Based on the January 10th, 2012 Premium Update. Visit our archives for more gold & silver analysis.
This may be the year that weaker member-states are booted from the euro. Will the continent fix its financial troubles or spiral out of control affecting not only the U.S. economy, but the global economy? The answer rests with Europe’s leaders. The sacrifices and austerity needed to preserve the currency zone and prevent a global financial collapse could become too heavy a burden for the political systems of one or more of the European nations. The whole house of cards is perched on thin ice. One wrong move and the world financial system would be in peril in the same way it was in fall 2008.
In the words of Dave Barry: “Moody’s announced that it has officially downgraded Greece’s credit rating from “poor” to “rat mucus” following the discovery that the Acropolis has been repossessed.”
But seriously, more eurozone troubles this year could mean more dollar (and gold!) buying even though there is no way to know how the euro will react in the short-term to such threats that may already be priced into the market. There is no doubt that the eurozone will be stronger without its weaker members. The problem is that the act of removing anyone from the eurozone will cause instability and will be a bullish factor for gold. If the European recession turns out to be mild or nonexistent, it could create a stock market rally and boost confidence worldwide.
For a funny look at the Eurozone problem we again turn to Dave Barry, who wrote that this past year “the economic crisis continues to worsen in Europe, especially in Greece, which has been operating under a financial model in which the government spends approximately $150 billion a year while taking in revenues totaling $336.50 from the lone Greek taxpayer, an Athens businessman who plans to retire in April. Greece has been making up the shortfall by charging everything to a MasterCard account that the Greek government applied for — in what some critics consider a questionable financial practice — using the name ‘Germany.’”
But Europe is not the only part of the world that has been troubled by recent economic conditions. Troubling signs suggest that the Chinese growth juggernaut, an anchor for the tumultuous past few years, could be slowing down, which raises risks for the global economy.
Can Chinese leaders guide their economy, the second largest in the world, to a soft landing making some overdue economic changes without halting growth? China’s growth has been fueled by exports of manufactured goods and real estate investments. Exporters could be hampered by the likely European recession, and the Chinese housing market is showing signs of trouble, a bubble about to burst. Now the question remains if China can shift to domestic demand for consumer goods and services, and away from exports and housing, without a major recession that could endanger global growth? That answer will help determine the health of the global economy in the coming year.
However, we do not need a fortune cookie to know that China will continue to buy gold, as much as it can get its hands on. China has every motive to move some of its massive $3 trillion-plus reserves into gold, the only currency that no other country can control. At the moment, the richest Western countries, including the United States, Germany, Italy, and the Netherlands, hold between 60% and 80% of their entire reserves in gold. The figure for China is less than 2%. The rest is simple math.
To see if this is translated into a bullish outlook for precious metals in the short-term is another thing. Our focus today will be on mining stocks. Let’s begin the technical part with the analysis of the Amex Gold Bugs Index (ticker HUI; charts courtesy by http://stockcharts.com.)
In the long-term HUI Index chart, we see that the index bottomed at the final support line and quickly rallied back above the 500 level. At this point, it appears to have reached the final bottom of this consolidation period. Gold stock prices are likely soar much higher. It seems that a breakdown back below the support line is very unlikely now as the index level is significantly above it.
In the short-term GDX chart, we see that the rally has paused somewhat in the last couple of days. The sharp move higher on significant volume was followed by a low volume pause. Consequently, it appears be just a pause and another rally is likely to be seen next. This is reinforced by the bullish situation for precious metals themselves, as argued in our last essay on the possible rally in silver:
(…) we see that the cyclical turning point worked perfectly as prices reversed sharply right at that point and then began to rise. These moves further increase the odds that we have seen a major bottom and it could very well be years before silver’s price is as low as it has been recently (or we may never see silver price as low as we just did).
This is by no means a sure bet, but twice previously, when silver bottomed at cyclical turning points in 2004 and 2010, we have seen an ultimate low – lower prices never followed. The long-term charts suggest that at least a medium-term rally is underway at this time.
The Gold Miners Bullish Percent Index chart has recently indicated good buying opportunities. This did not mean that a final low had been reached. It simply was a good time to buy. Gold stocks have since moved a bit lower but are now higher and apparently acting on the buy signal over the past couple of weeks would have been a good idea.
In the GDX SPY ratio chart, a bottom is seen and the ratio is still close to the 2010 lows. Precious metals have been extremely oversold and the RSI levels confirm this. Although the recent rally may seem sharp, it is truly not significant from a medium or long-term perspective. There is still a lot of room to the upside.
Summing up, the outlook for gold and silver mining stocks appears to be bullish, similar to the situation for gold and silver.
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