Honest Money Gold and Silver Report: Market Wrap
Week Ending 2/20/09
Both the Dow Industrials and Transports hit new lows, confirming a Dow Theory sell signal, as the charts below show.
I don't believe this particular aspect of Dow Theory (confirmation by both indices) is that important or imperative as a market timing tool. By the time such confirmations are made a lot of the damage has already been done.
Higher highs and higher lows versus lower highs and lower lows, and the various combinations thereof, are more powerful markers in my opinion.
The S&P 500 did not make a new low (at least not yet). It is, however, testing its November low at 752.
It came close today (Friday) and then bounced up to close the week out at 770. Notice on the chart that the Nov. low is aligned with the 2002-2003 lows.
Last week's market wrap stated:
The S&P closed down 42 points or just under 5% for the week. The market remains range bound between 925 and 800.
This week's close (826.84) held above the earlier Jan. low of 805.22. If the Jan. low is taken out, look for a test of the Nov. low at 752.44.
The monthly chart of the S&P shows that the lows of 2002-2003 have held so far. If the lows are taken out on a three day closing basis, a new leg of the bear market will begin.
As of now it does not appear that this is going to happen over the short term, but that needs to be confirmed by the lows either being tested and holding; or the market turning up from here.
Well, the Jan. low was taken out and a test of the November low is occurring. This coming week will tell whether it's going to hold or not. It's impossible to know for sure. It could go either way.
My gut feeling is that the next leg down is not going to start just yet, but if the banks are nationalized over the weekend all bets are off and anything could happen.
Eventually, I believe there is one more nasty leg down yet to occur in what will end up being the most severe bear market of record.
Or as Mr. Volcker put it in a speech last week,
"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world."
Gold was up $60 to $1002.20 (continuous contract) for a +6.37% weekly gain. From last week's wrap:
A bullish 50/200 ma crossover has occurred, yet signals remain mixed. There may be more upside price action short term, but the rally is closer to its end than its beginning (short term).
Both MACD and STO are overbought. In bull markets prices can stay overbought for longer periods of time than seem possible. A correction is likely to develop short term, followed by the next leg up in an on-going bull market. Prices may advance one more time before correcting.
The suspected advance occurred. Price is now more overbought than it was last week; and is more susceptible to a correction. One does not have to happen at any specific point in time or price level, but the odds are rising.
The dominant chart feature is the Golden Cross: the crossover of the 50 day moving average above the 200 day moving average. This is a very bullish signal for the on-going bull market.
The first chart shows the 5 such crosses so far in the bull market; and the powerful moves that followed.
The move up was taken advantage of to sell a few gold stocks that had rallied up on the back of gold. In today's volatile markets taking profits whenever presented is prudent action.
I remain quite bullish on gold because of the excess credit issuance of all paper fiat currencies around the world, as the central bankers try to stimulate an already debt-gorged consumer into accepting more debt. It is similar to throwing a drowning man an anchor.
The levels of debt needed to fund these stimulus plans will end up causing more problems - not less. Savings and paying down existing debt levels is what is needed; not more of the same.
The chart below compares the performance of the S&P 500, 20 Year T-Bonds, and the DB US dollar index, all versus gold. Once again gold wins hands down.
Gold is the best performing asset in the world right now.
Investors are realizing why gold is so precious: it retains purchasing power better than any other currency - hands down.
This is why it is making all time highs in several world currencies that are growing weaker by the day.
A new phase in the gold bull is about to be entered upon, regardless if a correction first appears as suspected.
Note that it is possible for gold to make a run at its all-time high without first correcting.
Gold and silver trade or exchange at different "rates" or "ratios" one to the other. The market decides on any given day how many ounces of silver will exchange for one ounce of gold.
Throughout history gold has always been valued higher than silver according to weight.
This free market relationship is the exact reason why it was a mistake of the highest order for Alexander Hamilton to fix the exchange ratio between gold and silver at 15 to 1 in the Coinage Act of 1792.
That is a fixed market, not a free market; and Hamilton knew better: he was as smart as they come. This was not unintentional in my opinion, but that's another story for another time: see: Honest Money.
In the last ten years the gold/silver ratio has been between approximately 80 and 50 to 1.
Recently, the ratio made a new high and has since turned down and appears to be headed from the upper zone to the lower zone.
If gold reaches $1200-$1400 later this year, at 50 to 1 this would suggest a silver price of $24-$28 dollars per ounce. IF being the operable word.
Many of the gold and silver stocks on the watch list that were bought have been sold into the rally. If a pullback occurs it will offer a better entry level to start accumulating positions once again.
Also, the overall stock market is in a bear market and this puts a headwind to the gold stocks.
It is difficult to buck the overall trend of the market. It happens, but it is more difficult than if the trends were aligned.
The following are some of the gold stocks that were sold into the rally.
Note the Golden Crosses that suggest there will be more upside action coming, regardless of whether or not a correction occurs first.
The above is an excerpt from the full market wrap report available at the Honest Money Gold & Silver Report website.
This week's twenty-four page report contains twenty-three charts & graphs, including positions in the model portfolio and on our stock watch list.
Available on the site is an audio version of the book Honest Money. A free copy is included with all new subscriptions along with two special reports:
Investment Vehicles for Bull & Bear Markets; and How to Protect Your Assets in today's turbulent markets. Stop by and see why we are so bullish on gold.
Good luck. Good trading. Good health, and that's a wrap.
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