The Wall Street Journal this week ran a headline that said:
“Gold is Still a Lousy Investment.”
Everybody who knows the markets knows that market sentiment is a key driver in market direction, and that the market will usually do the opposite of what the “pack” are doing at that point, so as to catch as many people out as possible.
Hence canny investors would read that headline as:
“Gold Still Has a Long Way to Go.”
From P Radomski here
“You know you’ve reached the top in a bull market when the shoeshine boys and taxi drivers who heard a hot tip are clamoring to get in.
Two years ago when people in cocktail parties in Florida were talking about how you can’t go wrong in Miami real estate, you knew it was time to sell.
That’s why an article like the one that ran last week in the respected, mainstream Wall Street Journal helps me sleep well at night with the knowledge that precious metals still have a long way to go.
The above type of analysis (reading headlines) is useful in estimating the long term tops, but if we want to check what may be in the cards during the next few days, weeks or months, we need to turn to charts This week I will begin with the USD Index.
The weekly perspective on the USD Index provides us with a perfect view on how the dollar moved lower after touching the upper border of its declining trend channel. Since there were voices (certainly not mine) that this resistance level will be broken to the upside, the fact that USD in fact resumed its main trend is one of the important news this week.
For now, the support level just below 76 (created by the September 2008 low) has not been broken yet, but it is likely to take place soon, given the prevailing trend, and especially when one compares this support to the one that USD broke through several weeks ago.
So it would not surprise me to see dollar lower soon. I realize that the RSI Indicator is currently near the 30 level, which generally means that an asset is undervalued, but please note that most times that this was the case in the past it meant further declines, not rallies. I have marked these situations with black ellipses on the chart.
The particularly interesting thing here is that once we go below the thin red line that marks the previously mentioned support level, we don’t have virtually any other support all the way to the 71-72 area.
This is obviously much lower than where USD is today, so the implications for the precious metals market could be huge, especially given the strength of gold’s reaction to the recent move in USD.
I’ve used the red exclamation mark as the description of this week’s price action, as its consequences are very important.
The message of gold above $1,000 goes throughout the worlds and many investors, who were hurt in the stock market, now begin to wonder whether or not precious metals might be a good way to go from now.
This is exactly what a bull market needs to move higher – a new buying power. Even if one of the markets driving gold in the short term i.e. the general stock market, moves lower, I would still expect the $1,000 barrier to hold as a support.
Should that take place, it will be the final call to go to the long side of the market and close any remaining short positions that you may have in the sector, as after that I expect gold to form a massive (!) rally.
It’s too early to say when we’ll see another long-term top (I would like to see where the next local top is put, in order to make necessary calculations), but it is likely that the size of the rally will be somewhat similar to what we have seen in 2005/2006 and in late 2007.
As I previously mentioned silver tends to outperform gold, during the final stages of a rally (the bigger the rally, the more visible – and useful – this phenomenon is). Since silver has been rallying strongly in the past few weeks, I believe it might be useful to analyze the silver to gold ratio.
Silver to Gold Ratio
From the long-term perspective (and I believe this one is appropriate here, as we are analyzing long-term price moves), this chart does not have bearish implications. The rally in silver has indeed been sizable, but that is more of a catching up, than outperforming.
The 2008 plunge took silver and thus the silver/gold ratio lower, and the white metal is still to recover. This process is under way, and the ratio reflects it.
Please note that the ratio has not been trading sideways before the current rally – it is still bouncing back after the 2008 drop. Another thing that suggests that we are not near a major top in the precious metals is that the Rate of Change (ROC) indicator is much below the 25 level. As a reminder, ROC indicator informs us how much the price of a given security changes in a given period, which is particularly useful in this ratio, as it is its momentum that should make one look for a top.
As you may see, we are still a long way (in dollar terms) from the top, as being “gold bug” is still perceived as strange.
Once we get to the point when NOT admitting to be into Gold will be seen as faux pas, we will then know that it’s time to sell our long-term holdings.
This is not what we see, hear, and read today, and it is not likely to be the case anytime soon.
From the short-term point of view, it currently seems that PMs will move a little higher before taking a breather. What happens then depends to a large extent on what takes place in the USD Index and on the general stock market.
Currently, it seems that the USD will move lower but it may take at least several days before the plunge accelerates. This would correspond to the abovementioned action in gold, silver and mining stocks.
Don’t believe the hype about recoveries, don’t believe the mainstream media’s stream of clueless propaganda and non-understanding of the current Stock Market Rally, it is not too late to get in on the real action..