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Is this the start of a run in Precious Metals? We think not

Commodities / Gold and Silver 2016 Feb 14, 2016 - 04:40 PM GMT

By: Donald_W_Dony


On the backs of a short-term weakness in the U.S. dollar, precious metals have made a sizable advance in the last few weeks.

Gold prices have jumped 17% and silver has increased over 12%.

There are several reasons for the latest move.

Gold and the US dollar tend to trade in the opposite direction to each other.

The Fed has backed down from its previous interest rate forecast of four rate increases in 2016, which is bullish for the dollar. The current outlook is more dovish and suggest a "wait and see" approach.

In response, the dollar has stopped its rise and dropped 4.5% in the last two weeks.

Another reason for the sudden advance in gold and silver is the "safe haven" aspect.

Global stock markets have been in a tailspin over the past six weeks, losing, on average about 7%.

In times of market turmoil, gold is often viewed as a safe haven investment.

Nevertheless, gold and silver are still in multi-year descending trading patterns.

Gold prices has been in a prolonged downward trend since 2012, and silver have fallen steadily since 2011.

To move out of this pattern, gold would need to break to $1,300 and stay above that level in March. Silver would need to advance to $17.00 and also hold that price over the next few weeks.

We think the probability of that event is low for the following reasons.

The U.S. economy is the strongest in the G8. They are the 1st to raise interest rates among the top industrial nations. The unemployment rate is another reason. The rate is the lowest it has been in seven years (4.9%). This would suggest that the U.S. economy is on solid footing and a return to strength for the US$ is coming back.

Also, the decline in the stock market (S&P 500) appears to be slowing. The index is suggesting it has found a floor at 1825.

Bottom line: Gold and silver prices have spiked upward in recent weeks and threatening to break out of a multi-year downward trend.

Part of the reason for the sudden rise appears to be connected to the sharp pullbacks of the U.S. dollar (DXY) and the equity markets.

However, there is growing evidence that the US stock index has bottomed-out at 1825 and the US$ is stabilizing on the support level at $0.953.

Should the S&P 500, in particular, return to its bull market path, the current movement toward safe haven metals will likely evaporate as quickly as it arrived.

By Donald W. Dony, FCSI, MFTA

COPYRIGHT © 2016 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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