Global Macro Commentary

A break above the downtrend line (see below) should lead to a quick move to around 20. We’re looking at a 2-year long downtrend line that may be breached here!

Silver 2-year
ssibly

I had initially thought that PM could launch a rally pre-FOMC meeting, but it looks like risk is due for a pull back (but only for the short term). Consequently, I expect the dollar to rally for the short term. I’ve taken profit on my PM (a very good run!) and shorted some as well. Eventually, however, I expect the long term triangle formation to be broken fairly soon. In terms of summer seasonality, one can argue that we’ve already passed the seasonally weak period. August is also traditionally a pivot month for a rally that extends into spring of the following year. As for my downside targets, I expect gold to drop to about 940 (50 dma) and silver to drop to about 14.250.

Gold 6-month: very neat triangle formation is near its end…

The 7-month triangle formation is finally coming to an end, and a breakout seems imminent. I had been cautious to factor in seasonality for precious metals, but it looks like the deflationists are the ones that are still on the beach (and caught with their pants down). A positive payroll tomorrow would be helpful.

I acknowledge that gold has underperformed most of its commodities siblings since the bailout/stimulus fueled recovery (the “Great Recovery”) began, but one must understand the dual role of gold ytd. Although it seemed like a noisy ride, the gold chart below neatly summarizes overall market sentiment ytd through the eyes of gold.

- Until late-February, gold rallied to $1,000 as a safe haven (along with the dollar and treas); this was not the propoer launching pad for four-digit gold.
- Until mid-April, gold sold off as capital rotated back into equities (even as the Fed announced QE); this marked the end of gold’s role as a safe haven and the start of the Great Recovery (also the last oppotunity to buy gold under $900).
- Until early-June, gold rallied as renewed risk-taking lifted inflation expectations; this marks the rebirth of gold as the anti-fiat currency.
- Until early-July, gold sold off to $900 as the government became more hawkish (and prematurely/foolishly announced plans to withdraw bailout facilities and raise interest rates) and the Great Recovery came into doubt; this marks the last oppotunity to buy gold before launching into four-digit territory.

News flash: Bank of England boosts QE; this should be positive for PM.

On the back of positive earnings from GS and JPM, risk taking seems to be back in vogue, fueling silver’s break above the falling wedge.

Silver SEP09: 1-month

…one of my favorite reversal patterns is in play. My medium term (2 months) expectation is for silver to make a quick break above the downtrend and go range-bound around 14.25.

Silver SEP09: 1-month

The silver:gold ratio depicts the level of inflation expectation and risk appetite in the markets; it has been on the rise as of late. While gold re-tested 1000 back in March, silver rose to a meager 14.6. The rally back in March was driven by fear, whereas the current rally is driven by risk-taking. The long-term chart of silver is signaling a new up leg to the previous high of 21. Of course, timing is always important. If silver doesn’t break out at this time (and suffers a correction), it may take weeks or even months to regain momentum sufficient enough to break the multi-year resistance level.

Silver:Gold ratio: 3-year

Silver: 3-year

Although there were signs of bottoming, it looks a downtrend might be forming for gold and silver; it’s time to short my friends.

Gold JUN09: 6-month

Silver MAY09: 6-month

Technicals look promising. A break through key levels could lead to a bit of a short squeeze. Lately, precious metals have been ignoring the rest of the market and have crept back up behind everyone’s back.

Gold: 6-month

Silver: 6-month

…could lead to a massive short squeeze. Many speculators piled in to short gold when it finally broke 890, expecting a significant correction (some say to 700!). Despite such selling pressure, gold seems to have bottomed at 865; the break below 890 may be a bear trap. Gold is sitting at 890 right now…I would like to see a weekly close above 900.

Gold JUN09: 1-month

Silver MAY09: 1-month (already breaking out)

One interesting observation I made this week is: dollar down and gold down at the same time. If you also take into account the heavy sell-off in treasuries, the likely explanation of this week’s erratic moves is: anti safe haven (i.e. no more fear or uncertainty in the economy). So is the worst over? It’s very hard to tell at this moment, but what matters most is that, at least for now, markets have less fear/uncertainty relative to early March. Of course, this doesn’t mean the bull market for gold is over; there’s still currency debasement (the real catalyst for long term gold). But as long as safe haven trades are being liquidated, gold will remain under selling pressure. There will be no significant data releases next week, so it will be important to see how the market digests everything that’s out there on the table right now and determines a direction: fear or no fear.

Taking a quick look at gold technicals, it is quite obvious that gold closed the week below the Nov08 trendline. Note, however, that gold is also sitting on a pretty serious level that has acted as both strong resistance and support for quite some time. Whether this level holds or not will determine whether the break below the Nov08 trendline is a fakeout or not. I understand that directional trendlines are important, but I think resistance/support levels are equally, if not more, important. One great thing about trading futures is that, because it’s a 24-hour market I can reposition my PA as early as Sunday evening, so it looks like I have some restrategizing to do over the weekend.

