This essay is based on the Premium Update posted on June 18th, 2010

In our previous essay we have mentioned that it does not seem that the ultimate top for this gold rally is behind us. Consequently, this week we would like to provide more information on what may influence various segments of the precious metals market, and what you can do about it.

When speaking about any money-related topic it is always useful to back up one’s arguments with numbers, and influence is no exception here. While correlation alone does not imply causation (meaning that the fact that something is correlated with something else doesn’t automatically mean that one of them influences the other, but the analysis of correlation coefficients for the precious metals stocks market is still important, because we often know more about the shape of the relation from other sources. For instance, we know that gold mining companies’ profits (and thus their stock prices, and the HUI Index) depends on the price of gold, not the other way around.

Having said that, let’s take a look at our correlation matrix:

Two factors are worthy of notation in the correlation matrix this week. First, there has been a significant decline in the coefficient for Gold and USD. Previously, both were rallying and there was a relatively high positive correlation between them. In the past two weeks or so, this has changed. Whereas gold has continued its upward movement, the USD has declined slightly. At this point – since gold moved higher in the past weeks – this number further supports the strength of gold and the validity of its rally. The yellow metal has strong momentum and is likely to maintain its rally in spite of where stocks and currencies go.

The second observation we wish to make this week with respect to our correlation matrix is the positive relationship seen between the general stock market and silver / mining stocks. The 30-day coefficients are both above 0.7, which means that the correlation is strong.

Mining stocks and silver are currently driven, to a comparable extent, by the general stock market and gold. It follows that trouble for the general stock market can clearly spell trouble for the mining stocks. At the same time the value of the correlation coefficient between gold and stocks is lower – about 0.4, which suggests that any trouble on the general stock market are likely to hit gold in a much smaller way than it would be the case with silver and mining stocks.

Therefore, if the main stock indices would be likely to move much lower, then it could be a good idea to stay out of silver and mining stocks. In fact, we have been steering our Subscribers away from mining stocks and silver for some time now. Gold emerged as the clear choice a couple of weeks ago when considering risk and reward ratios and this is still the case today.

Since the situation on the general stock market is so important right now, let’s take a closer look on the long-term SPY ETF chart (charts courtesy by http://stockcharts.com.)

On this week’s long-term general stock market chart we see that the lower resistance line has been surpassed with an upward move. The shape of the current chart and the volume patterns as well seem to indicate that we could be seeing the formation of the familiar head-and-shoulders pattern. This is a crucial development if it comes to pass. This would be a strong, bearish indicator for the general stock market and for silver and mining stocks as well. We will continue to monitor this daily and advise our Subscribers accordingly as this becomes more clear in the days ahead.

Here is a brief synopsis of what we will be looking for. If the main stock indices move to levels seen early in 2010, in the range of 114-115 and then decline, this will confirm the formation of the pattern and declining volume along with higher prices will indeed spell trouble. The next confirmation would be to see the volume increase along with lower prices after they reach the 114-115 area.

The range of the future downturn can be estimated by the size of the head or top of the pattern, which also corresponds to the 50% retracement of the 2009-2010 rally – around the 94 level in the SPY ETF. So although at first glance some may be inclined towards bullish sentiment in reaction to recent moves, this is not really warranted at this point in time.

Taking into account the comments made previously – that the general stock market is very likely to rally in the third year of the Presidential Cycle we end up with the conclusion that the main stock indices may begin to decline in the next few weeks, and move lower throughout the summer only to move up again in the final part of the year.

On the short-term chart, we see a close approximation to the 61.8% Fibonacci retracement level as a resistance close to the January high, thus making this resistance level stronger. Although we may see slight increases in the coming days, it does not appear that this will be the likely case in the month ahead. Further confirmation of this can be seen on the next chart.

On the Broker-Dealer Index chart, note that the upward move today in the general stock market did not keep the financial sector from declining. Conversely, it moved to its previous support level, and decline afterwards thus further verifying it as a resistance. This is a bearish sign indicating that declines in the general stock market are quite likely from here, but not necessarily right away.

Summing up, the situation in the general stock market may look bullish at first glance. Taking a broad perspective into account and analyzing multiple factors, it appears that the formation of a head-and-shoulders pattern may be in progress. If the head-and-shoulders pattern does indeed complete, there may be an inclination to sell long-term investments in silver and mining stocks. This is not yet the case, nor is it advised at this time. However, this is a possible development over the next few weeks.

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, I urge you to sign up for my free e-mail list. Sign up 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 precious metals Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-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.

