A Short-term Dip in Precious Metals Is Still Likely

By: Przemyslaw Radomski, CFA | Fri, Feb 17, 2012
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Based on the February 17th, 2012 Premium Update. Visit our archives for more gold & silver analysis.


 

We like Warren Buffett. We respect Warren Buffett. We'd love to sit and have lunch with him one day. As an investor, Warren Buffett is in a class all of his own. But the Oracle of Omaha just keeps bashing gold at every opportunity.

In an article published in Fortune Magazine, based on his upcoming annual Berkshire Hathaway shareholder letter, Buffett again dismissed the yellow metal. It is hard to argue with a man whose bank balance is a zillion times bigger than yours. Obviously he has been right plenty and has the bank balance to prove it.

But meantime, all the while that he has been bashing gold, it has bulldozed its way up and gold bugs have been laughing all the way to the bank.

Buffet attacks gold with the usual weapons in the anti-gold arsenal: gold has no inherent value; it underperforms stocks over time and has merely become a self-inflating bubble in its long climb to record highs.

Buffett observed in a 1998 speech at Harvard that "Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

At the time of his Harvard speech, the price of gold hovered at around $300 an ounce. If Buffett had invested just one of his many millions in gold that year, he would have $5.7 million today, that's an average return above 13% a year.

And yes, it does make sense to keep gold in a vault. It's valuable and rare. You keep it safe from theft-- it keeps you safe from inflation, banking collapses and the devaluation of fiat currencies.

Since we've touched on currencies, 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

Our first chart is the very long-term USD Index chart. There is basically no change this week as the daily index movements have been too small to be visible from a 20-year perspective. The situation is still somewhat unclear for the long term but appears to be more bearish than not.

The short-term situation, however, is not that bearish. The USD has been moving slowly higher in the past days and this trend may continue for some time.

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

In the long-term S&P 500 Index chart, we see that a local top may already be in or is about to be reached. The significant rally of the past month without a meaningful correction increases the likelihood of a local top being formed soon. Markets simply cannot continue to move higher indefinitely without corrections.

As we compare recent trading patterns with the 2010 upswing, similarities are still in place. A continuation of this anomaly would imply that a correction is quite possible soon and we are near a local top now. Although it can't be seen on the above chart, the Dow Jones Industrials and the Japanese Nikkei have both reached important resistance levels as well, a fact which also points to an end to the recent rally (or at least a pause) for these markets and the likely formation of a local top.

$XBD (Broker/Dealer Index - AMEX) INDX

In the Broker Dealer Index (proxy for the financial sector) chart, we have some bullish implications, but it must be kept in mind that these are for the medium term, not the short term. At this point, we could still see a correction in the main stock indices and a verification of the breakout here. The financials then could move back to the previously broken declining resistance line based on several 2011 highs.

The situation in the general stock market is bearish for the short term, as important resistance lines have been reached or are now close at hand. After a significant rally without a meaningful correction, a downturn would be in tune with previous trading patterns and current investor sentiment.

The financial headlines across the Internet have generally shown that the media is very bullish for stocks at this time (General Motors' profits highest in years!). Combining this fact with our bearish technical indicators suggests that a local top is very close.

Correlation Matrix

The Correlation Matrixis a tool which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector. The metals and currency markets are negatively correlated while gold and the general stock market show a positive correlation. The pending local top in the general stock market is therefore likely to be bearish for the precious metals sector.

This is also in line with our previous comments from our essay on the short-term bearish outlook for gold (February 14th, 2012):

So, will gold decline from here? Most likely yes, but not very far. The additional confirmation of the short-term bearish case comes from the general stock market, as gold has been recently moving in tune with stocks. Consequently a turnaround in stocks could ignite a move lower in gold as well.

Summing up, the two main short-term drivers of the precious metals sector, stocks and currencies are both providing rather bearish influences at this time. Although the long-term fundamental picture is the most important (and the long-term trend for gold and silver are up), the short term columns here should not be ignored when the coefficients show significant strength with precious metals and other markets.

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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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