The Dollar Confirms a Possible Silver Pullback

By: Przemyslaw Radomski, CFA | Fri, Feb 10, 2012
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Based on the February 10th, 2012 Premium Update. Visit our archives for more gold & silver analysis.


 

"It was the best of times, it was the worst of times, it was the age of wisdom (for those who invest in gold), it was the age of (central bank) foolishness, it was the epoch of belief (in Chinese growth), it was the epoch of incredulity (in fiat money), it was the season of Light, it was the season of Darkness, it was the (Arab) spring of hope, it was the winter of (Syrian) despair."

With several of our own additions in parenthesis, these are the opening lines of the famous novel "A Tale of Two Cities," by Charles Dickens whose 200th year birthday was celebrated around the world this week. His words seem just as true and relevant today as in the time in which they were written.

Greece played the Artful Dodger this week and missed another deadline to approve conditions for a second €130bn bail-out on Tuesday night because of last-minute haggling with international lenders over emergency spending cuts. Negotiations to save Greece from a disorderly default are now teetering on the edge.

The delay fueled anxieties that Athens may be forced into a messy default next month and triggered concern over whether Greece remains committed to fiscal reform after two years of failing to implement measures agreed in return for financial support. Greece has already missed two deadlines this week. Finally a deal was presented for approval at a meeting of eurozone finance ministers Wednesday only to be sent back to Greece as incomplete with a fresh set of demands and an urgent deadline. The eurozone finance ministers dismissed as incomplete a reputed €3.3bn package of Greek budget cuts and sent the country's finance minister back to Athens with a fresh set of demands and an urgent deadline. They also warned of more intensive involvement in the Greek economy to improve tax collection and accelerate the sale of state-owned assets.

Earlier in the week the Great Expectations that a Greek rescue plan will be completed drove the dollar down sharply against the euro and boosted gold 1.5 per cent on Tuesday.

Gold could face a short-term pullback if Greece strikes a deal, as it may hurt the appeal of safe-haven assets, but on the other hand it will be good for the euro (bearish for USD Index), which might be bullish for gold. In the long run, the lingering euro zone debt crisis is expected to support sentiment in gold.

Charles Dickens said: "Do all the good you can and make as little fuss about it as possible." To see what good we can do for precious metals investors, let's begin 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

In the very long-term USD Index chart we see no significant changes. Thursday's closing index level is slightly below that of a week ago, but the recent move back below the long-term resistance line has not yet been confirmed. The index level is now more or less right at this support-resistance line, and the medium/long-term situation is slightly more bearish than not.

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

In the short-term USD Index chart, we see that the index "somewhat bottomed" at the cyclical turning point. Instead of a rally, a pause has followed with some sideways trading and small moves to the downside although declining at a much slower pace than seen in previous weeks. It seems likely that the index could actually rally in the very short term but the outlook for the medium term is bearish.

The situation for the USD Index appears rather bearish for the medium term but bullish for the short term, which might be a bearish short-term indication for the precious metals sector. It is also consistent with our recent view on the mining stocks part of the precious metals sector published on February 3rd, 2012 in our essay on the likely top in mining stocks:

(...) the medium- and long-term outlook for the gold and silver mining stocks is positive, however a correction is likely to be seen soon - perhaps it will start next week. Long-term investors should consider purchasing junior mining stocks, while short-term traders might want to trade the coming correction.(...)if you've been considering trying outour Premium Service, it appears to be a good idea to do so now.

Since the dollar is negatively correlated with the precious metals market, the likelihood of a rally is bearish factor for the precious metals sector - also for silver.

Silver Chart

A look at the very long-term chart (if you're reading this essay at www.sunshineprofits.com, you may click on the above chart to enlarge it) reveals a rather uneventful week. Silver's price has been in a sideways trading pattern during the past two weeks after a strong rally in which the red support-resistance line was pierced and volume levels were significant. With silver now above this line, it seems that a move back to it, a test of the breakout may in fact be seen. The 38.2% Fibonacci retracement level based on the 2002 to 2011 rally is also in play and will likely assist in stopping a decline as well.

Summing up, the medium and long-term outlook for silver remains bullish but - also based on the analysis of the USD Index - the short term is now more bearish than not.

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Thank you for reading. Have a great weekend 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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