Based on the May 10th, 2012 Premium Update. Visit our archives for more gold & silver analysis.

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Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

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Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

By Mitchell Clark, B.Comm.

I was starting to put on my bullish hat on Friday morning when out of the blue an ugly close has forced me to rethink my position. After viewing a few hundred charts, I have determined that while I am still leaning into higher prices at this point in time, I will not totally rule out a rollover on the S&P 500. In coming days the news flow will be extreme and headline risk will be everywhere we look. The S&P 500 has been able to deflect worry for quite some time now and in every case the resiliency is unquestionable.

However, we are nearing the beginning of another earnings season which will start in just a few weeks’ time. First quarter earnings for 2011 are going to be quite interesting and most analysts’ estimates are relatively challenging. Will the rubber hit the road into earnings? Are we about to see a double top play out into earnings, or is there going to be a breakout which will take us to the SPX 1,400 – 1,415 price level?

I know, I ask a lot of questions but quite frankly that is what is running through my head. The SPX is not out of the woods yet, and the price action on Friday indicated that there is some serious supply overhead and two key resistance levels to break through before the SPX gets back to clear blue skies overhead.

SPX illustrates the two key price levels

In addition to the uncertainty that earnings season can bring, the primary reason why I am still leaning into a bullish move in the S&P 500 is the recent price action in the U.S. Dollar Index futures. The U.S. Dollar is scheduled to make its 3 year cycle low sometime this spring and the recent price action is indicative that the recent lows may not be the cycle lows. If the U.S. Dollar Index breaks down below recent lows, I would expect to see a nasty sell off.

The U.S. Dollar Index futures daily chart is shown below:

Whether readers believe that we are going to be in an inflationary environment or a deflationary environment is a topic for a different time, but the chart above is undeniable that recently the U.S. Dollar has declined in value and is exhibiting weak price action. Friday morning it looked as though the U.S. Dollar was going to rip higher, but by the end of the day sellers had stepped in and forced the U.S. Dollar into the red for the session. The price action on Friday highlighted the weakness in the U.S. Dollar and the high levels of overhead supply.

If the U.S. Dollar continues to weaken, in the short run I would view this as a positive for the S&P 500, crude oil, and precious metals. If the dollar breaks down to new lows, it should help buoy the S&P 500 and gold prices. Gold has been consolidating for nearly 6 months and a breakout higher from current price levels would make a trip to $1,500 an ounce very likely. I would not be surprised to see gold work even higher than $1,500 an ounce depending on how violent the selloff in the U.S. Dollar might be.

The weekly chart of gold futures is listed below:
I would think that most investors are aware that crude oil futures have been trading higher recently. On Friday oil prices climbed above recent resistance around the $107/barrel price level and reached new recent highs. Members that belong to my paid service enjoyed a relatively low risk options trade that we put on several weeks ago which involved selling cash secured naked puts on $USO. The trade was closed on Friday for a total gain of 85% of the premium that was sold. For long time readers, my stance on energy has been pretty obvious. In the longer term, energy prices almost have to go up as the world’s demand for energy increases while supplies remain flat.

I will likely get involved in another oil trade at some point in the future, but for right now I’m going to wait for a more prudent entry. Based on current price action, it would not surprise me to see crude oil futures test the $110 – $112 per barrel price range in the near future. If the $112/barrel price level is breached to the upside, a test of the $120/barrel price level will be likely.

The weekly chart of oil futures is listed below:

Weekend Trend Conclusion:
The S&P 500 is in an interesting place as far as the price action is concerned. With earnings season rapidly approaching and a possible break down in the U.S. Dollar Index likely, future price action is uncertain. I am leaning into the bullish camp at this point, but that could change rather quickly based on the price action later this week in both the S&P 500 and the U.S. Dollar Index. One thing worth mentioning is that if the U.S. Dollar Index were to bottom around these levels and a bounce higher transpired, it would put negative price pressure on most asset classes. The fact that price action in the U.S. Dollar Index has been weak lately makes me believe a break down is likely, but as most readers know Mr. Market offers few guarantees.

