Gold and Silver Rally is Not Over Yet

By: Przemyslaw_Radomski

As per the World Gold Council, precious metals demand will stay high this year with growing Indian and Chinese appetite for the yellow metal, but fresh buying in developed markets of jewelry will depend on economic outlook. At this juncture, market news suggests positive momentum for precious metals. Investment and industrial demand are set to witness an upsurge in the upcoming months. Let’s have an outlook on the present status of precious metals market.

Gold has recently touched its rising resistance level but no confirmation of a local top has been seen. The current short-term trend therefore has not been invalidated and the outlook remains bullish. Silver has broken out above previous highs on strong volume and this too is a bullish development. In fact this is what we wrote to our Subscribers on Monday, Feb 14th:

The recent rally in the general stock market has greatly contributed to silver's strong performance relative to gold and - based on the fact that stocks have decisively moved above their August 2008 highs - the continuation of the outperformance [of silver] appears probable also in the days ahead.

Amid anticipations of positive moves in precious metals, let’s have a close look into gold market moves. Relationship between currencies and precious metals, gold in particular, is one of the major indicators in predicting market direction, so let’s take a look how gold moved in comparison to the key currency indices (charts courtesy by http://stockcharts.com.)

In the short-term Euro Index chart this week, the bearish head and shoulders pattern continues. Nothing has really changed since last week and further development of this pattern gives us a bearish outlook for the euro which is bullish for the USD Index and precious metals overall.

Gold has been moving along with the dollar and has been somewhat “euro weakness driven”. It seems that perhaps many European Investors in the Euro-zone are protecting themselves against the weakness of the euro. This contributes to the bullish outlook for the dollar and also for gold.

Moreover, we can see the same on the medium-term USD Index chart.  The uptrend is continuing here although a bit of sideways movement has been seen within the trend channel. It’s important to note that the short-term trend is up as proven by higher highs and higher lows seen in the past weeks.

Concerning the cyclical turning points, we are just past the midpoint of the two turning points: last local bottom and the next local extreme. No bearish signs have been seen yet which implies we are not likely close to a local top. It will likely be seen in two to three weeks.

Overall, the Euro – USD Indices suggests positive momentum for precious metals in the upcoming weeks. Precious metals depict a positive correlation with gold and a negative correlation with Euro, indicative of bullish market trend at this time.

While the influence of the currency market is important, an insight into gold market seasonality at this moment is also promising.  On 10th February, we wrote that,  based on the findings of our new tool – True Seasonals, a rise in the price of gold was possible in mid-February. As a matter of fact, these findings turned out to be accurate in the past few days. After the publication, one of our Subscribers, who was particularly interested in True Seasonals (note that this is not the same pattern as you see on other websites – in fact we don’t know of any other source that provides seasonal patterns while taking into account expiration of options/futures – that’s why we call them True Seasonals), made a request to include the seasonal chart for March in the next Premium Update.

Today, we are pleased to make a positive response to that request. The chart below presents the seasonal pattern corrected for the expiration of derivatives for March. As the price of gold for March 1st, 2011 is yet to be known, we have assumed that this price is equal to the last known price of gold ($1379 – February 17th, 2011).

The use of True Seasonals is particularly important when there are no other market signals about the possible direction gold might go. When there are no clear signals, one should resort to the seasonal pattern. In other words, the analysis of the current market situation and the use of True Seasonals are complementary – when the current market situation is inconclusive, True Seasonals may offer you the clarification you need.

The chart also implies that the recovery of gold in the second part of the month might be relatively slow (compared to the possible decline) and bumpy (please, notice the slight decline after March 18th). Another implication is that gold might not be able to reach the price level from the beginning of March by the end of the month. Please note that this outcome would be in tune with the cyclical tendencies present on the USD Index and the fact that the dollar and precious metals have been moving mostly together in the recent months.

On a side note, we strongly believe that providing True Seasonals for April and following months in the above form will not be necessary, as by the time they are needed, the interactive version will be available on our new website (please take a look at our homepage for a short video featuring it).

Summing up, the USD Index is likely to move higher as the bullish sentiment prevails here. In the Euro Index, a continued downtrend is likely and the outlook is bearish. The situation in the USD Index and the general stock market is positive for the precious metals as a whole. Consequently, we believe that the rally in gold, silver and mining stocks is not over yet.

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!

