Seeking Alpha
Contrarian
Profile| Send Message|
( followers)  

I'm not sure if the Ramones reference will resonate, but I know the gold one will. It has been two weeks since I made the bold proclamation "The Bottom Is In For Gold" so I figured what the heck, I'll shake my tail feathers (Ted Nugent anyone?) and enjoy what may prove to be a longer term victory, especially in light of today's Fed minutes.

That article elicited more than a few responses, most of which were positive. Gold is up more than 2% since then but more importantly it has made some notable technical progress.

The most important technical occurrence was the trading activity yesterday and now today (thanks to the Fed). I'm using the SPDR Gold Trust ETF (NYSE: GLD) as my barometer and documenting these observations starting at the most recent bottom on May 16. That day also marks the beginning of the consolidation period of higher lows and somewhat stagnant but slightly lower highs. Since that low close of $149.46 GLD has made a series of sequentially higher moves with a significant resistant level that was final broken yesterday. As I was writing this, the Fed announcement came and GLD spiked higher yet.

(click to enlarge)

In the chart above the red circle is the May 16 close. The red line is drawn through the approximate trend line of higher lows. The green line begins and ends at the twin intra-day highs of $159.20 on June 6 and August 21 which was indisputably exceeded today.

The highlighted bar is today, as I write. Interestingly I began the article before the Fed released the minutes and had to pause for the wild reaction to mellow. What is surprising is the bluntness of the statement and the fact that stocks, at least for the moment, are up again.

I also wrote an article recently titled Read My Chart: Bill Gross Is Right where I provided analysis, both fundamental and technical, espousing the belief that the S&P 500 is peaking and we may be in for a decline similar, if not identical in magnitude, to the previous two. Owners of the SPDR S&P 500 Index ETF (NYSE: SPY) beware. The two previous peaks being the one after the peak of the tech bubble and the one after the peak of the \housing bubble. I think we are in a different kind of bubble now, and may be at the top, one which is produced by ample liquidity but a lack of result, something akin to Japan's liquidity trap. The greatest risk here is the reality of a stock market getting very close to highs set in 2000 and 2007 on the fumes of an empty tank being temporarily filled (with less and less gas each time) by the Fed. Eventually the car will stop.

(click to enlarge)

So we have potentially a triple-top spanning 12 years. Scary? It should be, unless you are prepared to go short.

But the Fed is sending a clear message, one that should be disturbing. No more dancing around the facts, nor more avoiding the topic of QE-whatever. When the Fed makes a pronouncement like today it means things ain't good.

And as gold goes higher so is its lesser loved second-cousin silver. Pay attention here, because despite silver being held back at times relative to gold because of its industrial uses and therefore lower demand when the economy sours, silver has recently risen more dramatically than gold.

(click to enlarge)

As with gold I am using the iShares Silver Trust ETF SLV (NYSE: SLV) to chart the progress. SLV fell lower than its golden counterpart, hitting an intra-day low June 28 of $25.34. Since then, on an intra-day basis, SLV is up well over 10%.

Of course, for many years we've heard about the historic ratio between gold and silver prices and how that ratio is out of balance and needs to correct. One side says gold prices have to come down, the other side says silver prices have to go up. I don't know about the validity of such analysis but I do see a high correlation between the recent trading activity of gold and silver, with silver acting a lot more like a precious metal than an industrial one.

For today, thanks to the Fed, I have a little more confidence in my outlook. Gold will go higher, silver will follow and stocks, in the US anyway, will go down.

Source: Hey, Ho, Let's Gold! (So Says The Fed ... And Silver Too)