Assuming the U.S. Dollar breaks down, we should see the S&P 500, precious metals, and oil continue to work higher. My eyes are going to be watching the U.S. Dollar Index closely in coming days/weeks. If a breakdown transpires, the potential upside in precious metals and oil could be intense. Ultimately, I remain slightly bullish on stocks and extremely bullish on oil and precious metals. However, my entire thesis could change if the U.S. Dollar Index starts to firm up and begins to work higher. There are simply too many question marks surrounding price action to take on significant amounts of risk at this point in time.

Analysis & Opinions of:
J.W Jones – www.OptionsTradingSignals.com
Chris Vermeulen – www.TheGoldAndOilGuy.com ]]> http://thedailygold.com/the-u-s-dollars-impact-on-price-action-in-the-sp-500-gold-oil/feed/ 0 http://thedailygold.com/why-gold-and-gold-shares-have-consolidated-for-five-months/ http://thedailygold.com/why-gold-and-gold-shares-have-consolidated-for-five-months/#comments Fri, 25 Mar 2011 08:01:48 +0000 Jordan Roy-Byrne, CMT http://thedailygold.com/?p=6237 Yes Gold has been flirting with all-time highs. Sounds strong, right? Wrong. In reality, Gold has been in a consolidation or running correction since October of last year. In recent weeks Gold has flirted with all-time highs but hasn’t been able to achieve a sustained breakout. Meanwhile, as the chart shows, the gold stocks (GDX, GDXJ) have been in the same consolidation. Yesterday, as GDX and GDXJ neared resistance they were rebuked.

Don’t get me wrong. The price action in GDX and GDXJ is long-term bullish and seasonal analysis also favors a short-term bullish stance. That may not guarantee higher prices tomorrow or next week but it will be obvious six or twelve months from today. That being said, its important to understand why these markets have been in consolidation.

In Gold’s case, it doesn’t perform as well when conventional investments are strong. As soon as equities gained favor Gold lost some strength. Also, a weak dollar is usually more a catalyst for Commodities and not Gold. Gold tends to perform best when conventional markets are not rising.

As a result of the vertical rise in Silver, gold stocks have taken a backseat to silver stocks. However, there are some fundamental considerations here. We show two in the chart below. The first row is Gold in Canadian Dollar terms and the second is Oil. Since the February 2009 peak, the Canadian Gold price is up only 12% while the US Dollar Gold price is up roughly 40%. Gold is much higher than it was back in 2007-2008 but Oil has climbed steadily higher and is now at an all time high aside from a period of three months in 2008.

Remember that most mining companies are Canadian companies. The Canadian Gold price is more important than the US Dollar Gold price. Oil comprises 25% of the cost of mining.

This is why the inflation trade is not always positive for Gold. (Sometimes, as we see now, it is positive for Silver). Money moves into Commodities and equities and Gold underperforms. Some will worry about a peak in the stock market or a falling Oil price but these things will become catalysts for Gold and gold stocks.

What happened in 2010? We had a deflation/sovereign debt scare and most markets sold off materially. Yet, Gold hit a marginal new high in US Dollar terms, Silver held strong and the mining stocks also held up reasonably well.

Treasuries have already bottomed and that is a sign of a pause or correction in the inflation trade. Look for the stock market to peak shortly and the US Dollar to put in a bottom. This will scare out some weak hands but in reality it will set the stage for the next breakout in Gold and gold stocks (as it did in, among other years 2002, 2009 and 2010).

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com

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Based on the March 11st, 2011 Premium Update. Visit our archives for more gold & silver analysis.

Recent developments in precious metals space raise series of questions in terms of sustainability of yellow and white metal moves in the foreseeable future. In order to gauge near-term precious metal moves, investors track precious metals’ relationship between currency fluctuations, stock market influence and crude oil prices.  In this essay we would like to provide you with our thoughts regarding crude oil.

In fact, several Subscribers have recently asked us to comment on the relationship, if any, between the prices of crude oil and gold and silver’s price, so here we are. Charts are courtesy of http://stockcharts.com.

The above chart shows the price movements for all three over the past five years and a close inspection seems to indicate that there are no conclusive patterns which will contribute in any way to market timing signals.

