Thomas
DeChastelain
Memorial Archives

Bullion Charts and Commentary
posted Sep 23, 2005 at 11:14PM

Bullion Daily



I expect gold to continue retracing in order work off an overbought technical condition. There are two scenarios that I would keep an eye out for. One is that gold holds the 450 level and starts moving strongly northwards. The new highs would be accompanied by major technical divergences and would probably mark the end of the first impulse of a new major upleg. We would then get a standard "scary" correction before the next "wave 3 of 3" type action sets in.

A move below 450 really muddies the waters, even though all trend-lines would be intact. From a conventional TA point of view, breaking the 450 support line negates the break-out - never a good thing.

From an EWA point of view breaching that level negates the impulsive nature of this move. It also brings out the spectre of "throw over", which is defined as an "exhaustion of bullish sentiment". This possiblility, in hindsight, would be supported by the bearish COT data


Bullion Weekly




On the whole, the weekly chart maintains its bullish bias. The weekly candle is the first truly bearish development, and was unexpected. RSI is hitting a resistance rail, and the stochastics brothers are in overbought territory.

By themselves they do not prove that the bears are in the driver's seat. There is certainly more than enough technical fuel to power more upside, and stochastics should be expected to stay in overbought territory in a major bull move.

But have no doubt, we are no longer in contrarian territory. One is now simply betting that overall momentume will be maintained.

HUI Daily



The HUI has entered a zone of major price resistance in an overbought technical condition. As could be expected, itchy fingered, weak-kneed swing traders (and I was one of them) were selling, and then watching to see what will happen.

What would be good to see is bascially sideways action while bullion backs and fills. Gold equities giving ground grudgingly would be a good sign that bullion will finish its correction somewhere above 450.

If the sector catches on fire without resting too much, then they will have to decide wether to jump on to departing trains, or just stand aside and wait for a more text-book correction.

The HUI does eventually have to put in new highs to truly confirm the gold bull. I would not put too much bearish weight on the fact that it hasn't yet. It is close enough so that a good week can place that factoid into the "red herring" file.

HUI/Gold Ratio Redux

A Close-up look



As long as the ratio stays above the 50 dma, the sector remains in bull mode

Pulling Back a Bit



A Big Picture



Obviously this past correction was of an order of magnitude larger than past ones, and dealt with (or is still dealing with) the digestion of gains of the entire bull move to date. This will muddy the waters a bit. Notice in the past that the break-out of resistance trend-lines were quickly confirmed by new highs in the ratio - as clear a bell as one could ask for. In this case waiting for new highs though would mean waiting for much higher prices to buy in.

USD Daily



The USD moves strongly off its 50 dma. This means that holding gold is no longer stress free. The reversal action in bullion shows that the disconnect between the USD and bullion may not yet be here.

When you consider the actions and words of the Fed, and the writing of neoconservative sympathizers like Mauldin and Duarte, one gets the feeling that the last thing the PTB wants to see, is a sinking USD - certainly not with oil above $60. Invariably they are talking down the Chinese economy, and talking down the oil market.

As discussed in previous editions, I believe that the Fed wants to increase interest rates. The fact that the destruction of some of the most important infrastructure in America was described as a "temproary" economic hiccup, does nothing to change my mind.

USD Weekly



The weekly chart is still in reasonably good shape. From a EWA perspective there is the potential for a fifth wave being in progress which would finish off a major impulsive move. That requires a move above 90 to really gain credence at this point though.

Trading Thoughts.

So what is the market going to do? I really don't know. The gold sector is at one of those technical points where it is very easy to argue both the bullish and bearish cases. (Impending break-out vs IT top)

If the bullish case prevails then we have confirmation that a major upleg is underway. This upleg, contrary to what I said last week, could last years...not just 5 or six months. Call it phase II of the Gold Bull, or a Wave III in Elliot Wave terms..or the Mother of all SKI buy signals if you follow Jeff Kerns.

If that is what is happening, then I don't expect bullion to go below 450. I don't expect the HUI/Gold ratio to drop below it's support trend-line, or more importantly its 50dma.

I expect the HUI to give ground grudgingly. Optimally we would see a bullish pennant or similar bullish consolidation. I would expect to see the USD slip back under its 50dma, accompanied by a very strong move up by bullion. From a swing trader's mentality that is as good a signal as one could expect to have to get back into golds.

For those that are holding tight, it would be a confirmation of your own bullish assesment and a confirmation that one should hold on to shares.

