Zak Mir on Churchill’s wisdom, Gold, Avocet and Vatukoula

To paraphrase Winston Churchill, with reference to yesterday’s taper non-event, “never in the field of financial markets have so many analysts, got it so wrong, for so long!”

As we all know, the consensus in the run up to yesterday’s FOMC meeting was that the Federal Reserve was about to scale back its bond purchasing programme by $10bn-$15bn a month. As it turned out, America’s policy makers balked at making a decision, so for now the party goes on. Of course the problems facing these people are not to be underestimated. First, withdrawing QE runs the very real risk of prompting a market rout. Second, there is the looming nightmare (yet again) of the debt ceiling. Remember that the last time this was in the news, at the turn of the year, it was perhaps the major reason that the Fed launched into QE Infinity in the first place.  

What I have enjoyed most about what’s happened in the last 24 hours (apart from the rise in the major indices!) has been the total lack of humility I’ve witnessed from the talking heads, who universally got it spectacularly wrong. Even better than this, not one of them has admitted to losing money, which many of them must have done. I suppose this isn’t too surprising as no one ever likes to admit this, especially those going cap in hand to the government for a bailout!

Over the course of today, there has been a definite smell of burning shorts in the air. This is especially true now that the Dow and S&P500 have both gone on to make record highs.

Even thought the movement of stock indices has been fascinating, it is gold I am most interested in at the moment.

Over September, the precious metal fell greatly in anticipation of the taper. However, this market suddenly spiked $15 higher in the immediate run up to the official announcement at 7pm. I thought at the time this looked liked the news had broken in advance of its official release and, as it turned out, this proved to be entirely correct!

But fiddled markets aside, yesterday’s low for gold (at $1,291/oz) was a couple of dollars higher than August’s floor. From a technical perspective this support suggests that as long as we remain above the 50MA (currently $1,343/oz) on an end of day basis, the next target has to be last month’s intraday peak of $1,433/oz in the coming weeks.

The stocks I’ve chosen to look at today have been suggested by my colleague at SpreadBet Magazine, Ben Turney. He’s been looking for “lower quality”, let’s say, small cap gold plays, which could be particularly sensitive to a rise in gold prices.

Avocet Mining (AVM) has been a star recovery play identified by our very own Mr. Richard Jennings not that long ago.

The question for AVM has been to what extent would it give up its August and July gains, as the price of gold fell?

The last time I looked at the AVM chart, I was backing a retracement towards a combination of the July uptrend line and the 50MA at 14p. So far this has been spot on! As long as there is no end of day close below the 14p combination zone, I’d be looking at the top of the broadening July triangle top at 30p as a target. It is quite possible this could be achieved by the end of November.  

The second stock is Vatukoula Gold Mines (VGM).

What interests me about the VGM chart is the extended base this stock has been making since April, which is backed both by an uptrend line and the RSI oscillator window from that month. This week there has been a rebound off the April uptrend line at 7p, which is a plus and this now provides a position to place a stop loss if you’re long. While this line remains unbroken the upside for VGM should see it through the August high of 11p. Only cautious traders would wait on the RSI breaking back above 50 on an end of day close or for an end of day close above the 20MA (currently 8.3p) before taking the plunge and buying this stock.