Oil, silver and gold are of course all commodities. Generally, bull markets are often seen across numerous commodity sectors simultaneously and it’s therefore not surprising to see these three in uptrends at the same time. Please note that tops in oil correspond to tops, bottoms and sideways price movements in gold and silver. Bottoms in oil also correspond to tops, bottoms, and sideways price movements in gold. Consequently, a local top or bottom in oil does not necessarily have any short-term implications for Gold and Silver Speculators.

Let’s take a closer look at the gold:oil ratio.

The above chart does not provide any information which seems to be useful in predicting gold’s future price performance.

Declines in the ratio – such as the one that we’ve seen recently – mostly correspond to higher gold prices without any specific details. However, since gold is in a strong bull market, then even random events would correspond to higher gold prices on average. Consequently, there’s nothing about the ratio that would make us use it as a trading tool and we do not feel that this ratio is one which should be monitored on a daily basis.

We’ve checked the silver to oil ratio as well.

In the silver / oil price ratio, there is little seen here as well, but we do note the formation of a cup-and-handle pattern. If this bullish pattern further develops and silver breaks out of it, much higher silver prices could be seen. Still, this formation is a long-term one, which means that the bullish implications are also long-term. Silver is however already in a very strong bull market, so this is nothing new.

Summing up, crude oil, gold and silver are all indispensible commodities, but that doesn’t necessarily mean that there has to be a significant timing-related link between them. In this case, it seems that gold:oil and silver:oil ratios are not really worth being followed on a daily basis. If you are interested in learning more about gold and crude oil from the long-term perspective, be sure to read our previous essay entitled Gold and Crude Oil. Should You Be Afraid?

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, we urge you to sign up for our free e-mail list. Sign up for our gold & silver mailing list today and you’ll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It’s free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski
Editor
www.SunshineProfits.com


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Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

Sunshine Profits provides professional support for

Gold & Silver Investors and Traders.
Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Gold and Silver Commentaries, Tools, and Charts. Naturally, you may browse the sample version and easily sign-up for a free weekly trial to see if the Premium Service meets your expectations.

All essays, research and information found above represent analyses and opinions of Mr. Radomski 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, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

By reading Mr. Radomski’s essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, 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.

Mounting social and political unrest in the Middle East boosted appeal for commodities as a safe investment option in recent weeks. Crude oil topped $100 a barrel and near month gold and silver futures traded above $1440 and $35 respectively, in the NYMEX.  Besides geopolitical developments, currency fluctuations and stock markets influenced precious metals.
Ongoing interest in precious metals induces positive trend in gold and silver mining stocks. After all, gold and silver stocks move in tune with gold and silver. No wonder – generally, gold mining companies’ business is to produce gold and sell it. As long as they don’t hedge their entire production, their revenues are based on the price of gold. Higher price of gold means higher revenues, which means higher profits, which means higher stock prices. At times mining stocks lag and at times they lead the underlying metals, so analyzing them is an important addition to the regular analysis of gold and silver prices.
Let’s have a detailed overview on what is happening in gold and silver mining stocks space. Without delay any longer, let’s turn to this week’s technical part with gold and silver mining stocks. We will start with the long-term XAU Index chart (charts courtesy by http://stockcharts.com.)

The XAU Index is a proxy for gold and silver mining stocks. Last week’s comment that “This week we continue to see a fight for new highs” here continues to hold for this week.
On a short-term basis, we have seen these 2008 levels surpassed, but here in the XAU Index chart, we are looking at major long-term moves. The use of monthly candlesticks, a valid charting tool for very-long term analysis, shows that values are only slightly above 2008 highs and a more significant move should be seen here before we state that such a breakout is definitely in. Therefore, we describe the trend as slightly bullish.

In our previous essay entitled Top in Stocks and Silver? we wrote that the head-and-shoulders pattern which was under development last week has nearly been invalidated. This would of course be a bullish development.
We now see that the head-and-shoulders pattern has been clearly invalidated with index levels remaining above the level of 2008 and 2010 highs. Consequently, the risk of a move down to the 400-450 level appears to be very low at this point. RSI levels based on the Gold Bugs Index are not above 70 and therefore not overbought. There is some room to the upside in the RSI here so a continuation of the current rally is possible and – based on other factors – likely.

