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Yesterday gold was little changed before the key
Federal Reserve policy decision, a day after a German court ruling in favor
of a euro zone rescue fund. The decision centered on challenges to
Germany’s participation in the 500 billion euro ($639.3 billion)
European Stability Mechanism, or ESM. Critics charged that the treaty behind
the ESM robs Germany’s parliament of its constitutional authority over
the country’s budget and had asked for an injunction to prevent the
country’s president from signing it into law. In other words the Court
ruled that it is constitutionally permissible for Germany to finance the debt
of other nations.
The decision means the eurozone
finally has two robust financial defenses against the debt crisis. The
bailout fund will take its place alongside plans by the European Central Bank
to buy unlimited amounts of short-term government bonds issued by troubled
countries. The ESM can support countries by loaning them money, while the ECB
bond purchases could lower the painfully high borrowing costs that are
threatening Italy and Spain. Additionally, the ESM is also expected to join
in purchasing bonds to support the ECB effort. Yet both the ESM and the ECB
bond purchases are only stopgap measures. They can give governments time to
reduce their deficits and cut debt long-term by reforming their economies so
they can grow faster. One wonders if the countries will bite the bullet or to
delay once the pressure is off, as they have during previous lulls in the
crisis.
The news of the German court decision Wednesday sent
bullion to its highest since the end of February. Also investors were hoping
that the Fed will announce another round of quantitative easing, (QE3) at the
conclusion yesterday of a two-day policy meeting. Such news would be
considered positive for gold, as injections of liquidity into the market tend
to benefit the yellow metal.
What investors got from the Fed was something much
bigger than QE3. What we got was an open-ended
QE. $40 billion will be pumped into the U.S. economy each month until further
notice. Just as if the endless QE wasn’t enough, the Federal Reserve
has maintained its funds rate at 0.0%-0.25% at least until mid-2015.
The above is not important only per say, but also
because it is something that exceeded market’s expectations.
Consequently, we didn’t see the buy
the rumor, sell the fact type of reaction – what happened was
bigger than the rumor, so markets got another positive impact.
This is a major bullish
fact for the precious metals market. As Europe and the US continue their
inflationary race, precious metals rally – and they should rally much
higher – endless QE means that they virtually have to.
At this point, it seems that higher precious metals
prices will be seen this fall and winter.
We’ve seen some quite bullish developments in
the precious metals this and last week. Let's now turn to mining
stocks’ technical picture to see whether they’re in a similarly
bullish situation as the metals themselves. We’ll start with short-term
HUI Index chart (charts courtesy by http://stockcharts.com.)
In the chart, we have a bit (!) of a bearish
situation. With the index reaching the psychologically important 500 level
this week, a level which has often provided support in the past, we could
very well see it serve as resistance this time.
A moderately strong resistance line is also in
place, one which is based on two local tops which were quite close together.
The situation would be more bearish if the previous tops were father apart as
this would make the resistance line a bit stronger.
At the moment of writing this essay, the HUI Index
is at 516, however the breakout is not confirmed and RSI is so extremely
overbought that a correction or consolidation is now quite likely.
Let’s now move on to a very interesting chart
that will show us the performance of mining stocks relative to gold.
In the miners to gold ratio chart we also see a
breakout this week and this is important and encouraging for mining stock
investors. The ratio has been struggling for a month to break out and we
finally see a convincing move above the resistance line.
If a correction is seen and the ratio does not break
below the support line, this will be a strong
signal that miners will outperform gold in the month to follow. In
exciting related topic, next week a brand new tool (in our new website;
actually two tools: one for gold and one for silver) will be at your disposal
for selecting mining stocks and rebalancing your mining stock holdings.
To finish off, let’s have a look at our own
in-house developed indicator that serves as yet another confirmation of the
recent bullish change in mining stocks.
On September 7th, 2012, one of our
indicators flashed a buy signal as it moved to the dashed line.
The medium-term trend is clearly bullish right now.
If the correction is seen in the precious metals in the following days, as
described earlier, we expect the bottom (and a great buying opportunity) to
be confirmed by at least one of our indicators – just as previous
important bottoms were (see the above chart for details).
Summing up, the miners are
beginning to outperform the underlying metals and this bodes well for the
future performance of the mining stock sector in the medium term. However, the following days may not
reflect this bullish trend because the HUI Index is extremely overbought on a
short-term basis.
Thank you for reading. Have a great weekend and
profitable week!
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