Gold spot: 7-month

Gold JUN09: 6-month (another look at the support line)

Payrolls came out this morning slightly worse than the forecast; 663 jobs lost, with 8.5% unemployment rate – sounds pretty bad to me. Let’s analyze this in ?the simplest way: does this data signal any kind of recovery/rebound? NO (although the rate of increase in jobless claims may be decelerating? still too early to tell). For now, however, the logical thing to do is to sell stocks (and whatever rallied along with it). Indeed, I covered my AUD longs and used some of the profit to buy more gold around 900. I understand that gold has been a frustrating trade for gold bulls during the past month; it is no surprise that many gold bulls have exited the market. I’ve stubbornly maintained a large long position in gold, but I’ve been actively hedging it via long stocks, long crude, and recently, long AUD, all of which has kept my PA beta neutral (as my brother would say). It may seem like a dumb idea to buy gold right now, but then again, it’s also the best time to buy gold when everyone else is dumping it.

Silver had been hammered pretty bad during the past couple weeks, and it traded as low as 11.8 just a couple hours before the Fed announcement. Given what happened yesterday, I expect silver to begin a strong rally soon.

Silver MAY09: 1-month (this baby’s about to EXPLODE)

Please note the silver:gold ratio below. It is clear that silver has been underperforming gold throughout the recent deflation/deleveraging period. I’m not saying that this ratio is going to flip back up any time soon, but I think it’s a good barometer of the level of inflation/reflation coming back into the system. The chart below is also a reminder that, going forward, silver may start to outperform gold.

Silver:Gold: 3-years

…$70/oz intraday move! The recent sell-off in gold was quite deep, and remained so for longer than I expected (perhaps the cartel knew what was coming? heh). Today was a real test of my patience, as gold prices plunged through the uptrend line that had been in place since Nov08 and traded a few bucks away from my “close-out/short” stop (880). With the Fed announcement only a few hours away, many thoughts raced through my head: will the Fed say “might buy long-term treasuries” or “will buy long-term treasuries?” is gold dropping back to 700? should I reduce my position? should I cancel my stop? should I close-out now and wait for the Fed announcement? should I just not do anything and wait for the Fed announcement? I ended up answering “yes” to the last thought, and at that moment, the one thing that actually gave me comfort in my decision to remain long was the diminishing volume pattern (which does not justify the magnitude of recent volatility/sell-off, though arguably it could be just reduction of risk ahead of Fed announcement) during the recent sell-off (see 3-month chart below). I did, however, get stopped out of my silver longs, and of course, bought back at a higher price once the Fed announcement came out.

Gold APR09: 2-day

Gold APR09: 3-month (note the decreasing volume: sell-off not confirmed)

Dollar Index: 6-month (as mentioned in my previous post, a retest of 83 is most likely)

Comrades, gold and silver have hit my targets, and I flipped my shorts to longs at 935 and 13; the correction turned out to be much quicker and dirtier than I expected, and thanks to Obama, i was quite confident in my decision to cover/flip this morning. I’ve been anticipating a rebound in stocks, and just as it looked like a rebound was literally around the corner, the Obama Administration spoiled it all by announcing its new tax proposal (don’t get me started on this!) and budget plan (at least $1.75 trillion deficit in 2009)…seriously, are these guys just plain stupid? Forget about the substance of the proposals for now (more on that later!), but couldn’t the announcement itself wait a few weeks, rather than announcing it just as stocks are re-testing the Nov08 low?

Gold: 9-month

After a couple of days of wild swings, my gold & silver shorts are finally playing out. Although it seemed like the banking sector was going to collapse last week, stocks have begun a potential bear market rally and the government has done a better job of alleviating market panic during the past couple of days (though such superficial rise in confidence cannot last long). Some commentators are saying that there needs to be one more big catalyst for gold to break into four digit territory; this could happen any time, for no reason. But for now, a correction is underway, and I need to figure out when to cover and flip back to long; the correction will most likely be quick and dirty. Let’s take a look at an intermediate chart for some guidance.

Gold APR09: 6-months (target: 925-935)

Silver MAR09: 6-months (target: 12.5-13.0)

Well we’re finally back to 1000, and I’d like to congratulate all my fellow comrades who have patiently held on to their ounces throughout this whole goddamn mess. I am now confident to say that the bearish trend which has been in force since last summer is over and done; the trend has reversed if you haven’t noticed! Although long term fundamentals for gold are quite clear at this point, a short term correction cannot be ruled out. Of course, I understand that overbought conditions can remain overbought for quite some time (e.g. crude early last year) and that technicals may not matter during these times when the fundamental case for buying gold is so blatantly obvious (i.e. not the best time to be contrarian)…but this doesn’t mean a short term correction/consolidation can be completely ignored. I think a re-test of the 950 area is quite possible, not to mention that such a pullback is a healthy thing for a proper bull trend (i.e. we don’t want gold going parabolic here…look at what happened to crude).

Gold: 2-weeks (with fibonacci retracement levels)