At present a non-conventional bullish continuation pattern has recently formed, the symmetrical triangle, indicating likely significant strength to follow in the yellow metal’s price.

The Symmetrical Triangle

For those who do not closely follow technical analytics, these are the most important characteristics of the pattern to consider:

• *Increased volume leading up to the start of the triangle and decreased volume until the breakout.
• *Volume should slightly pick up at the support of the triangle.
• *The break out should be 1/2 to 2/3 the way through the pattern.
• *3 day or 3% confirmation breakout should occur with increased volume.

Gold Continuation Chart

Traditionally the symmetrical triangle pattern has at least two short term support points, but in this case, I show the bottom foundation with the long term support line.  This slight difference might decrease the pattern’s success, but is not without utility.  To help verify the continuation pattern we’ll need to see increased volume on the upside which appears to be the case today with gold’s price rising ~$20.

My price target for this pattern is $2,100. This figure is derived by adding the length of the vertical side of the triangle (approximately $400, also the dotted line) to the break out point ($1700). Possible support is the apex of the triangle ($1,615).

See the full report by Citi’s analysts:

Taylor has been bearish on the euro for years but is presently even more short the US dollar than the euro. This relative positioning comes even as Taylor predicts the Greek economy to continue to get “worse and worse”, and that Portugal will soon be the next focus of Euroland decay, which has already begun to hit the spotlight.

The only strength the dollar might see in Taylor’s view is versus the Japanese yen, following a widely anticipated currency market intervention by the Bank of Japan. This will be short lived, however, and Taylor predicts the dollar will resume its decline versus all currencies including the yen soon after.

A weak dollar means higher asset prices, particularly for precious metals, and if no dollar strength can be seen going forward, neither can weakness in gold or silver.

See the full video interview with Bloomberg’s Sara Eisen:

Obama’s Campaigning Efforts Will Ensure Continued Spending

For the US administration its an election year and keeping the economy buoyed is priority number one with polls showing its the most influential voting issue at present. Its also a historically tested fact known in academia as the “political business cycle” which accounts for the consistent record of overspending and money printing leading into elections.

The Fed’s Hands are Tied

Moreover, there is ample reason to feel confident that the Fed will continue down the path of QE3, their next money printing program, no matter what employment gains ensue. For starters, the Fed’s Chairman has reminded us twice in the last couple weeks of their likely intentions to move forward on this program – once before congress and once during his press conference following their last interest rate decision. The next two high ranking members at the Fed, Janet Yelle and Bill Dudley, have both touted a new mortgage buying program as being essential to re-boost housing in their view. Beyond these verbal commitments, and more importantly, the Fed is bound by a technical constraint which will force them to not only keep interest rates ultra low, but also to continue expanding their balance sheet perpetually.

We recently discussed “Why the Fed CANNOT Raise Interest Rates” which outlines the fact that the Fed has insufficient capital to raise interest rates and their assets are so vulnerable that the only way to protect them is to accumulate more. Few realize the Fed, at a ratio of 54 to 1, is levered much higher than Lehman Brothers or MF Global before they went bankrupt. The marked difference between the failed banks and the Fed is the Fed can print money to protect themselves and, therefore, will.

Effect on Precious Metals

Any declines in precious metals following this employment report will translate into strong buying opportunities because markets will be surprised when the Fed does not reverse course as they are expecting. Few have realized the technical constraints of the Fed, and this leaves present gold and silver buyers who clue in with an informational edge. Today’s news is an opportunity to buy, and by no means a thorn in the long term gold and silver bull markets.

The Fed’s Cost of Funding Cannot be Raised

The Fed, like most banks, pays interest on the reserve holdings which banks store at the central bank. This is the rate the Fed would adjust if they tried to raise interest rates, but doing so also increases the cost the Fed must pay banks for holding those balances. This is not insignificant, because the size of reserve balances held at the Fed is at historically high levels: If the Fed were to raise rates by just 1%, the cost to the Fed would be $16 billion dollars. Whether this seems like a lot or a little to you, this represents more than 30% of the entire Fed’s capital base. If all remains equal, the Fed will be bankrupt in less than four years given a 1% rate increase. In the same sense, the Fed cannot raise interest rates to even 4%, the amount the Fed views as “normal”, without bankrupting themselves in less than one year. Keep in mind, the Fed Chairmen, Ben Bernanke, favors this tool the most for “exiting” their extreme monetary policy accommodations undertaken during this crisis, yet he never mentions the cost to the Fed for employing this tool:

Bernanke: “In particular, our ability to pay interest on reserve balances held at the Federal Reserve Banks will allow us to put upward pressure on short-term market interest rates and thus to tighten monetary policy when required, even if bank reserves remain high.”

Bernanke: “Even if bank reserves remain high, however, our ability to pay interest on reserve balances will allow us to put upward pressure on short-term market interest rates and thus to tighten monetary policy when required.”

The Fed’s Balance Sheet CANNOT Shrink

Bernanke has often stated that the Fed will return their balance sheet size to pre-crisis levels, which he fails to mention would involve selling more than $2 trillion worth of assets, but given his confidence the lack of realism in such a claim is not immediately obvious. As recently as last year, Bernanke, before congress, claimed that the Fed’s balance sheet would “normalize”:

Bernanke: “We also continue to plan for the eventual exit from unusually accommodative monetary policies and the normalization of the Federal Reserve’s balance sheet. We have all the tools we need to achieve a smooth and effective exit at the appropriate time.”

The big factor missed in Bernanke’s proposal is again the effect on the Fed’s solvency. The Fed is currently the largest holder of mortgage backed securities (MBS), treasuries, and agency debt, and for them to abandon their post would not leave much demand for them to offload onto. The Fed also holds these assets on their books at prices that they were willing to pay for them with inflationary demand, and do not reflect the real liquidation value. In all, its almost certain the Fed would suffer capital losses if they had to unload massive quantities of these assets, particularly if they do so at a time when nominal price inflation is creeping up which negatively impacts the prices of bonds.

