Will History Repeat?

2007-JUN-10

What do January 5th, March 2nd and June 8th, 2007 have in common?

The answer is that all three are Fridays, and gold dropped like a rock each day. Also, each day marks the end of the week in which gold incurred its three largest weekly losses this year. Gold dropped $30.30 the week ending January 5th, $41.60 the week ending March 2nd and $25.70 last week.

These three days have other similarities. All three have elements that are typically present in a selling climax. Importantly, as one would expect from a selling climax, both January 5th and March 2nd marked important lows in gold at $604.90 and $641.50 respectively. Will history repeat, with June 8th becoming this year's third important low?

Only time will tell of course, but the odds favor gold for many reasons. To name a few of these reasons:

• rising inflationary pressures worldwide,
• strength in commodity prices in general and crude oil prices in particular,
• a weak dollar, which people are fleeing in order to hold safer assets,
• growing federal deficits that need to be funded by dollars created out of thin air,
• central banks diversifying out of the dollar, etc.

Also, the technical patterns favor gold, as we can see in the following chart.

Gold is still climbing within its uptrend channel. Importantly, this year's two previous selling climaxes I refer to above were stopped on the bottom line of this uptrend channel. We will know within a few days whether the June 8th decline also proves to be an important turning point. I expect that it will.

Silver also is very strong from a technical point of view. Silver is testing support around its 200-day moving average. If gold turns higher from here, we can expect silver will lead the way, given its better relative strength. Therefore, a decline in the gold/silver ratio will signal that a rally in the precious metals has begun.

So watch the gold/silver ratio carefully here. The key level is 48.7. When the ratio falls below this level, the rally that I am expecting will have begun in earnest, and it will mark June 8th as the third Friday this year that made an important turning point.

Lastly, you may be wondering, why gold has made these lows on a Friday? There are two main reasons. Both are contrived, with one based on practical factors while the other is aimed at inflicting an adverse psychological impact.

Trading gets very thin and illiquid on Friday afternoons, particularly after 4.00pm London time, which is 11.00am in New York and 2 1/2 hours before Comex trading closes. If you want to 'paint the tape', that is the best time to do it. The following intraday Kitco chart shows that the tape was painted last week on both Thursday and Friday.

It doesn't take a lot of selling pressure on the Comex (i.e., from paper promises to deliver gold) to drive gold lower when the market for real, physical gold is closed in London, particularly on Friday after many traders have already left for the weekend. This observation in turn touches upon the second reason lows are often made on a Friday.

Big sell-offs are purposefully intended to cause gold holders to worry over the weekend. The thinking goes that one is so filled with angst by Monday morning worrying about their position that they can hardly wait for trading to begin on Monday to dump their gold, which will of course be bought by whoever was 'painting the tape'. And who could that be? Of course it is the gold cartel looking to cover their short positions by preying on those selling their gold for the wrong reasons. Don't let that be you.