This essay is based on the Premium Update posted on June 18th, 2010

Back in early 2000, during the euphoria of what later became known as the Dot.Com Bubble, one well-known professional investor stuck his neck out and predicted the bursting of that bubble. Jeremy Grantham was a bit early and was willing to give up millions in fees from customers who fled his fund transferring their money to managers who promised the party would never end.  In 2000 Grantham predicted stocks would lose 3.9% per year annualized for the next 10 years and he was proven right.

Given his prescient calls, we like to pay attention when Grantham publishes his famous quarterly newsletters, which have appeared since 1999. The publications represent his personal views on the stock market. Although he doesn’t write specifically about gold, concentrating more on equities, the various asset classes are all inter-related and as gold investors it behooves us to consider all aspects of the economy. Grantham, co-founder and chief investment strategist of Boston-based GMO has recently published the spring edition of his quarterly newsletter entitled “Playing with Fire (A Possible Race to the Old Highs)”.

Grantham is predicting the opposite of what he said in 2000. When the NASDAQ was at 5,000 he said sell. Now with the NASDAQ at about 2,307 he’s saying buy.

Grantham is far from euphoric—don’t forget that in the title of his missive are the words “playing with fire.’ He says the massive bailout program stopped the meltdown of the financial system and engineered at least a temporary economic recovery. The obvious cost of this bailout is well known– deterioration of the Federal balance sheet.

Grantham explains why he believes the rally will run through next fall.

“In October we enter the third year of the Presidential Cycle, the year every Fed except, of course, Volcker’s, helped the incumbent administrations get re-elected. Since 1932, there has never been a serious decline in Year 3. Never! Even the unexpected Korean War caused only a 2% decline. Even when Greenspan ran amok and over-stimulated the first two years instead of cooling the system down – which he did twice, having not suffered enough the first time – he stimulated Year 3 as well. The result was that we entered Year 3 in October 1998 and Year 3 in October 2006 with horribly overpriced markets, and still the market went up, and by a lot.”

So far since 1932 the market has had 19 tries to go down in the third year and has never pulled it off, he says.

Grantham believes that the market will move in the next 18 months or so back to the old highs, say, 1500 to 1600 on the S&P, accompanied by an equivalent gain in most risk measures, followed once again by a very dangerous break.  If the break comes rates will still be low and thus difficult to use as a way to jump-start the economy.  The financial system will still be fragile, and the country’s piggybank will be more or less empty.

“We are definitely playing with fire and need some luck.”

Another veteran global investor, Mohamed El-Erian, who runs Pimco and has lived through several financial crises, also recently issued a report to his investors. He described the new, dangerous state of today’s global economy like this: “The world is on a journey to an unstable destination, through unfamiliar territory, on an uneven road and, critically, having already used its spare tire.”

The U.S. used its spare tire to prevent a collapse of the banking system and to stimulate the economy after the subprime market crash. The European Union used its spare tire to help save the euro due to the meltdown in Greece. Having used up its spare tires, it seems to us that the world could probably not cope well with any new crisis.

Another financial heavyweight and famed contrarian, Marc Faber, gave a talk recently at the leading Austrian economic think tank, the Ludwig von Mises Institute. The publisher of the “Gloom, Boom and Doom Report” gave his perspective on the financial crisis and his bleak outlook for the future.

Faber said that contrary to what the “talking heads” are saying, markets are not out of control. It is the central banks that are out of control printing money. As a result, Americans must re-think what constitutes a safe asset. Traditionally ranked from most to least safe are the following assets: cash, Treasuries, corporate bonds, equities, commodities. However, since the Federal Reserve will keep interest rates at zero, cash and long term bonds will be a bad place to hold one’s money and equities will also be a risky proposition given the effects of rampant currency depreciation, he says. According to Faber, precious metals are the best place for wealth preservation. In an environment of money-printing and high volatility physical gold is the best thing to own.

Faber says the fiscal situation is much worse than it is made out to be. U.S. government leaders will try to postpone the hour of truth, pushing the problems off for future Presidents and Congressmen.

David Einhorn, president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time” doesn’t think it will take that long for the hour of truth to arrive. In a recent New York Times opinion piece “Easy Money Hard Truths” Einhorn wrote:

Before this recession it appeared that absent action, the government’s long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation — not our grandchildren’s — will have to deal with the consequences.

Einhorn points out that it was once unthinkable that triple A, “risk-free” institutions could fail.