In the short-term GDX ETF chart (again, a proxy for gold & silver mining stocks), analysis of volume is our general focus point. Thursday’s decline in ETF levels can be termed insignificant because it was not accompanied by an increase in volume.
As was the case with the HUI Index, the RSI for the GDX ETF is also below overbought levels. This appears to provide some support for the validity of 2010 highs as target levels although they have not yet been reached.
No support levels have been breached and index levels are closest to the short-term rising support line. This grey-dashed line in our chart has been touched on an intra-day basis but a move higher followed. The outlook remains bullish.
Now let’s turn towards GDX:SPY chart.

The chart provides barely any changes since the previous week, which by itself is somewhat bullish. In 25th February premium commentary, we wrote the following:
The GDX:SPY ratio chart is often used to reveal a sell signal. In other words, we usually see a spike high volume in the ration close to a local top. Such action would be attributed to the volume in mining stocks being high compared to other stocks.
We have not seen such a signal here this week and we have included this chart for this reason. Mining stock volume levels have not been high compared to volume accompanying moves in other stocks and consequently the volume ratio has not spiked.
This lack of bearish signal is additional information in favor of a rally in mining stocks although perhaps a few days pause may be seen first. The important point is that a rally is clearly more probable than a downturn based on the price and volume action seen in this chart.
Again, a single spike in volume here, especially if combined with a resistance level in the ratio and a supporting RSI would be a strong sell signal. This has not been seen recently and the critical bearish signals have not been seen lately.
Overall, gold and silver mining stocks seem ready to move higher from here. Thursday’s decline was insignificant and analysis of recent trends continues to point to a bullish outlook.
The implication here is that it is possible that Thursday’s decline may have been, in fact, the last local intra-day bottom rather than the beginning of a decline. Consequently, a rally could be seen from here. We will follow this closely and report to you should any of these assumptions be invalidated.
Summing up, declines in gold and silver stocks were barely visible and have not yet been confirmed. Consequently the outlook remains bullish for gold, silver and precious metals mining stocks. The question is for how long. If you’ve been considering using professional services to help you in your gold & silver investments, this might be a good time to go for it.
To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, we urge you to sign up for our free e-mail list. Sign up for our gold & silver mailing list today and you’ll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It’s free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski
Editor
www.SunshineProfits.com


* * * * *
Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

Sunshine Profits provides professional support for

Gold & Silver Investors and Traders.
Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Gold and Silver Commentaries, Tools, and Charts. Naturally, you may browse the sample version and easily sign-up for a free weekly trial to see if the Premium Service meets your expectations.

All essays, research and information found above represent analyses and opinions of Mr. Radomski 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, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

By reading Mr. Radomski’s essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, 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.

Some financial commentators have picked up on the fact that the dollar has failed to get a safe haven bid so far during the turmoil in the Middle East. This isn’t normal, especially considering the problems one of the main alternatives to the dollar, the Euro, has had over the past year or so. The dollar was the recipient of two separate flights to safety over the last 3 years, one during the financial crisis in 2008, and one during the Euro crisis in 2010. But since peaking in 2010 the dollar has steadily trended lower, even during the current crisis in the Middle East.

The chart below takes a long term look at the dollar, and shows the last major downleg from late 2005 to early 2008. Notice how the current chart pattern in the dollar is similar to the rounded top the dollar formed in 2006, before breaking down into Part 2 of the downleg. The dollar is also currently declining below a falling 30-week moving average, just like it was in 2006 before it broke the support line and started to accelerate its trend lower.

During Part 1 of the last major dollar downleg, from November 2005 to November 2006, the broad market including the S&P 500 and Nasdaq went higher along with commodities, gold, and oil. Clearly all asset classes, including stocks, were benefiting from the decline in the dollar.

The same thing has happened so far during the current dollar downleg from the June 2010 high.  The major indexes are up strongly along with commodities, gold, and oil.

During Part 2 of the last major dollar downleg, from November 2006 to March 2008,  the major indexes actually fell while the dollar lost 15% of its value.  This was in part due to the financial sector topping in early 2007, but is still a dismal performance when combined with the value lost in the dollar.  Commodities on the other hand, and more specifically gold and oil, performed exceptionally well and handily made up for the value lost in the dollar.

