1330: Initial weekly US unemployment claims rose by 1,000 to 308,000 in the week ended on September 21st, versus the 315,000 expected by economists.
1320: Vodafone’s CFO will step down from his role of nine years once the sale of its stake in Verizon Wireless completes. The stake, which is being sold for 80bn pounds, is expected to be sold by March 2014. The FTSE has risen 24 points to 6,461.50.
1242: Overnight the Chicago Mercantile Exchange (CME) hiked its margin requirements for operators in the Dow Jones, SP 500 and Nasdaq E-Mini futures contracts by nine per cent. According to Zerohedge that may be a result of President Obama’s remarks to the effect that Wall Street has not yet recognized the seriousness of the current impasse on Capitol Hill.
1120: A little more colour on Aviva, in remarks to Sharecast Ronni Chopra – Head of Strategy at Trade next – pointed out that in the medium-term the stock might still be a potential take-over target. FTSE 100 up 17 to 6,454.
The crucial story for gold investors is not the pure inflation rate of the dollar, but something much deeper. When you focus on gold, you should sharpen the focus of your lens on the dollar system. As history confirms, gold can both increase and decrease under inflationary circumstances. It is also the case when considering the opposite scenario, which is deflation. It all depends on how well the dollar system is performing (how well is both dollar as a currency and dollar understood as dollar denominated assets; bonds, stocks, derivatives, credits etc.).
The easiest way to look at the dollar is to compare it as a currency against all the other currencies. This, in fact, was the best way to assess the dollar from 2002-3, when it started to lose its value against other currencies and gold began its long and spectacular upward climb. This took place while a bubble formed in dollar denominated assets, especially real estate.
In 2008 there was a radical shift. Shortage of liquidity in the financial markets lead to massive selloffs of assets in all markets, with emerging markets being hit the most. That’s when the dollar got a gust of air in its sails, and increased significantly in value. Under current circumstances, the dollar – as a currency – does not appear to look that bad. Even when compared to other strong currencies, the dollar looks firm. The central bankers who print the British pound and the Japanese yen seem to be devaluation devotees, and the euro is still recoiling from the turmoil of numerous internal problems.
Therefore, when looking purely at the currency markets, the dollar does not appear as endangered as it may seem. However, as we hinted at the beginning, this is not the whole story. We have to assess not only the dollar against other currencies, but the entire dollar system, that is dollar denominated assets. The dollar may be a better investment than the British pound, but the big question is whether gold may be an even better investment than the dollar even when it outperforms the pound.
So how is the dollar system performing internally? One of many possible things to focus on is the interventionist policy of the government, especially the central bank. This can tell us how firmly the economy stands.
In recent years we witnessed tremendous expansion in the Fed’s activity. Since it all comes down to money creation (supplied for financial papers and bonds), this influence is rather negative for the whole dollar system. This means that from the economic point of view, the outlook for gold is quite favorable for the coming years.
In my opinion the top of the up leg from the November lows is in place.
We will have the absolute confirmation when price establishes a lower high.
Below I show you the SPX weekly momentum indicators, where we can see that the RSI has breached the trend line support in force since the November 16 low.
The next intermediate buy signal usually should occur when the RSI and the Stochastic retest the 50 line.
I rule out a major reversal, instead I maintain the scenario of a retracement of the advance from the November lows.
As I discussed last Friday the major reasons that suggest that price has not established a major top are:
- The up leg from the November lows has unfolded a corrective 7-wave structure ===> A corrective EWP cannot establish a major Top.
- The current pullback is also unfolding a corrective pattern, ===> The intermediate trend remains up.
- Retails investors are extremely bearish (I have never seen a major top with an extremely low AAII Bull ratio)
Regarding the potential target, at the moment, since we are in the initial stage of a corrective pattern I can only say that price should establish a bottom in the range 1485 – 200 DMA. (which today stands at 1453)
Once a lower high is in place, the next down leg should aim at the 0.382 R = 1500, where probably a large rebound will take place. If bears maintain the sequence of lower high/lows then the following down leg will reach the target box.
Therefore, I reiterate that the above “road map” looks very probable as long as the bounce, which began last Friday, establishes a lower high.
Regarding the long-term count, I maintain the Triple ZigZag wave (X) scenario. As I have discussed in previous weekly updates since the assumed wave (Z), which began at the November 2012 low is not impulsive I am suggesting that it should unfold an Ending Diagonal, if this is the case on April 11 price has completed the wave (I).