Our government leaders are faced with the same risk today. At what level of government debt and future commitments does government default go from being unthinkable to inevitable, and how does our government think about that risk?

The current European sovereign debt turmoil is a prequel to what might happen in the U.S., he says.

I don’t believe a United States debt default is inevitable. On the other hand, I don’t see the political will to steer the country away from crisis. If we wait until the markets force action, as they have in Greece, we might find ourselves negotiating austerity programs with foreign creditors…Though we don’t know what’s going to happen next, the good news for our grandchildren is that we will have to face our own debts. If we realize that our own future is at risk, we might be more serious about changing course.

Before moving on to the technical part of this week’s update, we would like to comment on one the questions that we’ve received this week:

The question is if with existing homes sales number looking like a decline does this generally make the price of gold go down or up.

Generally, the average real estate prices don’t change quickly – the price line is rather smooth (please take a look at the real-estate-related charts in the Gold Fundamentals essay for details.) Therefore, whatever the influence of this tendency would be on the gold market, it is very likely that this effect is already discounted in the price. Consequently, if gold market was able to rally significantly during the past years along with declining real estate values, we expect this trend to continue.

To see if our own future as precious metals investors is at risk, let’s begin this week’s technical part with the analysis of the long-term gold chart (charts courtesy by http://stockcharts.com.)

The weekly gold prices right now are above the previous high weekly close. This means that if gold does not decline on Friday (and we don’t expect it to decline), the weekly close this week would be the highest ever in nominal terms.

There is a short-term resistance line slightly above were we are today. This is the only negative factor that can be seen at this time, so its impact is limited. The RSI and stochastic indicators both point toward gold moving higher before its next top is in. The stochastic indicator level is not yet above 80, which is typical for a local high. The RSI is not close to its normal market top levels either.

Moreover, seasonal tendencies for gold point towards more strength in the coming days, as the mid-June bottom appears to be behind us.

Please take a look at the following charts for details (please note that we’ve assumed gold beginning the July slightly above $1,255 – this is not our official prediction for this date, we’ve put this number there to provide you with “real” size of the upswing instead of the percentage one):

Based on the seasonal tendency patterns, the expected trend is to rally to the end of the month, consolidate at the very end of the month and in early July, and rally around the second week of July with the possible top forming in mid-July or so. This would perfectly fit into our target forecast (detailed target is available for Subscribers). We would see gold move to or above the rising support level formed with December and May tops, take a breather, and then move higher once again. The top could form in mid-July and it could be followed by a regular summer consolidation. This is the most probable scenario based on the signs we have available today.

The final chart this week will be the one featuring the GDX:SPY ratio, because of its usefulness in timing tops. Since we have seen a strong rally to previous highs the question is if this is the top or not?

Based on the analysis of other charts we inferred that gold is likely to move even higher before topping out, but a confirmation is always useful, and the GDX:SPY ratio provides us with one. It flashes a “sell” signal when it moves on a huge volume, especially when the ratio encounters a resistance level. None of the above has been the case recently. Therefore, the above chart does not suggest that any tops are imminent.

Summing up, based on the information that we have available today, it does not seem that the ultimate top for this gold rally is behind us. Naturally, we may need to revisit this view if we see new developments on the market, but at this point, we remain bullish on the yellow metal.

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, I urge you to sign up for my free e-mail list. Sign up 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 precious metals Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-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.

This essay is based on the Premium Update posted on June 11th, 2010

One of the questions that we’ve received last week was about the possible non-confirmation between gold at new highs and both silver and stocks lagging well beneath their old highs. The question is if such a non-confirmation becomes a source of worry at some point, since these three sectors traditionally move together.

The answer is the one that every economist likes to give when being asked just about any question – it depends. In the long run fundamentals drive prices of assets and the precious metal market is not an exception from this rule. As long as fundamentals are in place, the bull market in the precious metals will continue. There are several signs (as featured in the “Top or Not?” list in the Tools section on our website) that will tell us that this is indeed the ultimate top – we don’t see them yet.

The declining general stock market may continue to put a negative pressure for mining stocks and (especially) silver until we get to the final stage of the bull market (actually, we expect high rates of return even from stocks that don’t mine gold nor silver, but that are just named “golden something” or “silver something”.) In case of silver, we might also see sharply higher values in case of a problem with delivery of silver on COMEX. However, until either of them takes place, we might continue too see underperformance of these two parts of the precious metals market if the world stock indices move lower.

