This Is It - to your stations...
Originally published November 4th, 2006.
One of the dangers of continually being close to the market, is that you can get lost in day to day detail, or even hour to hour detail, and end up not being able to "see the wood for the trees". A way to counter this tendency is to use weekly or monthly charts, which filter out daily "noise", and thus highlight changes to the big picture. As we will shortly see, weekly charts reveal that last week was a big one for gold and silver.
On daily charts it is not immediately clear that gold and silver both broke out last week from their lengthy triangular consolidation patterns, and this is especially the case with silver, although the application of trendlines does reveal that this occurred. On the weekly charts, however, it is obvious, even without trendlines.
The 3-year weekly chart for gold provides excellent perspective as it covers a substantial timeframe and strips out the noise of daily fluctuations. On this chart it is clear that gold staged a significant and sizeable breakout last week. It is also readily apparent on this chart that the triangular consolidation from the overbought peak in May was a perfectly normal reaction/consolidation back to the 50-day moving average that caused no technical damage, and, on the contrary has created the conditions for a sizeable advance by completely unwinding the overbought condition that existed back last May, as revealed by the neutralization of the MACD indicator at the bottom of the chart. Our minimum target for a new intermediate uptrend in gold is about $750 - $770. One gold dealer reported "minimal interest" in gold a few days back. Great - that's exactly what we want to hear - you certainly don't want to be buying something when every Tom, Dick and Harry wants in.
The situation for silver is much the same as that for gold, except that, as we can see on the silver chart, silver looks even stronger due to its triangular consolidation pattern being more upwardly skewed. Silver also has the added advantage that it its breakout is so far marginal, compared to gold's breakout - so there is everything to go for with silver.
The great news for Precious Metal stock investors is that the PM stock indices still haven't broken out. One reason for this is that players in the sector have had such a rough ride in recent months that many are feeling shell-shocked and unwilling to re-enter the fray. We can see the large consolidation zone on the 3-year weekly HUI chart, which actually started to form early in the year, ahead of gold and silver topping out, and how this holding pattern has allowed the overbought condition to neutralize, as revealed by the MACD indicator.
There is concern in some quarters that because the US dollar is short-term oversold, Precious Metals might get whacked again by a dollar recovery. While we may see some reaction due to a limited dollar rally, this is not thought to be much of a threat. The dollar's situation is becoming increasingly desperate. A point that is little understood by many US citizens and investors is the depth of anger generated in the rest of the world by the policies of the current US administration, which in 5 short years has pursued a policy of aggressive militaristic expansion, torn up international treaties and agreements formulated over many years, and destroyed the Constitution of the United States. There is a widespread complacent assumption within the US that the immensely powerful US military machine will "sort out" anyone who doesn't like it. What this overlooks is that, having gutted its own manufacturing base and racked up deficits of mind-boggling astronomic proportions, the United States is absolutely dependant on the rest of the world. The soft underbelly of the US is its economy and the dollar - and the rest of the world knows it. A powerful military needs a strong economy to support it and the economy of the US is at risk as it has never ever been. Already, important world players are positioning themselves to unwind their massive dollar positions in a big way in a manner that minimizes the damage to themselves. The population of the US may have just turned 300 million, but the other 5,700 million people in the world are not going to allow themselves to ridden over roughshod by the US military machine. They will show their displeasure by ditching the dollar. The consequences for the US economy will be grave to say the least, and prices of hard assets such as gold and silver, and oil too, will go through the roof.
New Gold and Silver updates will be posted soon, and on www.clivemaund.com we will be looking at the opportunities that abound in the sector. In particular, we will be looking at the many sound junior stocks that have been trampled underfoot in the recent correction, and provide an excellent way to leverage the expected strong rallies in gold and silver.