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Gold Bull Market Big Picture, Time for a Rest

By Mary Anne & Pamela Aden

If we had to pinpoint a time during the last 10 years when the gold price broke out into a full on bull market, it was in 2005 when the $500 level was clearly broken. That was a key level at the time and this break out coincided with the launching of gold's ETF, GLD.

It was also clearly a break away from the dollar as gold began jumping up in all currencies. This is when the bull market started heating up and gold never looked back until it surpassed the 1980 record high in 2008.

The financial crisis pushed the gold price down in the sharpest correction in the bull market, yet gold closed 2008 up on the year, which was only bettered by bonds at the time. Most impressive, it didn't take gold but a few months to reach a new high once again.

Most important and the reason why we are going over the bull market is because the gold price has been on a tear with not even a 14% decline since the crisis low in Nov 2008. Gold entered a stronger phase of the bull market along the way in September 2009, and once again it never looked back.

Interestingly, the Nov 2008 crisis low was near the recurring 8 year lows that gold has followed since the 1970s. That is, gold tends to reach a low every 8 years (see Chart 1). If this pattern continues, this means that gold has several more years ahead for an exciting bull rise to develop. In many ways it feels like 1976 again... only this time around the world is more complex and involved. The emerging world is carrying the load, while the developed world strangles on debt.

Bull: Time for a rest

For now, however, gold is in a downward correction that began with the new year and it's been moderate, only declining 7% so far. Is that all there is or will gold decline further? That's the big question... Will it be a decline similar to the one last February when gold fell 13.30%, or will it be milder, like in the summer when gold lost about 8%? We'll soon find out, but a correction at this point is not at all unusual. In fact, gold's strong rise was overdue for a normal correction.

Gold Timing

The key now is to watch the guidelines to measure gold's weakness. Our best guideline is shown on Chart 2. This indicator is our favorite in helping to time intermediate moves in the gold price.

The best rise in gold's bull market is a rise we call "C". The latest one had been in process since April 2009. This rise peaked on January 3rd. This means gold rose almost 64% in this 21 month time period... a super rise indeed and the strongest C rise of the last 10 years.

Our focus now is on the current decline, we call D and to measure its likely depth. A 10% - 15% decline would be a healthy one and it would still show overall bull market strength. This means a decline to the $1280-$1200 level would be a normal decline within gold's strong bull market. This level also coincides with the 65-week moving average, the major support level, now at $1230. D declines tend to fall to this average, but the exception was the 2008 extreme during the financial meltdown. Whether this decline ends up being mild or more severe, it's providing a good buying opportunity. Use upcoming weakness to buy with both hands.

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Gold/Silver Ratio

by Bespoke Investment Group

While gold is currently moving higher, the metal is still just about in the middle of its trading range and has a ways to go to get back to new bull market highs.  Silver, on the other hand, has moved back to new bull market highs in recent days, and it is currently trading more than two standard deviations above its 50-day moving average.

While gold has gotten most of the attention in the metal space in recent years, silver has outperformed by a wide margin.  This outperformance has pushed the gold/silver ratio to its lowest level in more than a decade.  A move below 40 (it's currently at 42.75) would put the ratio at its lowest levels since the early 1980s!

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6 Charts Which Prove That Central Banks All Over The Globe Are Recklessly Printing Money

by Economic Collapse

If the U.S. dollar is being devalued so rapidly, then why does it sometimes increase in value against other global currencies?  Well, it is because everybody is recklessly printing money now.  The 6 charts which you are about to see below prove this.  The truth is that it is not just the U.S. Federal Reserve which has been printing money like there is no tomorrow.  Out of control money printing has also been happening in the UK, in the EU, in Japan, in China and in India.  There are times when one particular global currency will fall faster than the others, but the reality is that they are all being rapidly devalued.  Unfortunately, this is a recipe for a global economic nightmare.

Right now you can almost smell the panic as it rises in global financial markets.  Investors all over the world are racing to get out of paper and to get into hard assets.  Just about anything that is "real" and "tangible" is hot right now.  Gold hit a record high last year and it is on the rise again.  In fact, it just hit a new five-week high.  Demand for silver is becoming absolutely ridiculous right now.  Oil is marching up towards $100 a barrel again.

Agricultural commodities have exploded in price over the past year.  Many investors are even gobbling up art and other collectibles.

Paper money is no longer considered to be safe.  All over the globe investors are watching all of the reckless money printing that has been going on and they are becoming alarmed.  An increasing number of investors and financial institutions are putting their wealth into hard assets that are real and tangible in an effort to preserve their wealth.