The major issue for the Fed is the fact they are more leveraged than even the worst banks before their bankruptcies, including Lehman Brothers and MF Global. The Fed is leveraged 54 to 1 on their portfolio, meaning losses on their assets are magnified 54 times against their capital. A 2% loss on their asset portfolio would again bankrupt the Fed, and this is true even if the Fed does not unload assets, but just suffers asset mark downs.Because of these restraints, the Fed will not only not be selling assets, but will be forced to keep buying, to effectively cap the prices of the securities they hold so they never suffer nominal losses.

What this Means for Gold and Inflation

Given that the Fed’s hand is forced and that they cannot raise interest rates, or shrink their balance sheet, the Fed is empty of measures to restrain inflation. Raising reserve requirements may be their only choice but the use of this tool would cripple the banking system which is too leveraged to sustain any meaningfully higher reserve ratio. Inflation, therefore, cannot be contained, and the Fed will likely be forced to exacerbate inflationary pressures just to avoid turning insolvent.

Since gold is a major benefactor of an inflationary environment, especially when the Fed is this impaired, prices for precious metals are bound to continue their march forward. The sustained negative interest rates by the Fed will further secure gold’s role as a wealth preservation mechanism as far as the eye can see.

Silver is up a whopping 20% for year so far and is increasing at 289% annualized pace:

The Federal Reserve today indicated that they will artificially maintain interest rates at about 0% until at least 2014. The reality is they will not be able to raise rates for even further than that due to internal balance sheet constraints. With a nominal return of 0% on savings, the accumulation of inflation will mean real returns are deeply negative for fixed income investors. Rare commodities are the only means of preserving wealth in such an environment, and their fundamental strength will remain for the forseeable future. 

Silver is an often forgotten precious metal amongst the hype gold gets, but silver has been an overall better performer than gold despite being markedly more volatile. 

Fed Expands Junk Mortgage Derivative Purchases

The programs the Fed has officially announced should not result in any balance sheet growth, yet the Fed’s balance sheet has grown by in excess of $200 billion since the official end of QE2 in June of 2011. What was seen this week, was also unusual as the Fed’s mortgage-backed securities holdings grew substantially for the first time since early 2010. The total pace of asset accumulation by the Fed, which is well within the size range of a major quantitative easing program, is unwarranted given no official easing program is in place nor was formally announced. See the total growth in the Fed’s balance sheet, despite the official policy which is not supposed to expand the overall quantity of assets held by the Fed:

Fed’s Bailout of Europe is in Full Force

Aside from MBS purchases, the other major measure the Fed embarked upon last week was a large increase in loans to the European economy. The Fed lent almost $11 billion to foreign central banks, via their Central Bank Liquidity Swap Lines, and grew their “Other Assets” category, which is speculated to consist of foreign assets, by $2.5 billion. Its not to be forgotten that the loans to Europe are now being done at a cheaper than usual rate, and the payback risk the Fed faces is greater than usual given the major falls the euro currency has recently undertaken. Total outstanding loans to foreign central banks is now in excess of $100 billion, and the secretive “Other Assets” of the Fed is now greater than $155 billion:

Good Time to Buy Gold

The Fed is doing a favor to those who pay attention not only to what the Fed says, but also what the Fed does. Despite the fact many Fed officials, including the top policymakers William Dudley, Janet Yellen, and Ben Bernanke, have indicated that a new printing program might be on the horizon, no official announcement has arrived. With little attention being paid to the Fed’s new money printing schemes, gold investors can purchase the metal before the general market rushes in after fleeing the dollar. Gold is trading at reasonable levels now, given the pullback in Q4 of 2011, and is now back in line with its historical exponential trend line, and metal’s value is especially true with new news that QE3 is already underway:

A much awaited QE3, the next major money printing plan from the Federal Reserve, will be announced sometime in the first quarter. This program will increase inflation expectations, artificially suppress interest rates, and drive up the price of rare commodities. More information on the likely timing of this program will be available tomorrow as a summary of the Fed’s last meeting will be released to the public.

Investors should look to get exposure to gold before the Fed announces their new program to achieve optimal gains. Once the program is announced by the Fed, gold will gain a lot of positive momentum as the Fed pressures the dollar and interest rates down.

Bonds are already at all-time highs, with near term interest rates trading at zero and have little to no room for prices to improve from here. The future outlook for bonds is extremely negative as the Federal Government is effectively bankrupt when running even conservative forward projections, and lenders will eventually wake up to this reality or will be paid in inflated money.

In addition, the flight from European debt will be mimicked in US bonds once renewed focus on the fiscal imbalances at home takes place. The only safety will be precious metals in such an environment, which bear no credit risk.

Another reason to add precious metals to a portfolio is to defend against is the potential increase of the European bailout from the Fed. Recently the Fed renewed their credit lending to European banks and discounted the rate of the transactions. But this will soon be seen as inadequate by US policy makers because since the Fed announced this bailout, the euro currency has fallen more than 5%.

The declining euro almost ensures the Fed will need to double down on their efforts to assist Europe and the money printing associated with these measures will further help gold as it marches towards its 12th annual increase.

Numismatic coins are ideal because they allow one to participate in gold’s appreciation with additional historical and ornamental value which tends to provide added liquidity and deeper security. For these reasons rare collector coins traditionally trade at a premiums over their gold value and have done so for decades. The discount given by the market at present on these invaluable coins is one to jump on as the average premium historically is much larger than the current price. If the trend reverts back to the norm, numismatic holders will benefit disproportionally larger than average gold holders.