We May Need to Wait for the Next Strong Upleg

By: Przemyslaw Radomski, CFA | Wed, Oct 6, 2010
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This essay is based on the Premium Update posted on October 1st, 2010

The concern in the U.S. is that if the Federal Reserve pumps more money into the system, its efforts will hurt the value of the dollar and possibly stoke inflation, two events that would drive demand for gold. Yet some investors are buying gold on concern that stimulus measures might fail, leading to even deeper problems for the global economy.

For many people buying gold is based on the lack of faith in conventional currencies. If the U.S. currency has the phrase "In God We Trust" printed on every dollar, some feel that an additional statement of belief should be added -- "In Gold we Trust."

The US Mint recently announced that it has run out of one ounce Gold Buffalo coins. Even the fact that the US Buffalo is priced about 20% over spot, and was last sold for $1,560, has not stopped the flood of retail buying. Gold wholesalers are raising premiums on gold coins and some are out of stock.

Gold is particularly attractive since the Fed has cut interest rates essentially to zero. Gold is more attractive than money in the bank since you earn zero percent on your cash in the bank, and earn zero percent on your gold. By holding gold today you don't give up any interest on your cash and you don't give up any "missed opportunity cost."

But it seems that gold will need to consolidate before going higher. Once the correction is done, it's not out of question that the price of gold will reach $1,500. We seriously doubt that the recent run up is the final stage of the bull market. In fact, it seems that there are several more good years. We're looking forward to it, especially in silver.

This week's HUI gold stocks index (charts courtesy by http://stockcharts.com.) does not reveal a great deal of new information. Gold stocks are above the declining resistance level but have not surpassed the highs seen in 2008. Whether this will happen before or after gold's correction is unclear at this point.

XAU Index Chart

In this week's XAU Index chart, we can see the breakout above the declining resistance level. This is bullish for the medium-term. Still - as mentioned in the previous paragraph - a consolidation could take place before the mining stocks breakout.

Precious metals could move above their previous highs (along with rallying metals) and then consolidate, or, mining stocks could under perform metals until the latter correct. Once the correction is completed, precious metals stocks would strongly break above their previous highs. As you may see, in either case, a second consolidation is likely to take place for the mining stocks as well as the precious metals.

GDX NYSE Chart

The GDX ETF, which is a proxy for the mining stocks, provides us with details and positive confirmation of what we have discussed previously. The resistance and support levels are clearly visible and we note that recent moves have taken place on strong volume. The extremes of the trading channel have been touched on an intra-day basis, which is a positive sign for the weeks ahead.

Meanwhile, currencies have been greatly affecting the price of precious metals lately and if the USD Index starts to move up, it could ignite metals' correction. This is exactly opposite to the general stock market, which seems to be moving along with metals and miners.

This would support gold, silver and mining stocks in continuing their recent rally, consolidating and then moving higher - most likely much higher.

Since our update two weeks ago, the Euro Index has continued to rally as expected. The consolidation period, which ended several weeks ago, has been followed by a consistent upswing. The expected target for this rally is around the 140-level, which is also close to the 200-day moving average. Obviously the rally is expected to continue since this target is above today's closing level. This also means further short-run declines for the USD Index as will most likely be seen on our next chart.

USD Index

In the long-term USD Index chart, the recent downtrend is clearly seen and is bordered in the chart by the blue declining trading channel lines. We see a move below the August local bottom and also below the 80-level, which normally provides support. The target level for the current decline is close to 77 and a pullback/consolidation is probable once this level has been reached. This may be followed by further declines approaching the 2009 low, although perhaps ending slightly sooner - at the 75 level - when taking into account level pointed by Phi number applied to recent turning points.

The Euro Index conversely has continued to rally. Although the exact timing for the reversal of these trends is not easily identified, it could possibly be soon. Expected target levels for the dollar and the euro are 77 and 140 respectively. There is a good chance these will be reached in the next week or two and thus the trends will reverse temporarily.

XEU Index

We do not recommend trading the short-term move in precious metals as it is the final part of current rally, so chasing it could prove to be very tricky, however, if one will insist on doing so, it seems that silver should be preferred due to its behavior around local tops and the fact that the general stock market is also likely to move temporarily higher. It is important, however, to utilize protective trailing stops and stop loss orders to minimize one's risk. We believe that the more profitable route is to wait for the next rally, which we expect to take place very soon.

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Thank you for reading. Have a great and profitable week!

 


 

Przemyslaw Radomski, CFA

Author: Przemyslaw Radomski, CFA

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
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