The other day, a reader of this column named James sent me some charts that he had put together.  I thought they were so good that I asked him if I could include them in an article.  These charts show how central banks all over the globe have been recklessly printing money.  Over the last 30 years virtually the entire world has developed a great love affair with fiat currency....

So is everyone printing money?

The U.S. is printing lots of money.....

Source, The St. Louis Fed

The Bank of England is printing lots of money.....

Source: The BoE

The EU is printing lots of money....

Source: The ECB

Japan is printing lots of money.....

Source: The BoJ

China is printing lots of money.....

Source: The People’s Bank of China

India is printing lots of money.....

Source: Reserve Bank of India

Of course anyone with half a brain can see where all of this is ultimately headed.  In the end, inflation is going to spiral out of control and we are going to witness financial implosion on a global scale.

So why don't these nations just adopt sound money?

Well, it turns out that if you are a member of the IMF, you are specifically prohibited from having gold-backed currency.

Yes, you read that correctly.

In fact, U.S. Representative Ron Paul once sent an open letter to the U.S. Treasury and the Federal Reserve asking about this and he received no response.  The following is the content of that letter....

Dear Sirs:
I am writing regarding Article 4, Section 2b of the International Monetary Fund (IMF)'s Articles of Agreement. As you may be aware, this language prohibits countries who are members of the IMF from linking their currency to gold. Thus, the IMF is forbidding countries suffering from an erratic monetary policy from adopting the most effective means of stabilizing their currency. This policy could delay a country's recovery from an economic crisis and retard economic growth, thus furthering economic and political instability.
I would greatly appreciate an explanation from both the Treasury and the Federal Reserve of the reasons the United States has continued to acquiesce in this misguided policy. Please contact Mr. Norman Singleton, my legislative director, if you require any further information regarding this request. Thank you for your cooperation in this matter.
Ron Paul
U.S. House of Representatives

Sadly, the truth is that the global elite don't want nations to start adopting gold-backed currencies.  They want countries to use fiat currencies that they can openly manipulate for their own benefit.

At this point, every nation on earth (to the best of my knowledge) uses a fiat currency.  All of the major global currencies are being continually devalued.  In fact, there are times when counties will purposely devalue their currencies even more rapidly in order to gain a competitive advantage in world trade.

This is why so many investors now have such an aversion to paper currency.  It starts losing value the moment you take possession of it.

In some areas of the world, "gold fever" is absolutely exploding.  For example, China imported five times as much gold in 2010 as it did in 2009.  On the Shanghai Gold Exchange, trading volume soared 43 percent during the first 10 months of 2010.

Gold, silver and other precious metals are now seen as a great hedge against inflation worldwide.  Investors all over the globe are demonstrating a strong preference for "real money" over "paper money".

So what does all of this mean?

It means that some tremendous imbalances are being built up in the global financial system.  The central banks of the world must continue to inflate these bubbles with constantly increasing amounts of paper money and debt in order to keep the game going.  If at some point the reckless money printing comes to a screeching halt it is going to unleash hell on global financial markets.

But if all of this reckless money printing continues we are eventually going to see horrific inflation all over the planet.  In fact, we are already seeing significant inflation happening in many areas of the globe.  Almost every single day a new headline about inflation in China seems to pop up in the financial news.  Rising food prices are sparking unrest in the Middle East and elsewhere.  Even U.S. consumers are starting to see some uncomfortable price increases at the gas pump and in the supermarket.

So it is not just Federal Reserve Chairman Ben Bernanke that is off his rocker.  The whole world is going crazy with money printing.

Hopefully this whole thing is not going to end as badly as many of us fear that it will.  But right now the central banks of the world are pumping unprecedented amounts of cash into the global financial system, and those in the global financial system are funneling a very large percentage of that cash into hard assets.  Unless something changes, that is going to mean that prices for basic necessities such as food and gas are going to continue to rise.

This is quite a fine mess that we are in.

Does anyone see a way out?

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MONEY TALKS, PEOPLE LISTEN

By Guest Author

Nobody’s Leaving the Euro

Frequently I have been asked how would Greece leave the euro if it so chose. My answer, which I have alluded to in The Dismal Optimist, has been look at what Argentina did in January 2002 when in a process dubbed pesificacion it forced the conversion of dollar deposits back into pesos which almost immediately lost the bulk of their value against the dollar.