The outperformance by gold and oil over general commodities in Part 2 of the last major dollar downleg can also be seen in the next two ratio charts comparing gold and oil to the commodities index.  Notice that oil initially underperformed commodities during Part 1 of the downleg but came roaring back and outperformed dramatically in Part 2.

In the current dollar downleg so far, both gold and oil have underperformed general commodities and are also coming off of 2-year lows against commodities.

Given the undervaluation of gold and oil against commodities currently, they could easily switch gears and outperform commodities if the dollar breaks support and continues to trend lower.

Source: Gold and Oil Should Outperform as the Dollar Continues to Fall

I will never make the mistake of assuming the world follows a linear path. I have always said that the major risks are to the downside, whether it be civil unrest, war, or a bond default. We live in a dynamic world that people just don’t understand. One second the world seems to be at ease, the next second civil unrest breaks out  all over the Middle East and Africa. One second stocks can’t possibly go down, the next second stocks retrace weeks of gains in 2 days. One second gold is a “barbaric relic”, the next second people are buying at any price. This is just the way the world works. Understand that when U.S. government bonds suffer systematic failure, it will seemingly come out of nowhere.

Gold

It was only a week ago that the mainstream was saying that people were fleeing gold because of an economic recovery. Oh how quickly they change their tunes. Gold is still in a bull market. No matter what the pundits say, the price action in gold is far from bubble-like.

Gold is hovering above its moving averages and is close to testing its all time highs at $1430. I will be watching this level very closely. On a breakout I will be a buyer. Some people may wonder why I just don’t buy now instead of waiting. My thought process is that a breakout from long-term resistance is very bullish and implies much higher prices. However, a failure to break out above $1430 could portend considerable weakness. Buying a breakout is a higher probability trade. I may lose out on some gains, but I also protect myself from more substantial losses.

Stocks

Events in the Middle East may have been the catalyst, but stocks were long overdue for a correction. I’ve always felt that stocks needed to correct a good 10-20% before resuming their bull market. A 10% correction would bring us to about the 1st retracement level from the July lows. If stocks were to fall this low, I would be very tempted to add. While dividend yields are not as attractive relative to bonds as they were last year, a healthy correction will turn the tides in favor of stocks.

Crude Oil

Crude oil was trending upward steadily until the recent events in the Middle East. $100 is the key level here. If it can hold as support, then the outlook for oil will be very bullish. Let’s not forget how $100+ oil will affect Americans at the gas pump. I personally think $4 gas nationwide is coming again this summer. Discretionary spending is going to take a big hit as will GDP growth.

We live in a very interconnected world. The effects of policies in the U.S. are felt abroad and vice versa. If instability persists in the Middle East, Americans will feel it at the gas pump. This will only fan the flames of growing civil unrest in the U.S. When protests really start picking up in America, you won’t be hearing nonsense about America’s “fight for democracy.” This explanation of  events in the Arab world is  somewhat baffling.  The U.S. has had its hand in Middle Eastern and Arab politics for a long time, and for Obama to get behind the move towards democracy (or military dictatorship if you want to get technical) in Egypt is something out of the Twilight Zone.  People  need to realize that the unfolding events are mostly about economics.

Baby Boomers have not saved for retirement. Home prices (aka piggy banks for Boomers) are falling. Taxes are rising. Pensions are underfunded. Social Security payment increases are linked to the manipulated CPI, so Boomers are getting screwed and they know it. Younger generations of Americans are perturbed that they have to pay for the profligacy of prior generations. The government has its head in the sand and their solution to this debt crisis is to get into more debt. Pure genius!

There will be civil unrest in America that will make what’s happening in Wisconsin look minor in comparison. Municipalities will start going bust and you will hear the word “bankruptcy” a lot. Gold is going to make $100 moves in a day. U.S. government bonds will be as safe as AAA-rated mortgage-backed securities were. Most of the population will be shocked as they always are when things outside their narrow perspective of the world occurs. The world is going to be a much different place in the next 5-10 years. Out of the pain will come renewed awareness and economic prosperity, but we must first pay the piper. That day is approaching very quickly.

Source: http://expectedreturnsblog.com/civil-unrest-moving-markets/