Based on the October 28th, 2011 Premium Update. Visit our archives for more gold & silver analysis.
The yellow metal, money for more than three millennia, has a close relationship to other forms of money. Some argue that it isn’t gold that has risen in value in the last decade, as much that fiat currencies have lost value against gold. Ever since gold began its spectacular rise a decade ago, the U.S. dollar has lost over 80% of its purchasing power. The other currencies have not fared much better. The euro and the Japanese yen have lost over 70%. Gold is the only form of money that governments cannot create out of thin air which is why the supply of fiat currencies is expanding exponentially faster than gold supplies, which increase by about only 3% per year.
We like to pay close attention to currencies and to the multi-front currency war because of the effect on gold.
In the “currency war,” neutrality does not pay as Switzerland discovered when it recently had to set a floor rate at 1.20 franc per euro by selling francs. The Swiss currency had gained because it was considered a safe haven. Now that the luster of the franc has dimmed somewhat, gold is more attractive than ever as a choice for wealth preservation.
The latest battle in this currency war is heating up between the U.S. and China and a trade war between the two most important economies in the world is certainly a cause for worry. For much of the past two years China has been under pressure from the US to allow the yuan to appreciate. For its part, China has accused the U.S. of lowering the value of the dollar by printing so much of it. Others suggest that both China and the US are “winning” the currency war by holding down their currencies while pushing up the value of the Euro, Yen and currencies of some emerging economies.
To see if you might win in the precious market in the following days, let’s move on to the technical part of the essay, namely to the analysis of the long-term US Treasury interest rates chart (charts courtesy by http://stockcharts.com.)
We start with the 30-year US Treasury long-term interest rates chart (if you’re reading this essay on SunhineProfits.com, you can click the above chart to enlarge it) since it is instrumental in putting everything which follows into proper perspective.
We have been including this chart pretty regularly in recent weeks since it is truly influencing most, if not all of the markets that we cover on a regular basis.
There was only a minimal change in rates this week but the rate-of-change (ROC) Indicator did move higher because rates held their previous gains and makes our current situation more closely resemble what was seen in 2008.
This was the only time where long-term rates declined as severely and then bounced sharply. The precious metals markets started a long-term rally soon thereafter. It is possible that we will see this once again (note that no market moves in a straight way either up or down).
Having said that, let’s move on to the general stock market.
In the long-term S&P 500 Index chart, we see that the 50% Fibonacci retracement level recently provided support and stocks have moved higher since reaching this level. A very strong resistance line based on 2007 and 2011 tops will be in play very soon however. This will likely cause at least a pause in the current rally and the present upside target level for the S&P 500 Index is between 1330 and 1340.
In the short-term SPY ETF, the recent price action has been very bullish. After declining, prices moved back up quickly on significant volume suggesting that there is buying power out there. It appears likely that higher prices will be seen in the near term and then a strong (combined with the long-term one) resistance line will come into play. If Thursday’s performance is duplicated Friday or Monday, the target level will likely be reached and a local top will likely be seen. The general trend however is still to the upside partly influenced by the long-term interest rate situation.
In the Broker Dealer Index (proxy for the financial sector) chart, strong price action was seen on Thursday, but the index is not above its declining resistance line yet. The trend of the rebound suggests higher index levels are likely but there is an important resistance line slightly above current levels. A pause in the rally and period of consolidation are therefore likely to be seen soon. A subsequent move to the upside would then be possible.
Now, let’s take a look at the correlations across the PM market.
In this week’s Correlation Matrix , we see rather mild signals.
The short-term, 30-day column values are quite weak at this time as no relationship is apparent. The 10-day column however shows more of a tendency which suggests that the general stock market is more likely to confirm the bullish scenario for metals in the immediate term.
This is in line with our recent essays. For instance, in our latest essay (21st October, 2011) on the possible rally in gold we wrote:
We are inclined to think that we’re relatively close to an upswing in gold. The point here is if a decline is seen before the upswing, it could simply be the formation of a double bottom with the rally yet to come. So a short move down did not invalidate any rally this week since the rally had not yet begun. We have simply seen a rebound after an initial bottom with a second bottom now being formed. As long as the two support levels in the $1,600 range hold, the outlook remains bullish.
What happened with gold afterwards largely confirmed what we had written. As of now, we are still inclined to think that in the very-short term a move up in gold is more possible than not. This obviously doesn’t alter our long-term bullish outlook in any way.
Summing up, the analysis of long-term interest rates and of the general stock market suggests possible higher prices across the PM sector in the immediate (!) term.
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Thank you for reading. Have a great and profitable week!
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