Dear Member,
Here is this week’s big picture update.
GOLD
Fundamentals:
Gold has largely held on to its recent huge gains — and after a brief pause and pullback, we should see gold again move up to test resistance at the $1,355 to $1,361 levels. Silver is also confirming a bullish trend higher.
The seasonality play in gold is coming to the forefront as well as the turning point I highlighted for June — which has come in precisely on target — with the next seasonal target being the September/October time period.
As we close out the first half of the year, look for some fireworks and volatility in the metals as these periods have proved to be big pivotal periods in the past. The second half of 2014 should be monumental for gold as the war cycles kick into fifth gear as I will be on the lookout for the confirmation that the bottom is in for metals.
Technicals:
Gold traded sideways within a narrow price range of $20 for six consecutive trading days and looks to be wanting to breakout at any moment as this pattern usually suggests. Upside targets are the $1,355 – $1,361 levels where we can expect some resistance. But a weekly close above that will send an arrow into the heart of the bears.
On the downside, gold still has plenty of support in the form of the 50- and 200-day moving averages (MA) both currently at the $1,285 area. I will not even look at the possibility of any breakdown in gold until these levels are taken out, which quite frankly is extremely unlikely at this stage of the game. Minor resistance at the previous pivot high around $1,330 should not be too much of an issue, but may temporarily halt gold for a day or two on its way to $1,355.
Indicators are all in bullish mode. Prices have now traded back within Bollinger Bands on the daily levels leaving room to the upside for another rally. On the weekly levels, the Center Bollinger and 50-day MA is now providing nice support with the Relative Strength Index (RSI) clearing the 50 level and the Moving Average Convergence-Divergence (MACD) about to strike an imminent bullish cross confirming a positive histogram reading.
SILVER
Fundamentals:
Silver was the better performer last week suggesting further rallies to come as this metal often leads to the upside as well as to the downside.
Other supporting factors for another silver run up is the TIPS spread, currently at its highest levels for the past six months, suggesting the inflation genie may soon be awoken — not to mention that commodities as measured by the Goldman Sachs Index is up the better part of seven percent this year alone.
Technicals:
Technically for the bulls, silver is ticking all the boxes. But I am concerned that it may have come too far, too fast, potentially setting up a retest of the 200-day MA (daily) before heading higher. The rally back in February failed to hold the 200-day MA which lead to the take down thereafter. But things could be different this time. Silver could actually trade sideways for another week without any significant momentum loss.
Should silver head higher, resistance at $21.80 comes into play as a likely near term target, and beyond that, the high formed back in February at the $22.15 level.
THE U.S. DOLLAR
Fundamentals:
The bout of weaker-than-expected economic reports that signaled to the market a less than bright outlook for the U.S. economy for the remainder of the year cast a shadow over the dollar as traders continued to sell it down last week furthering its slump from the previous week. The dollar has traded down a full percentage point since the highs in July and would need to hold these levels or risk a greater magnitude drop in quick order should the 80 level give way for any considerable time.
Whilst there is room for further dollar downside in the short term, I cannot get too bearish the dollar at this juncture given the state of affairs abroad as I’ve mentioned many times. Once the euro cracks, which it definitely will, it’s only a matter of time before we see the final rush into the dollar before that in turn begins to crack with the onset of the sovereign debt crisis.
Technicals:
The dollar has now breached some critical downside support; closing the week below the two important daily moving averages of the 50 and 200 at just above the 80 level. These two indicators that are closely watched by the big funds failed to provide immediate support. But as often is the case, we may get a fake out with the dollar trading back above 80 as soon as this week, particularly as we see support at the 80 level coupled with the previous pivot high on the last leg down formed mid-April.
Should the dollar break this support, the next line in the sand comes in at the 79.40 level that held the retest in March and April. It’s not inconceivable that the dollar even retests the 79 level with a brief dip below as there are certainly huge amounts of resident stops situated there by a number of large funds. If those get taken out, this could be the fuel required for the next big leg up.
On the upside, 81 remains the next target level for the dollar. And until that gets taken out, there is no point talking of a rally in the dollar at this stage. Indicators are showing the recent weakness with RSI (daily) now well below the 50 level and the Directional Movement Index (DMI) (daily) ready to strike a bearish cross on any further weakness.
THE U.S. 30 YEAR BOND
Fundamentals:
Reports released the previous week that the U.S. economy contracted more than forecast in the first quarter provided fuel for another bond rally. The long bond rallied on the back of fears that the Fed may delay or even postpone indefinitely the raising of interest rates as the dollar took a tumble due to the bad economic figures.
Despite the rally in bonds, news of Fed officials contemplating an exit fee for retail mutual bond fund holders liquidating their position, may have the opposite intended effect of forcing more liquidations as prices decline, potentially causing a panic sell off in bonds. This may be on the horizon sooner than most realize as the Fed is foreseeing the inevitable rise in rates.
Best wishes,
Larry
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