If the bearish case wins out I do believe that it would be of a temporary nature. That is the gold sector, even with bullion making new highs, is still in a corrective phase. Gold equities will go through one more downleg. An "e" wave in elliot wave terms..or a retesting of lows to put in a firm bottom from a more conventional TA perspective.

The dollar will conclude it's countertrend rally. It may even get back above 90. I doubt very much that it will make it to its 38% retrace level. In other words the dollar rally will end with an aborted impulse..a technical signature which speaks of true underlying weakness and which is certainly deserved.

In that same regard I think the HUI would come well short of testing prior lows. Bullion would go below 450 and may even break a support trend-line to induce some last techical selling; but shouldn't go much further.

At the same time I would expect the COT to completely realign itself into a more bullish posture.

This downleg will have nothing to do with reality, but can be induced only by a massively coordinated effort by Central Banks to support the USD.

Rita Impact

There is of course much speculation on what kind of impact the hurricanes will have on the economy.

I think there are only two certainties here. The US will have import more foreign oil, and the US will have to import more foreign savings.

Remember that the Gulf Coast had not even recovered to pre-Ivan production levels. Hurricane Rita, much more than Katrina, had a path that went right through some of the densest concentration of rigs and platforms.

I suggest that given that we are probably in an elevated hurricane phase for the foreseeable future (years, decades), then on can conclude that peak oil has arrived for the gulf! I expect a premium to start being paid for any new sources of reserves, especially those found in North America.

Foreign savings? Of course. The Gulf Coast is starting to look like Bangla Desh. Reconstruction is going to take the perverbial ton of money. Money that the US doesn't have.

Less certain, but quite likely, will come spending cuts, not from the sacred cows of security/defence, but from those "socialist" areas like education and health care - national pillars put in by conservative people, that help keep a country in some kind of cohesive form.

It doesn't really matter -, putting a neoconservative in charge of a "Rooseveltian" program only ensures that said program gets perverted into a cash redistribution system. (There is a reason why the neocon Republicans took out clauses that would actually allow state governments to negotiate lower prices. Indeed it is the same reason why they took out clauses which forbade contractors from war profiteering.

Like I said..a civil war within our life time.

The wild card is the state of the refineries. Despite thier obvious strategic importance, the US has no "surge capacity", no "excess capacity", no "redundancy" in thier refining capability. Of course not, those are the terms used by a country that thinks like an engineer. America is a country that thinks like an accountant.

Regardless of any long term damage to those refineries in Beaumont and Port Aurthor, people are going to be looking at appreciably higher monthly utility and heating bills. Gasoline prices, even without price gouging, are going to go up. Indeed we may actually get shortages at the retail distribution end of the system.

At the same time, under the radar, is the kicking in of neocon policy which effectively doubles the minimum payments on people's credit cards balances. (mid-October)

In short America may soon be embarking on a involuntary and draconian conservation and savings regime..even as incoming crude supplies start clogging up as overhang at refineries. Again the word here is "may"...I am unsure how things will shake out here.

It is just to keep in mind that there is potential that the high energy costs and incentive to pay off debt, will start sucking liquidity out of the real economy and have a deflationary impact on all other asset prices.

And don't forget

the recent news that the UN nuclear watchdog has passed a resolution that paves the way for Iran to be referred to the UN Security Council over its nuclear ambitions.

Chaos theory describes how, in certain circumstances, a butterfly flapping its wings in China, can result in a hurricane in America.

In the same way, a single bunker-buster bomb dropped into an Iranian nuclear facility will have a ripple effect that goes way beyond anything that the simpletons running the US can imagine.

There is really nothing that can be left off the table even if it seems to go into tin foil hat territroy. Turning off the oil taps, revolution in Saudi Arabia, pre-emptive nuclear attack by North Korea, radiation poisoning on a continental scale, Chinese and Russian opportunism.

In this environment actual bullion will be a natural. Paper shares? Short of things going nuclear, shares in oil and gold companies, that have good long and confirmed reserves should do very well. The closer to production the better.

Let me start closing this up by saying that watching the evacuation out of Houston really impressed upon me the necessity of avoiding being part of a herd rushing to an exit. You do not want to put all of your eggs into one basket, and your baskets have to be red herring free.sible.

Right now I have 58% cash and probably will maintain at least 45% for the foresseable future. Energy and gold are the equity clasees of choice. Right now I do not have gold exposure, but funds are in the "launch bay". In that regard I am in "watch and shoot" mode. I am of the mind that having a high cash level allows one to be more relaxed and fluid with the remainder.

Good trading

Bullet Bullet Bullet