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Federal Reserve Policy (superficially hawkish):
- Tightening trade has limited legs - central bank conviction on inflation
is immature and nearby costs too great
- The risk of the bluff is in the economic growth trade largely supported
by money / credit expansion (inflation!)
- It's tough to get bearish on the inflation trade unless we're underestimating
non-inflationary growth
- Tightening consensus at Fed not apparent - Bernanke still waffling (Reuters
writes "Mixed Fed Message")
- Hawkish talk among other bankers may be nothing more than some good old
fashioned butt covering!
- Easing speculations anew probably lay awaiting at somewhere around Dow
9750
Other Fundamentals & Noteworthy Facts (structure of gold market
sound, global money supply trends bullish):
- Chinese central bank plans marginal removal of accommodation via 0.5% increase
in reserve requirements
- Gold supply funnymentals still bullish, and tightening ("resource nationalism" /
environmentalism on the rise)
- Second quarter earnings for gold stocks could finally show well, even relative
to other sectors
- Asian currency complex could see weakness if speculation over North Korean
missile test launch heats up
- July is a seasonally weak month, but August through October is seasonally
the strongest period
- According to the COMEX COT's for gold, funds (large speculators) have been
liquidating their longs since October, and doubled up on their shorts between
January and March (the speculative net long position has hovered between
34 and 37 percent since February, down from the 40-50 percentage range during
Q4, 2005) - thus the view that leveraged funds and other players were caught
off side in latest slide should be suspect
- Trend in US broad money (MZM) thru May has seen a steady incline over the
past year (back up to 4% YOY)
- Year over year rates of change in monetary aggregates for the other G7
central banks continued their generally even more profuse incline thru April
(May figures are not in yet) as well with double digit (10-15 percent) growth
rates in broad and narrow money by the ECB and BOE; broad money growth in
Yen has recovered in the past two months to its fastest year over year clip
in seven years (though still much more moderate than the rest) - there is
no sign of a genuine global tightening campaign by central banks anywhere,
yet, as the press has it
Technicals (burden of proof shifts to gold bulls - intermediate trends
broken or at critical inflection point):
- In GOLD, the burden of proof lies with the bulls as cracks in intermediate bullish
trends evident
- Bullish intermediate trends in gold are broken in most currencies except
USd, Aussie & Rand
- Bearish intermediate trends have asserted themselves in the base metals
and silver
- Bullish intermediate trends in most small cap and many of the mid to
large cap gold stocks are broken, yielding bearish intermediate trends
in some cases (exceptions in the index shares that we track so far include
Barrick, Agnico Eagle, Eldorado, Glamis, Randgold, and Meridian; the intermediate
trends in Goldcorp, IAMgold, Kinross, and Newmont shares appear neutral
with a bearish bias at the moment)
- Short term gold trends are all oversold / bullish Platinum trend
intact
- Action in gold prices on the approach and immediate aftermath of FOMC could
hold significant implications
- Potentially bearish trends in other METALS and ENERGIES are not bearish
for the inflation trade, as they relax Fed's cost-push and demand-pull neo-Keynesian
style analysis of the inflation risks
- Five year trend in South African RAND / USd could be breaking down - weakest
relevant currency relation
- USd is next weakest CURRENCY on chart - intermediate trends still decidedly
bearish vis-à-vis all but Rand
- Next to Gold Stocks, Techs, Healthcare issues, and Homebuilders seeing
brunt of decline in STOCK PRICES
- Energy-related, Banks and Utilities joined in latest week
- Trend in energy moot for gold - reversal would let Fed relax, new highs
bearish for growth trade / bullish for inflation trade - but decline could
cause bearish reversal in CRB, underpin greenback and ease pain in bond pits
Conclusion
Our outlook on Federal Reserve policy (i.e. skepticism) suggests that the
correction in gold described by an abandoning of the inflation trade was a
mistake. Gold's valuation dynamics (relative to the main inflation reality
as well as the other commodities) suggests that it was premature. A correction
was inevitable and the hawkish overtones came at just the time that momentum
was breaking, causing damage to the bullish intermediate trends. If our outlook
and hypothesis is correct, recovery should be relatively fast, beyond the token
turbulence surrounding the June 29th FOMC. I believe that the market has overestimated
the Fed's resolve but may nevertheless need to see a concrete sign of its absence.
I still think the worst of this correction is behind us but I'm not sure whether
we've seen the correction lows yet.
Certainly, at any rate, now is a better time for new comers to jump on board
this bull market than it was during March or April. However, my intermediate outlook remains
on guard subject to a test of the Fed's resolve, the development and recovery
of gold sector trends, and the situation in currencies following the appointment
of a new US Treasury Secretary.
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Sincerely,
Edmond J. Bugos
GoldenBar.com
Edmond J. Bugos is
the founder and editor of the Goldenbar Report - calling markets accurately
since 2000.
The GoldenBar Report is not a registered advisory service
and does not give investment advice. Our comments are an expression of opinion
only and should not be construed in any manner whatsoever as recommendations
to buy or sell a stock, option, future, bond, commodity or any other financial
instrument at any time. While we believe our statements to be true, they always
depend on the reliability of our own credible sources. Of course, we recommend
that you consult with a qualified investment advisor, one licensed by appropriate
regulatory agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your own
before making important investment commitments.
Copyright © 2000-2008 Edmond J. Bugos
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