A Tale of Two Currencies

Best of Times for Precious Metals, Worst of Times for U.S. Dollar

Fri, Apr 1, 2011 - 12:19pm

It is the best of times for equities and precious metals and the worst of times for the U.S. dollar. It is prudent to focus on the sectors with long secular uptrends as these patterns tend to last longer than expected and produce the greatest returns. Gold (GLD) and Silver (SLV) are in a decade long uptrend as geopolitical uncertainty and rising debt levels have caused many investors to seek the safe haven shelter of real money. In July 2010, as the European Crisis was the prominent topic of worry, gold reversed higher and made a major move on central bank plans to ease. This continued through October and November, when the precious metal trade was very overbought. For the past six months, gold has consolidated as the dollar took a respite before hitting new lows. A breakout in precious metals and continued weakness in the US dollar to all time lows could radically impact our investments. In late January, my buy signal was activated when gold reached its 2-year trend support. During this time we saw precious metals reach very oversold levels. Even the strongest trends need time to pause. For six months gold bears have put up resistance. But it may end soon and this breakout may be powerful. Gold may follow

Now we have a six month rectangle where gold has vacillated between the 00 to 50 area. The battle is raging between buyers and sellers. Gold bears are not allowing it to break above the 50 area yet and we may see a further shakeout before the next major high volume breakout, as there are a lot of shorts. I would add on pullbacks, especially as odds are on the bulls' side for a major breakout. These long pauses in the uptrend usually result in major moves to the upside rather than bearish tops which usually end in parabolic moves. Don’t fight the odds, don’t fight an uptrend, and look for a breakout above 50 which will bring us closer to my late January target of 00.

Many Fed members are trying to support the gold bears by talking about exit strategies as the US dollar reaches record lows. These news items with central bankers should be bullish for the dollar, yet it is having difficulty sustaining any counter trend rallies. Most moves up in the dollar have been short lived and new record lows are being breached. Investors are realizing the record deficits and obligations will force the central bank to keep interest rates low and devalue the US dollar, so they can pay back their debts with a devalued currency.

I will continually monitor whether or not this breakout from the box in gold is authentic. Volume needs to come in and we should see gold's ability to hold new highs. I firmly believe that precious metals will continue their uptrend and the shorts will have to be stopped out once we significantly break through resistance. It is normal to see short term profit taking at new record highs. Most box patterns like this are continuation patterns, meaning that this consolidation will only be a pause. If gold closes 3% higher than 40 we could see a major short covering for precious metal bears. The US dollar is having a series of declining highs (Bearish), while gold makes higher lows (Bullish).

Gold (GLD) made a triple top breakout breaking above 0. Since the long term trend has stayed intact and since we have had a significant correction in January where gold reached long term support, there is nothing technically that should make one believe this is a major top or a bull trap. Although there may be a slight chance of that, the odds are in the bulls favor as trends tend to continue longer than expected. Pullbacks in precious metals should be times to add. For three weeks gold has consolidated at new highs forming a bullish three weeks tight formation.

Make sure to stay tuned as breakouts must be monitored. For investors who need more in depth and intra-day analysis of the precious metals, rare earths and uranium sector find out more about my premium service free trial by clicking here.

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