Big Pic Update: Gold, silver, dollar and bonds ...

Issue #70

Dear Member,

Here is this week’s big picture update.

GOLD

Fundamentals:

Gold sold off on the news of no change in the policy stance of the Fed last Wednesday afternoon. Traders who were anticipating an announcement to delay tapering to perhaps as late as April were disappointed and sold gold on the news.

The bulls were also caught off guard by a somewhat hawkish tone coming from the Fed that hints to a possible taper as early as December. Other bearish forces impacting gold through the week were weakening demand coming out of Asia and the continued outflows from gold-backed exchange traded funds.

As much as I would like to get excited about the recent rally in gold, I still hold a short-term bearish view on gold. Given the fact that the Dollar Index has begun to gain some traction in the last week, I see some obstacles for gold in the near term.

Technicals:

Gold was unable to hold the 50-day moving average on the release of the Fed statement on Wednesday, and the selling continued into Friday to close the week out in a weak position. Gold must hold above the $1,300 level next week or else the bears will be firmly in control of this market and will look to take gold further down to retest the lows at the $1,250 area. Initial support for gold comes in at the $1,300 area and then at $1,275, but a close below that and gold should be retesting previous lows. If gold closes below $1,250 look for a retest of the June lows with a high possibility of lower lows.

Resistance for gold can be found at the recent highs at the $1,360 level with minor resistance at $1,325. For us to be getting excited about gold it must close back above the $1,360 level and then a subsequent weekly closing above $1,425.

Indicators have turned somewhat bearish for gold on the daily level with the Moving Average Convergence-Divergence (MACD) getting ready to form a bearish crossover. The Relative Strength Index (RSI) has now curled back below the 50 level after having hit resistance at the 60 mark during the week.

SILVER

Fundamentals:

Silver followed gold lower during the week post the Fed release on Wednesday as traders also showed no mercy selling on the news.

Silver faced headwinds on multiple fronts as the commodities sector as a whole was subject to some heavy selling during the week as the continuous commodity index looks to retest the lows seen in July.

Given silver’s industrial applications, the continuing deflationary environment we are witnessing is not conducive to higher prices for the shiny grey metal at least in the near term.

Technicals:

Silver also failed to hold above its 50-day moving average as traders took the Fed release as an opportunity to book some profits.

Like gold, silver must reclaim the ground it lost last week or new lows are ahead. Only a close back above the $23 level would see silver sustain some bullish traction. But until it can manage that, the bias at least in the short term remains bearish.

Resistance for silver is coming in initially at the $22 level, but firmer resistance is currently at $22.50. Only a weekly close back above the previous highs at $25 would we begin to see silver break out.

Support for silver can be found initially at $21.40, but a close below that would see a retest of the next support level at the previous lows at the $20.50 level.

With last week’s selloff, silver sustained some technical damage with the MACD looking to form a bearish crossover and the RSI heading down below the 50 level on the daily time frame. Bulls must take initiative quickly as momentum is waning in silver, and bears will not hesitate to press their advantage.

THE U.S. DOLLAR

Fundamentals:

The dollar rallied on news of no change in policy of the Fed as revealed on Wednesday which seemed to disappoint traders who were expecting an announcement of a delay in tapering perhaps by as late as April. This has left the market contemplating a taper as early as December.

Another bullish factor for the dollar was Friday’s release of the euro-zone headline year-on-year inflation of 0.7%, dropping from 1.1% and reviving rate cut expectations amongst traders at next month’s European Central Bank (ECB) meeting. The headwinds we see for the euro zone in the near term looks to be coming home to roost, and I expect further dollar strength and euro weakness to continue into year-end.

Technicals:

The dollar has now made a major price reversal reclaiming some important technical targets in the process and altering considerably its technical picture.

The dollar managed to close the week out above its 50-day moving average and made gains everyday last week. The 79 level has proved to be strong support for the dollar and now a close above last week’s highs and a further close above 81.50 should see the dollar continue its rally. Resistance can be found initially at the 81.50 to 81.75 levels and stronger resistance at the September highs in the 82.75 zone. A close above this area should see it retest the 85 area.

On the downside, initial support comes in at the recent lows, and a close below that will likely mean a continued bear trend for the dollar. However, this now seems unlikely, but bulls will need to press their advantage and take the market higher as soon as possible in order to capitalize on this strong upward momentum.

Indicators are also pointing to the trend being firmly up as the RSI is now heading into oversold territory only after one week of price movement on the daily level. The MACD has confirmed the bullish cross over that looked ominous from last week’s report and has risen above the previous peak. All short-term moving averages are now beginning to curl up with the eight day crossing past the 13 day and will soon push through the 21 day.

I have been expecting an imminent dollar rally that should see it likely head up into at least the January time frame in the short term, and could see it back at its old highs in the 85 area, if not higher, at around the 90 level.

THE U.S. 30 YEAR BOND

Fundamentals:

The long bond sold off during the week on rumors of an earlier than expected tapering given the better-than-expected U.S. data. Not helping the cause for bonds was a Fed member stating he was favoring a cap on net amount of asset purchases which triggered further selling in bonds.

Friday’s slight rise in the U.S. ISM October manufacturing results, the highest in over two years, was enough to send bondholders rushing for the exits. If this was not enough, commentary coming out of a known Fed policy hawk, Charles Plosser, proposed capping the amount of bonds purchased for QE3 on Friday morning.

In other news, record high euro-zone unemployment and a sharp drop in euro-zone inflation readings were more cause for concern for bond traders providing a boost for support in the bund market and an excuse for bond traders in the U.S. to book some profits. Also pressuring bonds was upbeat manufacturing data coming out of China.

Technicals:

Bonds met with strong resistance at the 134-135 area during the past week with yields closing the week out above all of its short-term moving averages.

Bulls will need to reclaim their ground next week if they are to prevent a further slide in price as short-term momentum is now clearly with the bears.

Initial support for bonds comes in just below at the 132.10 level in line with the 50-day moving average. But a close below 131.50 will likely see bonds retest the lows of September.

Resistance for bonds still stands at 135 and only a close back above these levels will we see bonds continue to rally.

Indicators at the short-term level are already looking bearish with the RSI dropping down to the 50 level after almost reaching 70 a week earlier. The MACD is now looking to form a bearish crossover on the daily time frame.

Stay tuned …

Best wishes,

Larry