Beginning of The Golden Plunge, or Just a Golden Breather?

By: Przemyslaw Radomski | Fri, Nov 19, 2010
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This essay is based on the Premium Update posted on November 19th, 2010

It's no secret that the U.S. is borrowing too much, that China manipulates its currency and that Europe's fiscal troubles are growing at the same time that "the luck of the Irish" is running out. There does not seem to be any international political will to cooperate to rectify any of these imbalances.

The G-20 meeting in Seoul, South Korea, achieved nothing to improve global imbalances and end the currency conflicts.

Not that we had great hopes.

Is it any wonder that investors are feeling like the other shoe is about to drop? This week European officials, increasingly concerned that the Continent's debt crisis will spread, were warning that any new rescue plans may need to cover Portugal as well as Ireland to contain the problem they tried to resolve just six months ago.

And gold? With the $1,400 per ounce mark under its belt, after it corrects, gold will most likely shoot up for the next target and again you will see newspaper headlines saying that gold broke all time highs.

When you see headlines like "Gold sets record high" on the front page, take it with a grain of salt. As we have pointed out in the past, gold is at a record only if you don't adjust for inflation.

The actual record was set 30 years ago, when the price of gold, in today's dollars, hit more than $6,000 (taking static way to measure inflation into account), or over 340% higher than it closed on Thursday.

The price of gold began rising a decade ago, around the same time that oil prices began rising. Both fell sharply in the 1980s and 1990s, but began to increase around 2000, partly due to economic growth in Asia raising demand for commodities.

When the financial crisis occurred in 2008, oil and gold both fell, although gold's fall was milder and it soon began rising again. Over the last two years, it has nearly doubled in price, and with the recent stimulus money flowing (inefficiently, but still) into the economy, the currency war is becoming more tense, as various nations try to save their way out of trouble by holding (or aiming to have) a weak currency. With nations racing for the weakest currency (and also highest inflation), we may see another strong upswing in the price of gold and other precious metals.

However, not necessarily right away. In order to gain additional insight, let's take a look at the charts. This week's free commentary includes several general stock market charts and the one dedicated to describing their influence on the price of the yellow metal. Let's being with the long-term S&P 500 Index chart (charts courtesy of http://stockcharts.com.)

$SPX Chart

On the above chart we see that a correction to the breakout above the declining trend line (marked above with blue) is underway. The 61.8% Fibonacci retracement level based on 2007 through 2009 has once again provided resistance for the rally. Further slight declines may be seen before the current decline is over and stocks resume their rally - thus finally breaking above the abovementioned resistance (currently at 1233).

Let's zoom in for more details.

$SPX Chart

The short-term SPY ETF chart this week shows a level below the previous high of 120, which can be viewed as support at this point. Still, only 2 days fell below this level before an intra-day move back above it (actually, right to it) was seen, so the breakout to the upside has not been invalidated.

Consequently, the bias remains bullish for the main stock indices and - as mentioned a few paragraphs earlier - it will stay bullish even if stocks move lower temporarily as long as they stay above the declining long-term resistance line.

$XBD Chart

The Broker Dealer Index chart measures the strength of the financial sector. This week it is clear that the breakout above the multi-month resistance level has not yet been verified. It seems likely that further declines from the present 111 level may be seen. It was often the case that the financials lead other stocks, so at this point the fact that they did not move below their important support levels can be viewed as bullish.

So, the situation remains bullish for the main stock indices, and it will continue to be bullish as long as stocks are above their long-term support line marked on the first chart featured in this essay. But what does it mean for gold and silver Investors? Please read the description below the following table for more details.

Correlation Matrix

This week's Correlation Matrix shows that short-term coefficients for gold and the general stock market are similar to those seen for silver and mining stocks (the description is visible above). In other words, bullish news for stocks is bullish for gold, silver and mining stocks as well.

The 30-day column shows that correlations with the USD are mixed. There appears to be a tendency for reversal back to the long-term tendencies - that is the correlations being negative. In other words, it seems that the precious metals sector will once again trade again rise along with dollar's decline.

A local top in the USD Index will likely influence gold, silver and mining stocks in a positive manner. The local bottom seen for metals will likely be followed by a rally. Overall the Correlation Matrix confirms points made earlier in this update and suggest that caution is necessary when the short-term is concerned.

Summing up, the general stock market at this point appears to still be bullish. Currently we are seeing a correction of the breakout above the long-term declining resistance line. It is not clear at this time whether this correction has completed. Strong support level, have not been reached, but they may not need to be reached as the move below the previous high has not been verified.

The implications for precious metals are similar but it is important to note that any declines seen should not be of major concern for long-term investors as long as stocks don't break below their long-term support line. While we have suggested selling a part of the long-term precious metals investments to our Subscribers on Nov 9th, when gold topped, we believe that this capital should be already employed once again and long-term holdings should be repurchased (in fact we suggested doing so on Nov 16th, after gold had moved almost $100 lower). As far as details of this consolidation are concerned (targets), we will leave them to our Subscribers.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

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

 


 

Przemyslaw Radomski

Author: Przemyslaw Radomski

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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