The Rally in Gold and Silver is Not Over Yet
Based on the February 18th, 2011 Premium Update. Visit our archives for more gold & silver analysis.
As per the World Gold Council, precious metals demand will stay high this year with growing Indian and Chinese appetite for the yellow metal, but fresh buying in developed markets of jewelry will depend on economic outlook. At this juncture, market news suggests positive momentum for precious metals. Investment and industrial demand are set to witness an upsurge in the upcoming months. Let's have an outlook on the present status of precious metals market.
Gold has recently touched its rising resistance level but no confirmation of a local top has been seen. The current short-term trend therefore has not been invalidated and the outlook remains bullish. Silver has broken out above previous highs on strong volume and this too is a bullish development. In fact this is what we wrote to our Subscribers on Monday, Feb 14th:
The recent rally in the general stock market has greatly contributed to silver's strong performance relative to gold and - based on the fact that stocks have decisively moved above their August 2008 highs - the continuation of the outperformance [of silver] appears probable also in the days ahead.
Amid anticipations of positive moves in precious metals, let's have a close look into gold market moves. Relationship between currencies and precious metals, gold in particular, is one of the major indicators in predicting market direction, so let's take a look how gold moved in comparison to the key currency indices (charts courtesy by http://stockcharts.com.)
In the short-term Euro Index chart this week, the bearish head and shoulders pattern continues. Nothing has really changed since last week and further development of this pattern gives us a bearish outlook for the euro which is bullish for the USD Index and precious metals overall.
Gold has been moving along with the dollar and has been somewhat "euro weakness driven". It seems that perhaps many European Investors in the Euro-zone are protecting themselves against the weakness of the euro. This contributes to the bullish outlook for the dollar and also for gold.
Moreover, we can see the same on the medium-term USD Index chart. The uptrend is continuing here although a bit of sideways movement has been seen within the trend channel. It's important to note that the short-term trend is up as proven by higher highs and higher lows seen in the past weeks.
Concerning the cyclical turning points, we are just past the midpoint of the two turning points: last local bottom and the next local extreme. No bearish signs have been seen yet which implies we are not likely close to a local top. It will likely be seen in two to three weeks.
Overall, the Euro - USD Indices suggests positive momentum for precious metals in the upcoming weeks. Precious metals depict a positive correlation with gold and a negative correlation with Euro, indicative of bullish market trend at this time.
While the influence of the currency market is important, an insight into gold market seasonality at this moment is also promising. On 10th February, we wrote that, based on the findings of our new tool - True Seasonals, a rise in the price of gold was possible in mid-February. As a matter of fact, these findings turned out to be accurate in the past few days. After the publication, one of our Subscribers, who was particularly interested in True Seasonals (note that this is not the same pattern as you see on other websites - in fact we don't know of any other source that provides seasonal patterns while taking into account expiration of options/futures - that's why we call them True Seasonals), made a request to include the seasonal chart for March in the next Premium Update.
Today, we are pleased to make a positive response to that request. The chart below presents the seasonal pattern corrected for the expiration of derivatives for March. As the price of gold for March 1st, 2011 is yet to be known, we have assumed that this price is equal to the last known price of gold ($1379 - February 17th, 2011).
The use of True Seasonals is particularly important when there are no other market signals about the possible direction gold might go. When there are no clear signals, one should resort to the seasonal pattern. In other words, the analysis of the current market situation and the use of True Seasonals are complementary - when the current market situation is inconclusive, True Seasonals may offer you the clarification you need.
The chart also implies that the recovery of gold in the second part of the month might be relatively slow (compared to the possible decline) and bumpy (please, notice the slight decline after March 18th). Another implication is that gold might not be able to reach the price level from the beginning of March by the end of the month. Please note that this outcome would be in tune with the cyclical tendencies present on the USD Index and the fact that the dollar and precious metals have been moving mostly together in the recent months.
On a side note, we strongly believe that providing True Seasonals for April and following months in the above form will not be necessary, as by the time they are needed, the interactive version will be available on our new website (please take a look at our homepage for a short video featuring it).
Summing up, the USD Index is likely to move higher as the bullish sentiment prevails here. In the Euro Index, a continued downtrend is likely and the outlook is bearish. The situation in the USD Index and the general stock market is positive for the precious metals as a whole. Consequently, we believe that the rally in gold, silver and mining stocks is not over yet.
Thank you for reading. Have a great and profitable week!
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