Thomas
DeChastelain
Memorial Archives

Bullion Charts and Commentary for June 20
posted Jun 20, 2004 at 11:56AM

Gold move quite energetically to close at important resistance with various indicators sporting a bullish tone.

In short it was a mirror image to the previous week's action.

But again nothing so dramatic happened as to make anyone change any overall view of the sector that was held at the beginning of the week.

My own view remains the same. That we are still in the process of correcting the entire bull move, that lower prices lay ahead (3-6 months). Any trades on the long side should be considered short term swing trades. The rationale for my thinking has been explained in earlier commentaries, so no need to get into great detailed rehashing.

In summary it revolves around the fact that the Chinese are slowing liquidity and the Fed is about to begin a tightening cycle.

The bullish case, espoused by such analysts as the Aden Sisters and Tim Ord is still very much in play. They visualize much higher prices for gold and gold shares over the next three to six months.

With the Fed meeting coming, the near term price action promises to be exciting, so let us look at the charts to make sure we have our bearings going in.

Price Action



Fib Study - Resistance



Fib Study - Support



Daily Chart



Weekly Chart



Monthly Chart



In the short-term (days - weeks) gold has elements working in its favour. The yield spreads stopped plumetting last week and even a consolidation should help provide a floor for gold prices.

The USD starts the week below the 200dma and Euro above. The gold rand price recovered slightly and should remain above critical support.

Other elements like the XAU/Gold ratio and A/D lines are in neutral territory in absolute terms - but are trending up so edge goes to the bulls.

The deterioration of the Iran situation is a new wild card on the geopolitical front.

Momentum indicators are far from overbought and can support northwards action.

Commerical short positions are relatively low...with the emphasis on "relatively".

What stands in the way? Well the bears will point to major price resistance at the 200 dma and more importantly the 400 level.

Looking at gold shares we see a similar situation in terms of resistance lines.

HUI - Daily Chart



Not annotated but one should also note the reisistance being provided by the 50dma

HUI Weekly Chart



Again the 65wma remains resistance. Bears will be quick to point out that volume since the early May bottom has been unimpressive. They will also point to Friday's stock action..where a lot of stocks gapped up and then stayed steady for the rest of the day...a sign of distribution.

Contingency Planning - Potpourri

Rick Ackerman in his latest commentary (which I reccommend as daily reading) answers the question - at what point is all hope lost for committed gold bulls. He gives numbers of 298 and 319. (Please read the entire commentary on 321gold so you take nothing out of context)

Of course the practical problem is that by the time you wait for these levels to be reached your gold mining shares are going to be greatly "reduced" in value. Indeed by my current view of things gold at 298 would be a time to sell your children, morgage your lungs, and get into gold in a big BIG way.

This whole exercise brings up a line I read from Sol Palha, "How much do want to bleed for your stocks?" It is a question you must have answered before you buy anything that is not physical bullion. Remember in of themselves, paper shares have no value..they simply give you the right to sell this lower form of currency to someone else.

There is the other slant to this of course..at what point do the people on the sidelines give up waiting for lower prices and decide to risk capital and participate?

Obviously if you wait for gold to explode past 430 to new highs, then a good chunk of gains will be lost to you.

Again - if the bulls longer term assessment is right, then the sector will show some definite characteristics - consecutive closes over the 200 dma...HUI over 65wma..and preferably over 40wma...gold/usd ratio showing rejuvenation, and in this scenario yield spreads starting to grow again, and China indexes moving back up.

Technically more sound...and it gives some lines in the sand in case the market is just trying to suck you in.

Even in the very short term...I know that I will ignore any stock that has not yet participated in this rebound...no matter how oversold. I would stick to stocks that have good liquidity, have good balance sheets (risk reduction) and have shown good vigour on good gold price days. Good entry points cannot be overemphasized.

I have read some analysis that argues that people should be buying gold vehicles because general markets are topping. In conventional terms that may be true, but again I believe the circumstances are different, because the market is still revolving around the reflation/carry trade. And not until that is completely unwound will the PM and general indexes go their separate paths

Case in point was last week when the market perceived inflation data to be "benign" thus reducing the pressure for the Fed to hike aggressively - and thus giving a boost to equities and gold at the expense of the dollar.

So those who are bemoaning the powers to be who are artificially supporting the major indexes, again need to be careful for what you wish for. If that support was taken away and equities started plunging, it would do so under the aroma of deflation, and most likely would drag gold shares with it.

In summary one can argue that although the variables are in place for short term strength, my reading of the tea leaves suggests that at some point it will run out of steam, as highly leveraged players of the carry trade use the opportunity to unload positions.

A prayer

Another favourite read for me is nearly anything from Sol Palha, one of those rare breeds of "trader-philosophers". I particularly like his zeitgeist of trying to "sniff out trends before they start"

With that sentiment in mind I spent some time plugging economic terms into google and seeing what came up. One of the items that really stuck was a prayer, written by Thomas L. Friedman (SOURCE)


"Dear Heavenly Father, please keep the leader of China, President Hu Jintao, healthy and on an even keel. Please see to it that he moves steadily and carefully toward restructuring the Chinese banking system and ridding it of its huge overhang of bad loans and corruption, before there is a real meltdown that would be felt around the world.

Give him the wisdom to cool the overheated Chinese economy without creating a recession that would prompt China to stop importing like crazy and start just exporting like crazy.

And Father, forgive us for all the bad words we used in recent years to describe China's leaders - terms like 'Butchers of Beijing.' We did not mean it. We meant to say 'Bankers of Beijing,' because their economy is now fueling growth all over Asia, bolstering Japan and sucking up imports from everywhere.

May China's leaders live to 120, and may they enjoy 9 percent GDP growth every year of their lives.

Thank you, Father.

Amen."


Vigilance,

Good Trading

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