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This
essay is based on the Premium Update posted on August 20th, 2010
This week we have sent out several
messages to our Subscribers regarding the current market situation. Now, the
markets have calmed down for the weekend, and we are able to provide you with
a report summarizing precious metals performance over the whole week, and -
to some extent - provide you with our thoughts regarding gold's next move.
Specifically, we will comment on
the link between gold and the U.S. Dollar, and in the following part of the
essay, we will also comment on the price of gold directly.
We will start with the long-term
USD Index chart (charts courtesy by http://stockcharts.com.)
In
this week’s long-term USD Index chart, we see some consolidation after
last week’s small rally (reflection of the current consolidation in the
Euro Index). Since these consolidations often take place in the middle of the
move, we might expect the recent rally to take the dollar higher to 84.5 or
so. Similar examples can be seen – in a bigger way - in the recent
December to June prolonged rally.
The
rally itself lasted for nearly seven months and it included one big
consolidation – from Feb to April 2010, which was right in the middle
of the move.
Again,
it is likely that the USD Index will move higher very soon. The probable
downtrend for the euro, which we discussed previously, is an important
contributing factor to the dollar’s likely near-term direction. By
comparing the current rally with that seen earlier in 2010, a target for the
top of this USD Index rally seems to fall in the 84-85 range. The main
determining factor here is the assumption that this current consolidation
period is somewhat near the mid-point of the rally. It is important to note
that the term mid-point refers to index levels which may or may not
correspond to mid-points in time.
Precious
metals have, for the most part, been moving on their own lately. It is
possible, however, that their turning points could coincide with those of
the USD Index.
In
this week’s short-term chart, there are two developments worthy of
note. First, the break above the declining trend channel has been verified
this week. We have seen several consecutives closings above this level, which
was surpassed last week. It is likely that the dollar will rally from here.
The
second observation clearly seen in this chart is the vertical red line which
indicates a likely turning point to the upside for the USD Index. A close
inspection of recent turning points reveals that in seven out of the last
eight, gold and silver declined either immediately thereafter or in the next
few days. Since we are in this position today, it is something which
cannot be overlooked in our precious metals analysis and a decline in gold,
silver and mining stocks therefore appears quite likely for the near-term.
The
likely short-term trend for the Euro Index appears to be down. As is normally
the case, this is bullish news for the USD Index and a rally may very well be
seen here soon. Gold, silver, and mining stocks will likely see lower
prices in the close future. Speaking of gold, let's check how did the yellow
metal perform in the previous weeks.
The
long-term chart for gold this week provides some evidence in support of a
soon-to-be-seen local top. The RSI has risen to levels which often marked
previous local tops. The GLD SPDR level is presently only slightly above the
61.8% Fibonacci retracement level, and the long-term resistance line (rising
thick black line) is being touched right now.
The
situation is quite similar from the non-USD point of view.
From a
non-USD perspective (valuable for instance to Investors/Traders watching gold
priced in the euro, sterling, or rupee), it also seems that gold is
approaching a local top as is gold in USD. The 50-day moving average seems to
be a resistance level. This average has provided strong support or resistance
on many past occasions, so we shouldn't ignore it here.
Keep
in mind that gold in non-USD currencies will likely trend similar to USD gold
markets, that is local tops may very well coincide.
Before
summarizing, we would like to comment on one of the questions that we've
received this week (thank you for your feedback, we really appreciate it).
The
question came from an Investor, who purchased shares of a silver producing
company in order to profit from a speculative trade that was supposed to take
only a few days (this was a bet on good earnings report). The company didn't
do well, and this Investor finally end up with about 1/3 portfolio allocated
in this company's shares. The question is what to do given the current market
environment. Our reply is that if it was our money on the table, we would
close the position right away, not only because of the possibility of a
correction from here. We would do that mainly because the factor that made us
open this position in the first place is no longer valid and because we would
not open such a position if we didn't own any shares - at least it would not
be this big.
If -
at any point - you are not sure if you should hold on to a position that you
currently have (and there are low transaction costs), all you need to do is
ask yourself a different question - would you open this position at current
market price in the amount that it currently equals to in your portfolio. If
the answer is no, then you have just told yourself to close the position.
Summing
up,
it is likely that the local top for gold is in or very close to being in.
Bearish indicators are in place for the near-term and if the expected
downturn does not begin immediately, we expect it will be seen very soon.
Much of the doubt present today will be erased once the downturn is
confirmed. Additional information, detailed price/time targets and
explanations are available to our Subscribers along with the in-depth
description of a new way to analyze the gold market.
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!
Przemyslaw Radomski
Editor,
www.sunshineprofits.com
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