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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold and Silver Negative Momentum to Continue?

Commodities / Gold and Silver 2011 Jun 10, 2011 - 11:06 AM GMT

By: Przemyslaw_Radomski

Commodities

Best Financial Markets Analysis ArticleLet’s begin today’s discussion with fresh Fed decisions and its implications on capital markets. Ben Bernanke sent a strong signal recently that despite weaker economic data, the US Federal Reserve is not planning to loosen monetary policy. He said that the recovery “appears to be proceeding at a moderate pace”, in other words, no QE3, at least not for now. Wall Street turned south, the 10-year Treasury yield eased back under 3 per cent and gold futures fell. In the last Premium Update before we knew what Bernanke planned to say, we said that it was a good idea to close long speculative positions in gold.


Mark your calendars. On June 30th the Fed will end its second round of quantitative easing, the money supply will tighten. It is the flood of money pumped out by the Fed that has propped up the stock market for the past three years. What will happen when the dollar pump shuts off? It seems plain common sense that the stock markets will go down. It also makes sense that when markets will plummet to where it really hurts; the politicians will demand a new round of QE. We find it difficult, if not impossible to believe that there will not be QE3 in the future.

It’s only a matter of time before the Fed will have to turn on the presses again sending a message to America’s creditors that they will be repaid in devalued fiat currency. All around the world, more and more central banks are selling dollars and buying gold. Apparently they have come to the conclusion that U.S. credit is not that reliable and that the value of the dollar is likely to decline. We have come to that conclusion long ago and have been recommending long-term positions in precious metals.

In desperate times it’s good to hold some physical gold and silver. The investment demand is clearly strong from individual (small) buyers, but does it mean that markets will move up soon?

Let’s move to chart analysis to find out more about the short-term trends. We will begin this technical part with the analysis of the Euro Index. We will start with the long-term chart (charts courtesy by http://stockcharts.com.)

We begin with the long-term Euro Index chart where we have seen a continuation of the trend to higher index levels. However, based on the price action seen this week, there may be a slight pause underway which perhaps will be followed by a retest of the declining support line. A move below this level could be followed by additional declines to yet another support level.

The implications for gold, silver and gold and silver mining stocks are the same as was seen in previous declines of the Euro Index where the precious metals sector generally declined as well. It is important at this time for all precious metals Investors to keep an eye on the decline of the euro for these reasons.

Additional implication is that currently the analysis of the short-term chart (below) is just no less important than the analysis of the long-term one (above).

In the short-term Euro Index chart, we can clearly see the important short-term cycles which generally have had profound impacts not only upon currencies but also upon gold. The chart suggests that the local top was in a few days ago and this will likely lead to lower Euro Index levels and lower gold prices in the days ahead. Note that these short-term cyclical tendencies have been particularly reliable on a short-term basis, but if we are, in fact, on the verge of a bigger downward move, this could very well be the trigger for it.

Moving on to the long-term USD Index chart, we see that index levels recently moved below the 2009 lows and then reversed direction. It is possible that we could see a local bottom as there is a support line here created by the 2009 November low.

Fundamentally speaking, the situation favors a short-term rally. The markets are digesting news that we won’t see QE3 soon and that the supply of the USD will be at least somewhat limited. On the other hand problems within the EU make many market participants believe that EU will monetize its debt either directly or indirectly (without calling it such). Combining these two points provides us with a short- / medium-term bullish picture for the USD Index (recall that the EUR:USD exchange rate is the most important part of the USD Index).

In the short-term USD Index chart, we see the cyclical turning points, which are represented by the vertical lines in our chart. It’s important to note here that these have medium-term magnitude with respect to index level trends. Presently, the USD Index is close to a local bottom and this is consistent with points made earlier.

The USD Index is therefore likely to move higher from here. It is unclear at this time whether the level of previous highs will be reached and/or surpassed (based on the strong support in Euro). Whatever the situation, generally speaking, higher USD Index values will likely have a negative impact upon gold, silver and gold and silver mining stocks and the signals from this chart also support this short-term outlook.

Summing up, the USD Index has become bullish at least for the short term and the Euro Index conversely appears to be in an analogous period of decline. These changes reflect the fundamental news of no QE3 that some market participants were counting on. Consequently, the short-term picture for gold, silver and mining stocks is now bearish.

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, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski
Editor
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    All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

    By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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