In case of silver, we don’t think it would invalidate its final rally or make it anything less than breathtaking, but it could certainly delay it. In a way, lower values of the main stock indices are good for long term silver investors, because they would allow to buy as much silver as possible at relatively low prices before the silver market takes off.

As for the mining stocks, the situation is quite different, as they are not that likely to outperform metals during the final stage of the rally. However, in case of gold and silver stocks, the history suggests that the positive correlation with the general stock market is likely to wear off sooner or later. Please note that from 2001 to 2003 gold stocks managed not only to rise, but also to outperform gold along with declining stock market.

Therefore, the disproportion between gold’s performance and the one of silver and mining stocks does not change the fundamental situation for the whole precious metals market, and consequently, does not make us concerned, as there is a good explanation behind it in the form of declining stock market.

There’s one more thing that we would like to comment on in this essay, as we’ve been also asked about the final stage of the rally, and what would be the use of the having massive gains on one’s mining stocks, if they would be priced in the U.S. Dollar that could be worthless at that time. That is true that the final stage of the bull market in the precious metals market could correspond to a financial instability to say politely, but fortunately we are in this market to maximize our chances of even increasing our wealth during these difficult times.

Let’s split the above question into two separate matters. The first one is “how do I know that I won’t lose everything I have if the U.S. Dollar collapses overnight” and the second one would be about the gains in mining stocks when the U.S. Dollar is worthless.

The first question is all about owning physical metals. If you own physical metals, keep them in a safe place, or even better it is spread among several “safe places”, it seems that you could sleep well at night. If the USD collapsed overnight, the increase in the value of the precious metals holdings would be so massive that just a 10% in gold/silver should more than make up for the losses in your “paper wealth.” So, by following the rules listed in the Key Principles section you would have about 20%-25% of your portfolio in physical metals and an overnight dollar collapse could in fact massively increase your wealth. Therefore, you’re protected at all times.

The second question is about protecting one’s profits in mining stocks or from other speculative vehicles. Generally, it does not need to overly concern you either, because – as mentioned above – mining stocks are not likely to outperform metals during the final stage of the bull market. Therefore, we will strive to detect when it is not likely that mining stocks’ outperformance will not return soon, and we will suggest switching directly to metals, just like we are now suggesting owning gold instead of silver and mining stocks (of course this is because of the short-term uncertainty regarding the last two markets, not because we believe that the bull market is close to being over.)

This is not recommended for most Investors, because could decrease one’s profitability, but if you are particularly afraid that you could lose your speculative capital because of the death of the U.S. Dollar, you might want to put 10-90% of your profits from each trade (depend on how afraid you are) in mining stocks directly to physical gold or silver. In this way you will be sure that the relative amount of physical metals in your possession is constantly rising, and at the same time the amount of “paper wealth” at risk (here: stocks) decreases. Again, the price here is limiting your exposure to profits from speculation on mining stocks, so it’s a trade-off.

Summing up, the long-term direction in which the precious metals is likely to go is still up, and if you prepare yourself accordingly, you should be able to preserve your wealth, and probably even increase it, even if the current financial system would cease to exist in the current form. Meanwhile it might be a good idea to earn money along the way by trading gold, silver and mining stocks.

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, I urge you to sign up for my free e-mail list. Sign up 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 precious metals Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-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.

This essay is based on the Premium Update posted on June 11st, 2010

In our previous essay we have emphasized the importance of the analysis of the Euro Index, while evaluating recent performance of gold. We have also featured a gold chart that included a resistance level which gold has just approached. Since that was the case, you might be wondering if the final top is in or not. Consequently, this essay is going to feature the updated version of the previous gold chart (charts courtesy by http://stockcharts.com), with an additional important factor – areas marked on the below chart with blue ellipses.

Please note how the recent local tops for gold coincide with the stochastic indicator above the 80 level. In other words, in the previous 18 months there was no significant top that was not heralded by Stochastic trading visibly above the 80 level. Today we do not see an extended (more than a few days) above the 80 level, which indicates an additional rally period is likely before the top is reached. It seems that the first thing to take place is the Stochastic indicator moving visibly above 80 and the rally then runs out of steam.

Consequently, based on this single factor, gold does not appear to have topped at this point. Let’s take a look at the HUI Index for more details.

This week’s HUI mining stocks chart is basically unchanged since the last week. Although it had appeared to be the case until about two weeks ago, there are virtually no similarities with recent trends and that which was seen in the November 2009 when a strong rally took hold and lasted for several weeks. The lack of strength in the mining stocks could mean that the rally in gold does not have much further to go from here.

