COT charts in the past.

We will close by taking a quick look at the dollar. The dollar index has now broken down from its uptrend by a clear margin, and is expected to continue to drop. Last week the Fed declared open-ended warfare on the currency which will become the victim of relentless dilution going forward. The only mitigating factor is that other countries and trading blocs are going to follow the Fed's example and go in for currency dilution of their own, with the German court last week clearing the way for massive Fed style European QE. What this means is global QE, so we should see gold rising against most currencies as their buying power is eroded by dilution. Given the magnitude of the Fed's assault the support levels shown on this chart are unlikely to count for much, and it could easily crash them quite quickly. Over time however the dollar's demise may be masked on this index chart by as Europe races to catch up in the QE stakes and the euro is thus subjected to similar treatment.

Silver Market Update

Clive Maund

The strong uptrend in silver of the past several weeks is believed to mark the start of a major uptrend that should take the price comfortably to new highs before it's done. On the 12-year log chart for silver below we can see that this uptrend is still in its infancy, as it has a target at the top channel return line shown, which means it should get to over $60 on this advance, a modest objective given the stunt pulled by the SPSC (Silver Price Supporters Club) over at the Fed last week.

Silver is approaching an inner trendline that appears to still have some validity, the pale blue trendline shown on the chart, and given that this coincides with a resistance level shown on the 2-year chart below and that silver is now critically overbought short-term, and also that its COT readings are at extreme levels, and also that the good news is now on the street, a period of consolidation or a minor reaction here looks likely, which would set up the next upleg. Before leaving the 12-year chart note the momentum breakout shown by the MACD indicator at the bottom of the chart.

Silver's 2-year chart makes plain that it has now broken out decisively from the long corrective downtrend in force from April - May of last year. Moving averages are now swinging into bullish alignment again for the first time in a long time and we should soon see the "Golden Cross" where the 50-day moving average rises up through the 200-day, and the latter turns up, which will be a sign that the new uptrend is becoming established. Silver is now critically overbought on its RSI indicator shown at the top of the chart, which suggests that it is likely to take a rest soon before continuing higher - most likely it will consolidate for a while, and perhaps react back somewhat - but it is not expected to react back much, given that the Fed last week hooked up the fire hoses to the gas pump with every intention of spraying gasoline on the spreading fires of inflation. This makes perfect sense from their point of view, as the massive QE now set in motion will enable them to continue to enrich their crony pals in the banks and on Wall St by simply passing this spirited into existence money straight to them, and by propping up the bond market, and pass the bill for this munificence on to the middle and lower classes via roaring inflation and a zero return on savings.

The 6-month chart for silver shows recent action in much more detail. On this chart we can see the powerful, steep uptrend of recent weeks, that has in part been fuelled by panic short covering, of course, and last week got an extra boost from the grandstanding by the Fed, which was on a scale that surprised even those expecting QE, for not only did they announce QE, but they even went as far as promising that it would be open-ended, and also their intention to clamp interest rates near to zero for another year, until 2015. This is all music to the Precious Metals markets of course, and all but guarantees ongoing strong uptrends. Nevertheless, we can see that silver is heavily overbought here short-term with several technical factors pointing to it needing to take a rest before continuing higher, and this fits with the fundamental situation as all the good news is now out and on the street.

One technical factor pointing to silver needing to take a breather here is the latest COTs. On the COT chart below we can see that Commercial short positions are about to fly off the scale, with Large and Small Spec long positions being at very high levels too, and here we should note that this data is only up to date as of last Tuesday, so Thursday's spike in the silver price can reasonably be expected to have driven these positions to even more extreme levels. This makes a period of consolidation or a reaction here likely before the uptrend continues towards our objective at new highs.

Clive Maund, Diploma Technical Analysis

[email protected]

www.clivemaund.com

Copiapo, Chile, 17 September 2012