The summation Index, which, peaked at the end of January is already oversold (RSI has crossed the 30 line) and on Friday it has breached the 200 dma. It is remarkable that SPX has been able to establish higher highs with such a weak breadth performance.
Going forward since price has just begun a corrective phase, an already oversold Summation Index should prevent a major decline.
Lets move on to the current price action.
It is reasonable to expect that the rebound from last Thursday LOD to reach the target box delimited between the 20 DMA = 1564 and the 0,618 retracements = 1574.
If it tops at the 20 DMA the 1×1 extension target for the following down leg would take us to the 0.382 retracement of the advance from the November lows at 1500.
EW wise price would be unfolding a ZigZag therefore if lower prices were in the cards probably this initial ZigZag would morph into a Double ZigZag
Lastly, VIX on Friday has “issued a Bollinger Band buy equity signal”. Friday’s drop has been larger than I initially thought, moving back below the 200 DMA. I still expect a bottom in the range of the moving averages (10-20-50) or in the worst-case scenario at the rising trend line support in force since the March 14 low. The lower is the retracement, the larger will be the assumed SPX wave (B) rebound.
I still think that the pattern that VIX is unfolding does not suggest a major move to the upside, but as long as the sequence of higher lows/highs is maintained the trend remains up.
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Nov 20, 2012
- Earlier this year, Goldman Sachs’ Peter Oppenheimer said that compared to bonds, US stocks were the cheapest in 50 years.
- If Peter is correct, that could be good news for your gold stocks, because there is an ongoing correlation between the Dow and most gold equities.
- Unfortunately, Goldman also believes that the fiscal cliff situation could drive stock markets 8% lower by year-end.
- You are looking at the daily chart for the Dow, and you can see that it made a small top in mid-September. It has declined about 8% from the high.
- Gold stocks are more volatile than the Dow. GDX declined about 18%, during the period in which the Dow fell 8%. There is a lot of symmetry between these two charts.
- If the Dow is set to fall another 8% from the lows of last week, GDX could fall another 18% from its recent lows. That would put GDX at about $37, and below the May-July lows.
- Some of the largest gold companies are already trading near their summer lows, which is somewhat alarming.
- If you own a home, it is wise to purchase home insurance. If you own gold stocks, carrying some cash and short positions is a form of insurance. That’s the daily chart of DUST, which is effectively a triple-leveraged bet against GDX. The performance is calculated on a daily basis. I’m a buyer, moderately, in the $28 and $22 areas.
- What would happen to gold stocks, if Goldman Sachs is correct about the Dow falling another 8%, and then they called for an even harder fall, instead of a rally?
- The situation could get quite ugly. A small position in DUST may help gold stocks investors to professionally manage fiscal cliff fear.
- Gold recently sold off along with the other so-called “risk on” markets, but it bottomed quickly. The daily chart shows a nice head and shoulders bottom pattern in play.
- The daily gold chart looks superb. The H & S pattern sits near the demand line of a beautiful rising channel.
- HSR (horizontal support & resistance) at $1758 is the initial upside target, and then $1800. A “price pop” to the $1825 price zone could be a game changer for gold stocks.
- Silver looks even better than gold. Yesterday’s price action was important, because it took silver above the neckline of a head and shoulders bottom.
- At this point in time, gold has yet to rise above its neckline, so silver is clearly the leader.
- Silver seems eager to race to $35.50, and if gold can rise above $1800, that could catapult silver into the $40 range.
- There’s more good news. Ben Bernanke makes a speech in New York today, and he may give more hints about ramping up QE3. Currently, QE3 is being “diluted”, because the Fed is selling short term Treasuries.
- There are rumours that the Fed may cut back on that practice, or even halt it, before the end of the year. If “Big Ben” speaks boldly about ending the dilution of QE3, gold and silver could spike higher, very quickly.
- Most investors in the gold community like speculative resource stocks. If you are looking for action, my favourite play right now is the “Global X Gold Explorers” fund.
- At about $8 a share, the GLDX ETF is something that is probably priced “just right”, for action-oriented investors. In contrast, GDXJ is trading at about $22.
- It’s a lot easier to look down from $8, than it is from $22. Aggressive investors should considering accumulating GLDX on every 25 cent decline, inside the highlighted $7-$9.75 “price box”.
- I like both GDXJ and GLDX, but there’s no question that GLDX is a lot easier to handle, emotionally.
- A move above $1800 in gold could be the catalyst that takes GLDX above $10. From there, the target would be $13, which is about 50% higher than today’s price!