There’s one more thing that we would like to comment on this week before moving on to the short-term chart analysis. One of the messages that we’ve received recently included a question about the possibility of existence of the cup-and-handle formation with the cup being formed between Dec 2009 and May 2010. The implications of this would be bullish, because it would mean that we are right now in the “handle” stage, which – when completed – marks a beginning of a strong rally. This situation is even more visible on the short-term GDX ETF chart below.

Generally, we don’t consider this to be the cup-and-handle pattern because of two important reasons. First of them is the shape of what would be perceived as “cup”. It should be almost ideally U-shaped, and as we see the bottom was quite sharp. The second – and the key one here – is the non-confirmation form the volume. The corresponding volume should also be U-shaped, which means that the bottom of the cup should have been formed on the lowest volume in the Dec 2009 – May 2010 time-frame. The reality is that the bottom took place on huge volume, which is exactly the opposite of what one would expect from the “cup” pattern.

So, the HUI Index chart does not provide us with clear medium-term bullish signals at this point.

A closer inspection of the above chart shows a slightly higher volume daily decline followed by a lower volume rise on a recent trading day. This is normally a bearish sign but may also simply be attributed to consolidation.

Although a slight increase may be seen for the precious metal sector soon, this will likely be offset by any downward movement in the general stock market. This negative influence could more than negate any minor rally for precious metals. However, when the general stock market bottoms out, the negative correlation of the PM sectors could possibly result in a huge catch up rally for silver and mining stocks. This may mean a smaller decline instead of a bigger rally, but it’s too early to say at this point.

At this writing, gold and silver stocks continue to be slightly positively correlated with the general stock market. The situation on the latter is slightly bearish, and at the same time we have bullish signals from gold.

Another confirmation comes from the analysis of the GDX:SPY ratio.

The GDX:SPY helps us to analyze the precious metals stocks‘ performance relative to the general stock market. The ratio in the above chart actually provides us with top calls, which is another word for sell signals for the whole precious metals market.

Ideally, the volume would reach exceptionally high levels (resistance level) and some kind of resistance would be encountered, thus forming the top also in this particular ratio. Recently, however, neither is yet the case.  We have not seen high volume levels and we are presently close to the month-to-month 0.5 support level. This means that when this level is reached one share of the SPY ETF is equal to two shares GDX. When gold and silver stocks are this high – relative to other stocks, it used to be advisable to get out of the market as the top was very close.

Still, we have not seen the ratio reach the 0.5 level yet, and it did not provide us with a sell signal in the form of very high volume. Therefore, the analysis of the GDX:SPY ratio suggests that the final top has not yet been reached for the precious metals sector

Summing up, due to numerous unclear signals and lack of clarity with respect to the general stock market (slightly bearish sentiment), we conclude that the risk/reward ratio for mining stocks is not favorable enough to enter speculative trades at this point.

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, I urge you to sign up for my free e-mail list. Sign up 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 precious metals Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-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.

This essay is based on the Premium Update posted on June 8th, 2010

Markets are skittish and the pace and force of financial crises has taken a frightening turn for the worse. It seems like the fuse gets shorter between each crisis. We barely catch our breath from one when confronted with the next. Looking back three decades a crisis had taken place, on average, every three years. But now, a scant 18 months after the 2008 meltdown, Europe’s Greek sovereign debt crisis hit with full, fulminating force. One crisis begets another and it seems like the world’s economy is on a treacherous bumper-to- bumper course where any misstatement from politicians can cause a multiple car pile up. Still, the fact worth keeping in mind is that the main stock indices lead, not follow the main economic indicators, such as the GDP growth.

Therefore, when one reads something about the unemployment, GDP, import/export dynamics etc., in the vast majority of cases this information is something that is already factored into prices. Let’s just say that the realistic assumption here is that the institutional investors / specialists have better access to information / research teams. At the same time they usually control large amounts of capital and their investment decisions can influence the value of the stock indices. So, if these investors’ research suggests that the economic statistics are going to be grim in the future, they are likely to sell stocks right away, before everyone else gets the same information – without waiting for the official numbers to be released. Consequently, prices of stocks are to lead economic statistics.

Naturally, a move in either direction might accelerate after a particular piece of news is released, but the overall trend will most likely be in place much before that.

Moving back to gold – more and more often we hear talk of investors searching for “Safe Haven,” as if it’s a quest for a Holy Grail.

