Thomas
DeChastelain
Memorial Archives

Bullion Charts and Commentary
posted Oct 31, 2004 at 09:52AM

Introduction

Gold sector chose the consolidation route. I remain 100% cash. My hope is to stay that way until the election takes place.

Gold Daily



Gold Long-term



By all rights a triple top break out should also take bullion clear of a decades old resistance trend-line. That gives a measured move target well in excess of $600.

HUI Daily



240 remains key resistance. The trend-line is a early warning line, but 220 and the 50dma are the more important supports to watch.

A Closer Look



US Dollar



Key Fed Officers are vigorously trying to talk the dollar down on the premise that it will ease trade deficit numbers. What would a 20% devaluation do to the price of oil? What would that do to the trade dificit numbers?

The reality is that the policies that America would have to enact to solve its trade deficit problems are 180 degrees opposite of what the current neo-conservative regime has in mind. A low dollar has not helped the trade deficit one iota since falling 20+ percent...and it won't help one iota if it falls another 20.

Having said that the USD was helped by lower oil and hiccupping long bonds and still remains above a strategically important support level.

As one reader pointed out to me, most bounces in the USD require the presence of positive divergences... something to keep an eye out for.

Oil



You know "spin" has reached new levels of absurdity when a drop in oil down to $50 dollars is considered good news for the incumbent Republican President. That basically says everything you need to know about corporate media.

Bonds



Still within its uptrend channel but the momentum indicators give the chart a definitive mushy feeling.

Discussion/Trading Strategy.

As I sit here pondering on how I should approach trading in the next week I must admit I find the current environment to be an uncomfortable one.

The big question is does one buy a triple break-out despite the fact the technical condition is almost diametrically opposite of what experience has proven to be a better entry point?

My thinking is, in this case you do. In the end, price is the final technical indicator.

Of course this doesn't mean one throws prudent trading practices to the wind. The big danger is that this break-out turns into a throw over... an "exhaustion of bullish sentiment" and the boat that one had comfortably exited a short while ago, is still filled to the brim, but now eager to follow your earlier example. You really don't want to carry a losing position into the close.

There are certain things one expects to see on a successful bullion break out, and not seeing them are a warning to sign to be aware of.

One, gold equities should start hopping. 240 should be taken out with no difficulty (it would become a stop loss level) and indeed new highs should be reached in a forthright manner. As well the juniors, many of which have been treading water need to do some of the heavy lifting.

The need for alertness and flexibility is not being unduly cautious. There are many aspects to the market which reinforce the arguments that we are in a topping process.

A lot of the variables outside of the bullion price are not falling the gold sector's way.

Open interest sits at 320,000. If you go to Fig 9 of Capt Hook's Technical Analysis Of The Amex Gold Miners Index you will see that it put open interest right at the top of a megaphone reversal pattern - not the place where one thinks of making bullish contrarian bets.

Now not to take the above out of context. Both Captain Hook and David Petch are very bullish on the gold sector and I consider these two to be amongst the finest chartists on the planet.

Stocks have been soft in relation to bullion. Indeed most juniors are nowhere close to their past highs - a bearish divergence...and also a reminder that there is no real rush as long as these stocks stay relatively cheap.

Base metals and a lot of base metals stocks have received a shellacking in the recent past, hardly an auspicious omen.

Yield-Spreads keep diving suggesting the market, whether rightly or wrongly, does not see inflation ahead.

The China Fund weekly chart shows it bouncing off neck-line resistance, putting a massive H&S pattern back into play (with a potential measured move target of 15)

COT for Swiss Franc

COT for USD

COT figures are at extreme levels, which from a contrarian view-point, are bullish for the USD.

Political Considerations

The real wild-card of course is the presidential elections.

The standard story out there is that there is lots of cash on the sidelines and that a clear winner will have it coming into the markets, first from the "winning" side and then the remainder who don't want to miss out.

Perhaps.

American cash-flows can still influence what happens in their own equity markets. There is a technical argument to be made and we are entering the traditional seasonal strong period.

We will see.

However in the world of currency, international sentiment towards the election results will mean much more. How do you think the world is going to feel if they are in for another four years of what would now be completely unrestrained neo-conservatism?

I think there is a high possibility that such an event could, despite all the signs of topping, cause gold break-outs not just in price but in terms of COT

Indeed the entire bull run of gold can be described in terms of the Republican administration. Gold bottomed just around the time George Bush was elected. The China Spy plane fiasco confirmed a bottom was in. Gold gave back all its gains after 9-11 but then came that famous State of the Union address, the Axis of Evil speech, where everything gold started taking off... when it started losing steam Cheney came out with "mushroom clouds" in America and gold sky-rocketed. Next time gold peaked, it was when Powell emasculated himself on neo-con kool-aid at the UN... and on and on.

The can be no doubt about it... neo-conservatism is tailor made for gold. Can you really see any hope of the risk premium on oil coming off on a Bush victory? Can you really hope to see any fiscal prudence come into the budgetary arena? Is there any doubt in anyone's mind that the war in the Middle East will expand to include military action against Syria and Iran?

In the same way the Bin Ladens were airlifted to safety to 9-11, I wouldn't be surprised to see the same occur for the whole Saudi Royal Family ... except they probably will request to be dropped off in Paris, not Texas.

This is not the place to get into the weeds of why neo-conservatism is a failed ideology, and how it is destroying America, conservative and liberal both. You either agree or you don't -- I am not here to convert you.

I can tell you that the best strategic investment decision I ever made was going 100% gold shortly after Bush was appointed. The worst decisions I have ever made was in underestimating how far into the red the neo-cons could push the idiot-gauge needle.

As far as the international community is concerned, the upcoming election in nothing less than a giant mental health check of the US populace. I think that the results will have a great impact on the currency markets and thus on gold. Of course my politics may not be your politics and it is certainly not necessarily the market's politics.

I, for one, though, will be keeping a very sharp eye on overnight price action following Tuesday's election. Make sure your powder is dry.

Note: For election news junkies who want to see how local papers are covering the national and different state election races, my wife has put together a very extensive media directory which can be found at USA National Media Directory

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