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The Perfect Storm

Stewart Thomson
Aug 14, 2012

  1. Gold bulls have endured a long and frustrating year. Gold continues to move sideways. I believe the breakout will be to the upside, for a number of not-so-thrilling reasons.

  2. First, the growing tensions between Iran and Israel seem to be close to boiling point. “Prime Minister Benjamin Netanyahu and Defense Minister Ehud Barak have ‘almost finally’ decided on an Israeli strike at Iran’s nuclear facilities this fall, and a final decision will be taken ‘soon,’ Israel’s main TV news broadcast reported on Friday evening.” -The Times Of Israel newspaper, August 11, 2012.

  3. A number of high-ranking politicians in Israel argue that Israel’s military is not adequately prepared to “manage” a military reprisal attack from Iran. That doesn’t seem to bother the pro-war crew.

  4. Wars often progress a lot differently than originally envisioned by the war mongers. Unfortunately, I believe the continuing “triangularization” taking place on the gold chart reflects the growing possibility of severe and prolonged military conflict, between Iran and Israel.

  5. Please click here now. Gold is coming off a six-day win streak, and coiling within a very symmetrical triangle pattern. A downside break is possible, but unlikely. The upside target is approximately $1710.

  6. The quantitative easing issue has been relegated to the back burner by most analysts, but there has been a subtle change in the statements of Chairman Bernanke, and the statements of a number of key Fed governors.

  7. Bernanke has begun to speak about the possibility of “doing more” if jobs numbers don’t improve faster and more significantly.

  8. Please click here now. You are looking at the Federal Reserve System, which is made up of twelve regional banks.

  9. If you click on the cities of Boston and San Francisco (first and last on the list), you will see the president of each bank.

  10. Both Eric Rosengren (Boston) and John Williams (San Francisco) are now publicly advocating not just more QE, but open-ended QE.

  11. How many more governor “bowling pins” will join Rosengren and Williams, if employment numbers don’t pick up dramatically before the election?

  12. QE was supposed to jump start the economy and prevent a double-dip recession. I don’t see any double dip recession coming this year or next year, but growth is stagnant, and debt continues to grow. Open-ended QE means monthly QE with no specific endpoint.

  13. Critically, it allows the Fed to respond specifically to each jobs report, rather than waiting for a trend to develop, or guessing that one will develop before making a move. Credit Suisse has suggested that the Fed could also profitably sell shorter term mortgage contracts and buy longer-dated ones.

  14. The fiscal cliff looms directly ahead. The main problem is that if the spending cuts and tax increases are implemented, they could significantly cut economic growth and jobs growth.

  15. If the “reforms” are not implemented or are drastically watered down, then the debt “ball and chain” could grow to the point that institutions start cutting back on their exposure to government debt.

  16. The fiscal cliff is the driver behind Rosengren and Williams “coming out of the closet”. I think more governors are in that closet. and only monthly QE provides a practical mechanism to manage the effects of the fiscal cliff.

  17. In the very short term, most gold stocks have moved about 10% higher. Please click here now. You are looking at the GDX daily chart. Note the HSR (horizontal support & resistance) created by the low at $45.07. I’ve highlighted that in black.

  18. GDX has attacked that HSR area for four days in a row. The bulls probably need to retreat slightly before trying for a decisive penetration to the upside.

  19. Note the 2nd HSR line at about $42.50 that I’ve highlighted in blue. Don’t be over-concerned if GDX pulls back to that price area. The gold stock snake needs to coil before she strikes!

  20. I’ve highlighted the overbought condition of some of the technical indicators with red circles. A decline to $42.50 seems small, but it could be enough to change these sell signals to buy signals.

  21. Please click here now. That’s the weekly chart for GDX, and it provides you with a broader picture of the price action.

  22. GDX has broken above an important downtrend line, and the overall technicals are very constructive. Note points “1” and “2”. The high price of point 2 is quite a bit lower than at point 1, but the technical indicators are almost all higher, signalling a very bullish non-confirmation.

  23. It’s critical that gold stock investors “connect the dots”. A movie was made about the true story of the Andrea Gail and its crew of fishermen. The ship was caught in “The Perfect Storm”. Three different storms converged on the ship at the same time, and sank it.

  24. The US dollar is the Andrea Gail, caught in a fundamentally perfect economic storm of quantitative easing, military tension, and the fiscal cliff. The “gold coil” on the price chart reflects the horrific perfection of that storm!

Aug 14, 2012
Stewart Thomson
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