Take a look at these recent headlines:

· “Bullion Sales Hit Record in Stampede to Safety.” (Financial Times)

· “Gold is Safe Haven for Looming Crash.” (Seeking Alpha)

· “Gold Ticks Higher On Safe Haven Buying.” (AP)

· “Gold Rush: This is a new round of safe haven buying.” (Bloomberg)

Safe haven is defined as a currency, stock or commodity favored by investors in times of crisis because of its stability and/or easy liquidation. Gold is a universally recognized currency carrying no counterpart risk, easily portable and unlike fiat currencies, it is nobody else’s liability. Early civilizations equated gold with gods and kings, and gold was sought in their name and dedicated to their glorification. Humans almost intuitively place a high value on gold, equating it with power, beauty, and the cultural elite. And since gold is widely distributed all over the globe, we find this same thinking about gold prevalent throughout ancient and modern civilizations.

Sometimes safe haven is mentioned in connection to gold, other times U.S. treasuries and the Japanese Yen. Last month when financial markets plunged in “flash crash” mode, there was talk of capital flight from countries like Germany and Britain to perceived safe havens like Switzerland. Across the globe, investors fled from risky currencies, bonds and stocks to gold, the dollar, the Japanese yen and U.S. bonds.

In mid-May with intense pressure on the euro, we witnessed panicking German dealers and banks desperate to get their hands on Krugerrands, the world’s most popular gold coin. At the Rand refinery in South Africa, the phone did not stop ringing all that week and people were buying gold coins like crazy.  The Austrian Mint, which produces the popular Philharmonic gold coin, sold more gold in the two weeks from April 26 than in the entire first quarter of the year because of soaring European demand. Still, when the general stock market decline, gold used to move lower in the past years.

There are two reasons why gold has retreated on each of these occasions. The first, gold, as a part of some commodity indices, is automatically subject to liquidation along with the others. The second, gold is sold in order to raise cash or meet margin calls from other sectors. Once nervous investors and distress sellers had been flushed out of the market, sentiment towards gold returned in most of the major crises as well as its status as a safe haven. Still, as mentioned in the previous Premium Update, this might not be the case in the near future, as investors would realize that any declines in gold caused by plunge on the general stock market are only temporary. So far gold’s performance confirms this theory.

Throughout history and in all civilizations gold has been valued and cherished. It has offered security in times of political or economic crisis. In extreme situations a few gold coins hidden in a coat lining could mean the difference between life and death. Gold is almost indestructible and does not corrode or rust. The amount available changes slowly and the quantity of newly-mined gold added each year is a small proportion of the existing inventory.

Gold has been a “reserve currency” and a safe haven for thousands of years, and those who understand history know that it will always remain one.

To see what history will say about the gold price this week let’s begin this week’s technical part with the analysis of the Euro (charts courtesy by http://stockcharts.com.)

In the Premium Update published on May 21st, we identified two strong support levels that the euro was approaching (marked with red circles on the above chart.). Since that time we have seen the euro move lower after having paused briefly. Right now, the euro is declining towards the lower support area at the level corresponding to its 2005 low as well as its mid-2003 high. Additionally, the lower border of the multi-year trading channel is marked by the declining dotted line on the above chart.

These two border levels cross right at the area marked with the red circle. Also significant is the level of the Fibonacci 61.8% retracement level obtained from the euro’s 2000-2008 rally. The euro is not likely to fall much further from here. We have illustrated its probable bottom with the red circle, and we believe that there is about 90% probability that the euro would not move below the Fibonacci 61.8% level.

Therefore, it appears gold is driven by the downward movement in the Euro Index. As the euro declines, gold’s price increases, because – as mentioned earlier in this update – we see significant demand from European Investors. Speaking of gold, let’s take a look at the long term GLD chart.

In the recent Market Alert, we discussed how the self-similar pattern, which we’ve referred to in recent updates, is no longer reliable. It served us guidance for a few months, greatly improving the accuracy of the analysis, but it does not seem to be much useful any longer. Generally, there is a trade-off between particular pattern’s reliability, accuracy, and the time that it is valid. The self-similar pattern was really something outstanding because it provided all of the above benefits for a relatively long time. The reality is that each and every pattern has to end and that self-similar pattern could not have been an exception.

Moving back to the gold market itself, in this week’s long-term chart, the more classical RSI tool indicates that we are not in an overbought situation. We saw a decline and then a bounce-back and we may see it go a bit higher than we saw in early-May. The rising support line confirms this. Moreover, we have seen a confirmation in the form of relatively high volume in recent daily upswings.