Taking Argentina as a guide, here’s what Greece would have to do. To begin, the Greek finance and prime ministers would adamantly declare that Greece was staying in the euro. Then one fine night when everyone was asleep they would issue an order converting all euro deposits back into a resuscitated drachma. 

Henceforth, only drachmas would be available at Greek banks and only drachmas would be usable as legal tender in Greece. The drachma in international markets would immediately go to a huge discount against the euro. Of course, when the Greek people woke up and realized their euro deposits had been transmogrified into a devalued substitute and they had in fact been cheated, the country would go up in flames.

I recited this scenario to a Greek professor friend in Hong Kong who quickly pointed out the naiveté and incompleteness of my model. Assume Greece did that, he rejoined. Then the very day Greece was going up in flames every Italian, Portuguese, Spaniard and Irishman would pull his or her euros out of their banks. What would be launched would be the MOTHER OF ALL BANK RUNS. Europe’s banking system would go up in flames.

It won’t be allowed to happen.

I do not want to underemphasize the yet unresolved banking and sovereign debt problems that afflict the euro area. Probable sovereign defaults lie ahead particularly with Greece and probably Ireland. But in the end the euro will survive just as the US did after eight states and the territory of Florida defaulted in the 1840s. The member countries can threaten to check out but as the song says they can never leave. Yes there is no central European government and common fiscal policy. But history, technology, geography and overwhelming financial convenience are powerful forces behind the euro. If necessary the hard working Germans will pay and pay. Post World War II Germany has been determined to comport itself as a model citizen. This, combined with still lingering nightmares from the hyperinflation after the first World War, make Germany the ideal core engine for the euro. And the profligate south will slowly have to give up its wanton ways. Euro Uber Alles.

Looking over to the other side of the Atlantic, can we be even cautiously optimistic about the US whose president in the midst of a cyclical and structural fiscal crisis, dreams of massive railroad and alternative energy expenditures? (sorry “investments”) How long can the US government stay in this fiscally irresponsible dream world when the rest of the world including US states are biting the bullet of contracting government? The respected financial historian, Barry Eichengreen, in several of his books has pointed out how in the interwar period the dollar and the British pound shared the limelight as the world’s reserve currency. Competition among reserve assets is not unhealthy. The headless euro, powered by its German locomotive and disciplined by the bond markets, may give the dollar significant competition. As will gold.

Hong Kong –The Great Mall of China

Average citizens don’t always realize how invisible monetary and macro forces play dominant roles their economic decisions. And investors often suffer from the same ignorance. Nowhere better is this illustrated than in today’s Hong Kong. Hong Kong is a place investors should keep an eye on, if only because of its currency US dollar currency peg puts it at the intersection of the US and Chinese economies.

Hordes of newly rich Mainland tourists are continuously descending on the city like the northern tribes that overran the Great Wall of China a thousand years ago. But unlike the invaders of old, the Mainlanders haven’t come to pillage. They are happy to buy. And buy. And buy. (And gamble in nearby Macau) Condominiums, LV and Prada bags, Cartier and Bulgari jewelry, Gucci clothes, Rolex watches, baby’s milk – everything. The Mainlanders wear Prada. Every day the newspapers tell of the closing of another venerable Hong Kong retail establishment, often a restaurant or food store, to be replaced by an upscale store selling some chic European brand.

All this is great for landlords renting to the European brands, apartment owners selling to the Mainlanders and merchants running the upscale stores. Or operating a Macau casino. (Macau gambling revenues are now approaching four times that of Los Vegas and the Macau gambling stocks have soared.) But this is also sparking a populist reaction in Hong Kong whose citizens feel like they are being priced out of their own city especially with regard to non-tradable goods like apartments. Their ire is directed at the Hong Kong government which is supposed to do something about this. And the government in Hong Kong has duly responded with a variety of punitive measures against so-called speculators in high end apartments. But these measures attack symptoms and ignore underlying causes which are monetary and macro in nature.

I will offer two causes and one so-so solution:

First as I have been arguing the Peoples Republic of China is a very protectionist place and one where the newly rich Chinese consumers get a bad deal. Tariff and non-tariff barriers drive up the cost of imported luxury goods in China and restrict their availability. Gambling in China is forbidden. Interest rates on bank deposits are held down below inflation. Restrictions on the free flow of information contribute to shoddiness of locally produced goods and whistle blowers on subjects like poisoned baby’s milk are treated as troublemakers.

