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Now it’s official! The yellow metal has gotten the golden
seal of approval. This week none other than the President of the World Bank
said leading economies should consider readopting a modified global gold
standard to guide currency movements. Writing in the Financial Times, Robert
Zoellick, the bank’s president since 2007, says we need a successor to
what he calls the “Bretton Woods II” system of floating
currencies.
Zoellick is not exactly calling for currencies to be backed by
hard assets again and what he is proposing seems vague, but it seems like
this idea of using gold as a fixed reference point is a small step in that
direction.
The press has seized on his gold comment with front-page banner
headlines even though Zoellick mentioned gold almost in passing as his fifth
and last proposal. But the world press has ignored those items focusing
instead on his statement about gold.
What can we say? Gold is sexy.
What we find interesting is that a figure of the stature of the
president of the World Bank is saying on the record that gold could play some
role in a new global currency system. Gold is being spoken about in high
places. This underscores an obvious need for discussions on monetary reforms
at the highest levels.
Zoellick's views reflect the discomfort that exists with the
international system, where China's intervention to hold down the renminbi is
blamed by the US and others for contributing to global account imbalances.
There is also a growing loss of confidence primarily in the U.S. dollar whose
value is expected to fall, especially in the light of the Fed's QE2.
Doubts about the overall monetary system are being felt at all
levels. Investors worry that the Fed’s move last week to pump $600
billion into the nation’s banking system, as well as a surge in
borrowing around the world, will undermine paper currencies, making gold a
refuge once again. Over the last two months, the dollar has declined 6
percent against its principal peers, but gold has jumped 17 percent.
Pointers from the USD Index and the Stock Market
The quantitative easing step taken last week seems to have had
the opposite effect on the USD Index when compared to what was expected. One
theory is that there is a belief other markets will follow and become more
intensive. Another thought is that since the step was widely publicized,
markets had already reacted prior to the actual official announcement.
Market bought (here: sold) on rumor and sold (here: bought) on fact.
The short-term chart this week shows that the dollar reached a
local bottom precisely at the cyclical turning point. This was also
the case last August. Since this rally has been ongoing, gold, silver and
mining stocks saw their rally end but prices did not plunge.
 
Consequently, once the USD does decline, the rally in the metals
could be resumed. The area marked with the red ellipse on the above
chart includes what we believe to be the next local top for the USD Index.
The USD Index is relatively close to its local top and therefore
a local bottom should be seen soon for precious metals. This may very well
provide a good buying opportunity for investors in gold, silver, and mining
stocks - we are not there yet.
In this week’s long-term general stock market chart, we see
that the key 61.8 Fibonacci retracement level has still not been surpassed.
This is noteworthy and could impact how quickly stocks move higher from here.
Not much more is seen in this chart but our analysis will
continue with the short-term chart.
The short-term chart this week shows that volume levels have
been relatively low after the $120 level was surpassed. Low volume has
accompanied small declines back towards this level although the $120 level
has not yet been reached on the downswing. At the same time, the volume
was higher during the daily upswing on Wednesday. This leads us to be bullish
at this time. Further consolidation is possible but it is likely that the
$120 level will hold and provide support.
Breakout or Correction – Which Will Strike?
With the abovementioned influences that USD Index and the
general stock market have on the precious metals sector, it is important to
monitor the way they could relate to gold, silver and mining stocks' prices.
For more details, let's take a look at our correlation matrix.
This week we unveil the new, interactive version of our
correlation matrix. What you can see here is only a static screenshot,
but when you check it out directly in the tools section, and put your cursor
over virtually anything within the table, a description will appear at the
bottom. An explanation providing definition, importance and implications of
each value should make the matrix much more useful than it was previously.
That's right - the description changes dynamically, which means that it tells
you implications of a particular value of a given coefficient.
You might have noticed that we had put the circle around the
correlation coefficient between gold and the general stock market in the 30
days column. This is because we wanted to indicate that the description
visible below the table comes exactly from this field. Please note that if
the value of the coefficient was much different (for instance it would amount
to 0.2 or so), we would display a different comment below the table. It took
a lot of work to cover all cases for all pairs of assets for all terms
(columns) (it's about 800 combinations that can be displayed), but we believe
it was worth it.
Moving to the analysis itself - precious metals continue to be
negatively correlated with the USD Index, although to a lesser extent. Gold,
silver and mining stocks have held much of their recent gains even as the
dollar rallied. It appears that metals have been moving in tune with the
general stock market more so than against the dollar and it seems that
watching the stocks has become more important recently for precious metals
Investors. Consequently, another strong rally appears likely for the metals
sector, but a breather first appears likely as well.
The final chart for today is the very-long-term silver chart.
Our first very long-term chart for silver is useful for
comparing similar strong rallies over the years for the white metal. It
allows us to see the size and pace of past trends and this is quite useful in
analyzing current developments. By extrapolating from these prior patterns,
we can now profess that silver maybe somewhat ahead of itself. The red,
dashed lines have been used to show you how this rally would look like if it
was like the previous ones. If this is indeed the case, a period of
correction will likely be seen before silver moves even higher.
Ideally a steadier pace is preferred. Silver’s volatility
frequently leads to situations such as we see today. RSI levels and weekly closing
prices confirm the premise that a pause is quite likely very soon as several
past trends similar to recent price and volume moves have followed this path.
The likelihood is that the local top is quite close and some consolidation
will be beneficial to a further rally, which could take silver to new highs
(we will leave details regarding the targets to our Subscribers.)
Summing up, the white metal recently tried to breakout above the rising
trend channel and failed. This leads us to believe that a pullback is very
possible, as the current move above this level has not yet been verified.
When historical data is analyzed in conjunction with this current
development, a strong case is made for a period of consolidation soon to
follow. Similar can be said about other parts of the precious metals sector.
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 weekend and profitable week!
Przemyslaw Radomski
Editor,
www.sunshineprofits.com
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