Trading The Midline
As you're well aware, the metals have been rangebound for all of 2012. As we enter the new year, where will price be and will the ranges hold? Correctly answering those questions holds the key to successfully forecasting the next big move.
Admittedly I'm biased. Not only am I 100% confident of my long-term assessment, the short-term fundamentals seem extraordinarily positive, as well. To recap:
- The U.S. government is embroiled in a nasty fiscal debate. Regardless of how these issues are resolved, the debt ceiling must still be increased and, as we know, the price of gold has historically tracked the debt ceiling quite well.
- The last debt ceiling debate ultimately led to a drop in the U.S. credit rating. This event sparked a 5-week, Cartel short-covering rally from $1665 to $1920.
- The Fed is poised, in January, to restart the wholesale printing of money ($85B/month) in order to partially fund the U.S. government deficit for fiscal 2013 (which, after just two months, is on a run rate of $1.7T).
- Recent history suggests that gold rises sharply for 3 consecutive years and then consolidating every 4th.
Here are two charts that you need to commit to memory as we turn the corner into 2013. The first is one we've printed here repeatedly. It shows the price of gold tracking the ever-increasing level of U.S. government debt. The second chart is one that I just found this week. It shows the price of gold this century and details the point made in the last bullet above.
Against this fundamental backdrop, the metals will likely enter 2013 mired within the trading ranges that contained them in 2012. The charts below detail all of the price action over the past 12 months. Please study them for a moment. Note how price has consistently found support or resistance near the midline of these ranges. When trending either above or below the midline, the trader needs to hold either a bullish or bearish bias, depending upon where price currently resides.
And this is a critical point as we finish 2012 and head into 2013. Where would you expect price to reside currently, based upon the fundamentals? Should price be above the midline or below? Should the trend be toward the upper end of the range or the lower end? Should we maintain a bullish bias or a bearish bias? Again, based upon the fundamentals laid out above and other factors such as total gold open interest (which is only 432,000 so I ask you again, who is left to sell?), I simply do not believe that the metals should break down here, through the midlines and trend toward the lower end of the ranges. A far more likely outcome is that the metals bounce off of the blue diagonal trendlines I've drawn and then proceed to rally into the end of the year. I have been thinking (hoping?) that we'd wrap up 2012 near the top of the ranges. While the action this week certainly calls that into question, there's still quite a bit of time left and, as we saw on Black Friday, thin holiday conditions can lead to sudden short squeezes. If we don't make it back to $1780-1800 gold and $35 silver before year-end, I'll be perfectly content with $1750 and $34. And, regardless of how the next two weeks play out, all of this week's BS regarding the "premature" ending of QE will be soon recognized for what it was...complete and utter nonsense. Why?
- Unemployment will not print at 6.5% anytime in 2013 and not in 2014, either. Even The Fed's own forecasts do not show sub-6.5% unemployment until 2015 (which is exactly why they've consistently said that rates would be "extraordinarily low through mid-2015).
- And inflation will not print higher than 2.5% anytime soon, either. Oh, you and I will know that's it's higher than 2.5% every time we go the grocery store. That's not in question. But what's also not in question is that the CPI will never be allowed to show anything higher that 2.5%. Right this minute, your politicians in Washington are discussing ways to alter the computation of the CPI so that they can, once again, dramatically cut the COLAs for Social Security recipients. ( http://www.oregonlive.com/today/index.ssf/2012/12/gop_proposes_medicare_cuts_red.html)
Finally and again, I can't stress this enough...though I'm too lazy to type it all out again so here's a C&P from the comments section of the previous thread:
Submitted by Turd Ferguson on December 14, 2012 - 10:17am.
The Fed is buying $45B in treasuries directly from The Treasury Department. This is direct monetization of the debt and money that is put into circulation by federal government spending, transfer payments etc.
The Fed is also buying $40B/month in MBS from the Primary Dealers. This does two things:
- "Cleans up" the PD balance sheets by allowing them to exchange the near-worthless CDS for cash which the PDs then, in turn, use to purchase treasuries.
- By purchasing $40B/month in treasuries, the PDs artificially create demand for treasuries at auction. This demand, when combined with Fed demand, creates $85B/month in buying pressure at auction. This continues the illusion of a healthy bond market, keeps auctions from failing and holds interest rates at extraordinarily low levels.
IT IS CRITICAL THAT EVERYONE HERE UNDERSTANDS THIS. THE FED IS, EITHER DIRECTLY OR INDIRECTLY, MONETIZING AT LEAST $85 BILLION DOLLARS PER MONTH OF U.S. GOVERNMENT DEBT. PERIOD. END OF STORY.
OK, that's enough for a Saturday. Please use this weekend to step away from your computer for a while. Hug your kids, grandkids or someone else who is near and dear to you. Appreciate and value the important things in your life because, as we were all sadly reminded of again yesterday, they can be taken from you in an instant.
God Bless everyone in Turdville and thank you for making all of this possible.