Summing up, from the USD perspective, the gold market appears to be moving slightly higher. Still, the current rally might be more visible from the non-USD perspective, as the Euro Index is still declining. In other words, if you’re trading gold for euro, sterling or other non-USD currencies, there appears to be even more upside potential for gold.

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, I urge you to sign up for my free e-mail list. Sign up 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 precious metals Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-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.

This essay is based on the Premium Update posted on May 28th, 2010

In our previous essay we’ve commented on the precious metals stocks, and since that time we’ve received many questions about the yellow metal itself, we would like to provide you with a more information regarding that particular topic.

Let’s begin with the long-term chart of the GLD ETF (charts courtesy by http://stockcharts.com.)

We see a situation similar to what we reported last week on the long-term gold chart. The self-similar pattern is again useful and indicates we may be seeing a repetition of October-November 2009. This is confirmed by both the RSI level and the shape of the stochastic indicator. As a reminder – self-similar patterns are situations when the past price patterns repeat in a very similar manner, at times (as above) in a bigger or smaller scale – meaning that a 10-day move, could now translate into a 15-day one.

Having said that, let’s move to the short-term chart.

The short-term chart this week may appear quite perplexing at first glance. The price has perfectly followed the Oct-Nov 2009 pattern, but we have not seen huge volume levels. What one needs to keep in mind here is that at the beginning of November, volume levels initially were quite low (before the point marked with vertical dashed line), followed shortly thereafter by a tremendous increase (right after the point marked with the vertical dashed line.) The second thing that one needs to recall here is the fact that the scale of the pattern is bigger this time, which means that a few additional days on low volume are not necessarily a bearish sign. Still, if we don’t see higher volume along with rising prices soon, it will make us concerned about the existence of this particular rally.

There’s one more thing that we’d like to comment on regarding the “is this 2008 all over again” question and that the way that gold is likely to react even if we get a substantial decline from here in the main stock indices. We all remember how gold (and also the rest of the precious metals sector) reacted to the severe plunge in the world’s main stock indices – it was far from amazing. In fact, gold got smashed along with everything else, as many (institutional) investors were required to raise cash

Here’s how it can develop:

A hedge fund manager sees that his stocks are declining, so he thinks of selling some of his other investments (including gold), as this he recalls that everything declined back in 2008. However, before clicking the “sell” after having selected his gold position on his trading platform he decides to give this idea a second thought.

Hey – wait a second – gold moved temporarily lower, but just a year and a half after the decline started it moved about 20% higher, so in fact that decline was just a temporary phenomenon. In hindsight – there was nothing to be worried about – in fact, why did I sell back then?! Fundamentals didn’t deteriorate, so why did I jump out of my gold position, when everyone else did? Hmm… I guess I panicked with everyone else. There were some margin calls that I needed to comply with, but there were other ways of raising that cash besides selling gold. Well, I can’t fix what already happened, but I sure can learn on the past mistakes and make better decision this time.

Let’s take a look at our quant team report… Wow! There’s no way I’m selling gold this time! The correlation coefficient based on the last 3 years equals -0.42, which means that on average gold used to move rather in the opposite direction to stocks, so maybe if stocks decline from here, gold won’t fall at all… It’s a tough call, but even if it moves down temporarily, it’s still likely to rebound soon and move to new highs, so why would I risk not getting back in near the bottom?

Besides, I know that John, Andy, Michael, and Daniel have also noticed gold’s extraordinary performance just after the bottom was put and their quant team’s have the same correlation coefficient, as we have and I sure don’t want to have a lower rate of return than they do! So, I’m keeping my gold this time – I will have no trouble in explaining this action to my clients since they are aware of gold’s performance.

As you may see, the above thought process appears rational, and if many institutional investors follow it, it might result in the decline in gold being minimal even if the general stock market plunges. After all, if many wealthy investors (that might influence the market) decide not to sell because they will believe the coming downturn is just a very temporary phenomenon, such downturn may not materialize at all.

Summing up, overall the situation for gold appears bullish. However, it is unclear if we are seeing the early stages of a big rally like November 2009. We would need to see a confirmation in the form of a visible upswing along with very large volume levels before stating that higher prices are likely. More short-term details are available to our Subscribers.

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, I urge you to sign up for my free e-mail list. Sign up 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 precious metals Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-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.