So what are the new rich and middle classes of Chinese cities supposed to do with their money? Travel restrictions have now been relaxed. Across the border lie Hong Kong and Macau, with totally wide open tax free non-protectionist free market economies. Just like residents of U S states with high cigarette taxes buy their smokes in neighboring states with lower taxes, Mainlanders head for Hong Kong and Macau.

Second, the Hong Kong dollar has now become undervalued relative to the renminbi. Six years ago the Chinese currency was trading at 8.27 to the US dollar. Now the ratio is 6.57. The Hong Kong dollar is pegged to the US dollar at a central target rate of 7.80. (The Macau pataca is pegged one to one to the Hong Kong dollar. Therefore the pataca is also pegged 7.80 to the US dollar.) As the renminbi has risen against the US dollar, the Hong Kong dollar has become cheaper for the Mainlanders even as the Hong Kong and Chinese economies become more integrated. Actually, as Treasury Secretary Geitner has finally figured out, in real terms the renminbi has been revalued even more than the change in nominal exchange rate because of the acceleration of inflation in China. For the Mainlanders, Hong Kong and Macau are huge bargains just because of the currency misalignment alone. For the Mainland-oriented Hong Kong vendors and the Macau casino operators, the price signals say “keep expanding.” Just like in 2002 when the Greenspan low interest rate policy signaled “leverage up and buy a house.”

Unless the renminbi suddenly becomes overvalued against the dollar, sooner or later the Hong Kong authorities are going to have to do something. The authorities of course know what is going on. But their options are limited. The simple solution – repeg the Hong Kong dollar to the renminbi – is not a solution because any such peg is not workable because the Chinese currency is not freely convertible on capital account. Meanwhile as the US irresponsibly continues with QEII, high powered money is flowing into Hong Kong. The December CPI for Hong Kong was up 3.1% yoy. Expect that to rise if the current monetary structure is not changed.

One solution might be to repeg the HK dollar (sometimes called the HONKY) at a higher rate to the US dollar. There is nothing eternal or sacrosanct about the Hong Kong US dollar peg. Certainly in the past at various times the Hong Kong dollar had floated, been pegged to sterling and earlier to silver. But do this once and the markets may start anticipating further changes encouraging all kinds of speculative flows.

And the political problems with this could be formidable. At the time of the 1997 Handover back to China, many worried that PRC troops would come marching into Central (Hong Kong’s financial district) and kill the golden goose that was and is Hong Kong. But they were wrong. The PRC troops did march into Central. But then they disappeared into what used to be called the Prince of Whales building and only come out for the rare ceremonial occasion.(As opposed to the British troops who would regularly emerge on Friday nights for some manly brawling in Wan Chai’s bars.)

Rather an army of populists, one of which was the last British Governor, has invaded Hong Kong. They are quite visible. They have brought with them such things as more generous welfare payments and minimum wage laws. Fiddle with the peg and they will start poking their noses into managing the currency.

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S&P 500 NEW HIGHS

By Carl Swenlin

The daily number of New Highs and New Lows (NHNL) refers to stocks reaching their highest or lowest price during the most recent 52-week period. Below is a NHNL chart for the stocks that compose the S&P 500 Index, and we can learn a few things from it.

First, we can see that the main problem is that new highs are contracting as prices move higher. This is a negative divergence and is also almost certain to be a setup for a price decline.

Another feature on this chart is that the new high structure for this bull market is much more massive than at any time during the 2002-2007 bull market. Even though they represent a contraction from earlier new highs, the most recent new high readings are nearly as high as the highest new high readings of the the preceding bull market. This attests to the strength of the market rebound off the bear market lows in 2009.

Note also that the price advance from the 2009 low has taken about half the time as the same amount of price gain took during from the 2002 lows — we’re talking 22 months versus 54 months. Again, this has been a very powerful move.

Another thing I wanted to mention — something that has nothing to do with the subject of NHNL — is the Flash Crash Correction. I have named it thus because I believe that its depth and duration were more exaggerated than they would have been were it not for the Flash Crash. In hindsight we can see that this event took place in the middle (so far) of a strong bull market. 

Notably, there was no significant deterioration before hand that could have given us a credible warning. We are told that it can’t happen again. I wonder.

Bottom Line: New highs are presenting a negative divergence, but the level of new highs remains very high, and the strength of the price advance better than normal, in spite of the Flash Crash Correction. Corrections are inevitable, but there is no indication that the next correction will be unusually difficult.

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