The Stock Market and the Dollar Sustain the Bullish Environment for Precious Metals

By: Przemyslaw Radomski | Fri, Jan 27, 2012
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Based on the January 27th, 2012 Premium Update. Visit our archives for more gold & silver analysis.

 


This week marked the Year of the Dragon in the Chinese calendar, and according to Chinese mythology, Dragon years bring powerful changes and optimism representing imperial power, prosperity and good luck. This year is supposed to be even more auspicious since it's a Water Dragon year, something that occurs once every 60 years. We admit that we don't yet use the Chinese Horoscope as a technical indicator, and who knows, perhaps we should. One thing is certain--the Year of the Dragon began with an auspicious move for precious metals. The dragon that breathed fire into precious metals prices was the Federal Reserve which announced this week that it is planning to keep interest rates at rock bottom for some years and hinted at further economic stimulus measures. Gold prices hit 6-1/2 week highs on Thursday as stock markets, commodities and the euro all rallied. This followed Wednesday's biggest one-day rise in three months after the Fed said it might consider further monetary easing through bond purchases (creating fiat currency out of thin air) and pushed back the likely timing of an eventual interest rate hike to late 2014.

Since many view a U.S. rate hike as a kiss of death to the gold bull market (we disagree), the news that it won't happen for at least three more years prompted those on the sidelines to join the ride. Gold closed above its 100-day moving average, a technical factor that further boosted confidence.

The Fed said in a statement that the economy had expanded "moderately" in recent weeks, but that unemployment remained at a high level, the housing sector remained in a deep depression, and the possibility of a new financial crisis in Europe continued to threaten the domestic economy.

Usually after the Asian gold buying binge for the Lunar New Year gold demand tends to drop along with winter temperatures. We have reasons to believe that will not be the case in the short term. Generally, central bank demand is not subject to seasonality (although one could argue about the business and election cycles impact). Accumulation by countries has removed several hundred tons of gold from the market in each of the past two years and there is no reason to think that this year will be different. Central banks use periods of price weakness to step up their buying which reduces downside risk for all of us while setting the stage for sizable snap-backs. Central banks around the world added 157 tons to their holdings in the six months through November, recent World Gold Council data show.

The gold accumulated by Chinese for the Year of the Dragon is not likely to go back into the world market since most Chinese savers and investors buy gold as long-term, quasi-permanent holdings. That coupled with buying by central banks whose holding periods can be measured by decades, means that there is less supply and any rise in demand for jewelry is likely to have a greater effect on the metal's price than might have been the case several years ago.

To see if the Year of the Dragon will be as auspicious as millions of Chinese believe it will be, let's turn to the technical part with the analysis of the USD Index. We will start with the very long-term chart (charts courtesy by http://stockcharts.com.)

$USD (US Dollar Index - Cash Settle (EOD)) ICE

Our first chart today is the very long-term USD Index chart. There has been virtually no change within the past week, but we can clearly see that the recent breakout above the long-term resistance line is being verified or invalidated at this time. The latter is more likely (70% probability or so) since the recent breakout was not confirmed. A reversal to the downside is more probable and likely underway already.

$XEU (Euro - Philadelphia) INDX

In the short-term Euro Index chart, we see a confirmation of the recent breakout. Recently, we have discussed the lack of a confirmation and a possible breakout in the Euro Index. Several days of closing prices above the support line without any significant moves to the downside not only confirm the breakout, but they also point to strength in the Euro Index at this time - actually that's more likely weakness in the dollar that we're seeing here, as currency exchange rates are ultimately relative valuations of currencies against each other and the recent statement from the Fed did not help to boost confidence in the greenback.

$SPX (S&P 500 LArge Cap Index) INDX

In the long-term S&P 500 Index chart, the self-similar pattern which we've been discussing for a few months with our subscribers has continued to play out well. If this goes on, the next local top will probably be close to the level of the 2011 high. The recent trading pattern has been consistent with the period leading up to the local top in 2010-11. In October-November 2010, declining prices were seen for a few weeks but were quickly followed by a continuation of the rally. We may have a similar situation here.

RSI levels should be looked at as well and are also indicating that a rally is likely ahead. It appears that it could last for two to four weeks as the RSI level will then likely be close to 70. This has coincided with local tops in the past.

Correlation Matrix

A brief explanation of how the Correlation Matrix worksis to be found in our last essay on the US dollar's influence on gold. Significant changes have been seen here this week. The short-term correlation between the USD Index and the precious metals is rather weak and can be attributed to the strong European demand for gold. The yellow metal's price has rallied in all currencies and the correlation between the dollar and gold's price has therefore weakened.

A declining USD Index is medium-term bullish for gold and the precious metals, and the coefficient in the 90-day, medium-term column indicates this. The precious metals and the general stock market both have bullish outlooks at this time and several of their coefficients reflect this although the relationship cannot be described as strong. It seems best at this time to look directly at the precious metals themselves in order to analyze their likely short-term and long-term trends as we do in our full analysis.

Summing up, the breakout in euro above the short-term declining resistance line has been confirmed, which is bullish for euro and bearish for dollar. The situation for the general stock market is a bit unclear for the next few days, but the outlook remains bullish for the weeks and months ahead. Based on correlations, these factors do not disrupt our bullish view on the precious metals sector.

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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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