This essay is based on the Premium Update posted on May 21th, 2010

The recent carnage on the general stock market corresponded to a visible downturn in the mining stocks, which consequently caused many PM Investors to be worried about the future performance of their PM assets. In the following essay, we’ll provide you with our thoughts on that particular topic and let you know what appears to be the most likely short-term outcome. Let’s start with the long-term SPY ETF chart, which allows us to analyze volume (charts courtesy by http://stockcharts.com.)

During the past few weeks, we saw a slight bounce followed by decline, short uptrend, and now we have seen a sharp decline. Still, we are at a strong support level created by the 50-week moving average – the blue slope on the above chart. Many times in the past this has proven to stop both rallies and declines (blue ellipses on the chart). We have also seen a spike in the volume on a weekly basis, which indicates that the bottom for this decline might have been reached – or at least that a temporary upswing is likely. Please note that this is precisely what we’ve seen at the previous bottoms in the past several years.

The thing that changed the most in the past weeks is the RSI indicator, which has moved much lower. Here, the RSI is based on closing weekly prices and after being above the 70 level (which is signals an overbought market), we have seen it decline dramatically. It is now below 50 as this dramatic downturn has occurred in a very short period of time.

Looking at the historical charts, we see there were two times in past 10 years where a similarly overbought condition (RSI above 70) was followed by a sharp decline that took the RSI to or slightly below the 50 level. This occurred early in ’07 and also later in the same year. Please note that in both cases, a sharp rally followed.

While we can’t rule out the possibility that the general stock market plunges severely in the future, it is unlikely to take place right away. Please note that even the gargantuan 2008 plunge didn’t start right after the top was formed in 2007 – instead we’ve seen a sharp corrective upswing before the end of the year.

Looking at the long-term chart this week we see a second spike in the daily volume and this normally corresponds to lows in the index. Moreover, the RSI has fallen below 30 and this level has frequently coincided with market bottoms in the past. The question everyone has today is are we seeing 2008 all over again?

We need to have a confirmation before we can agree to this premise. So far there is no evidence that what we’ve seen recently is more than just short-term correction. Once bearish signals are confirmed, this could actually be the beginning of a significant downturn trend – but until we see that confirmation, the trend remains up. Strong resistance levels at this time have not broken. This suggests that the odds still favor a rally ahead even though the decline appears very scary.

Since stocks have recently plunged severely on huge volume, at least a small rally is likely. The key point to monitor is the volume during the following upswing. There were two cases in 2008 when the volume was low before the next downturn began. It was extremely low in the period prior to June and September 2008 and the downtrends materialized respectively in the middle of 2008 and in October. This is one of the things that we will watch and monitor the days and weeks ahead.

Additionally, in 2008 we’ve seen a severe under-performance of PM stocks relative to the general stock market. This occurred very visibly before the final part of the market’s decline, and also – less visibly – in the middle of 2008. We have not seen this in the PM sector recently. Even though the decline in the PM stocks has been huge and rapid, gold stocks didn’t drop more than the main stock indices. The major stock indices are much below their March low, while the HUI Index is clearly above it. This is certainly not what we would call underperforming.

Speaking of the precious metals stocks, let’s take a look at the long-term HUI chart.

With respect to the precious metals stocks, the risk/reward ratio for speculative investments has not been favorable since May 12th (we’ve sent a Market Alert to our Subscribers). The significant decline in PM stocks that followed week was much greater than the decline in gold itself. This is clearly visible on the above HUI chart above, which shows that the downswing has been stopped by the 50-day and 200-day moving averages. Still, this, and the RSI close to the 30 level suggests that PMs are not likely to fall any further.

The short-term chart confirms this. Here, we see additional two support levels. The lower border of the rising trend channel and the 50% retracement level of the February-May upswing provide this additional support. The RSI also indicates a possible buy signal.

Summing up, whether or not we will see much higher prices in the following weeks will depend on the PM sector’s performance relative to the way they are influenced by other markets. Early in 2010, during the final part of a rally, actually a correction within a bigger decline, we saw low volume during up-trends and rising volume during downtrends – as marked with a black ellipse on the above chart. This was in fact, confirmation of a fake rally and the future move was likely to be lower. Should we see a similarity to this pattern develop, we will suggest exiting the market. As of now, we have yet to see evidence that the trend has broken. Although things might appear very bad today, this was also the case in October ’09, which was followed by a big rally. So far there is no evidence suggesting that this pattern has been invalidated. Conversely, so far we’ve seen the GDX ETF rally on average-to-strong volume (not visible on the chart above), which supports the bullish case.

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, I urge you to sign up for my free e-mail list. Sign up 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 precious metals Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-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.