Gold broke out of its 6 month consolidation and cup and handle pattern. The gold bulls are now in control and short covering should begin to cause an explosive move to my late January target of $1600 on gold and $40 on silver. In late January, gold and silver were in a sell-off and many were predicting lower prices as moving averages were broken. Now we are on our way to the January target in gold of $1600. Many ask what to do as they sit on hefty gains. I have learned through many years of studying the markets that the use of measured moves and technical targets when making a selling decision is quite important and must be followed. Institutional investors sell into strength at overhead resistance and are able to take profits. At those times of extreme optimism is when one must get worried and take some risk off the table. For one person it may be going off margin, for another it may mean raising cash. At times when technical targets are reached risk management becomes crucial as it is the most difficult time to sell as the consensus turns positive. Please stay tuned to daily bulletins on when technical targets are reached.
What is interesting about last weekend’s breakout in gold is that it occurred simultaneously with China raising rates. In November and December, when China was battling inflation and increased rates, sharp reversals and selloffs occurred in gold and silver to the downside. Now the exact opposite has happened. Excellent price action on negative news from China raising rates shows the yellow metals relative strength at this juncture. When precious metals rally and breakout on interest-rate increases that is suppose to slow down inflation, it is a very bullish sign. This may signal that any rate hikes will not be enough to get inflation under control. Jesse Livermore teaches us that it is not the news item itself that should be monitored, but the market’s reaction to the event is most informing. Are we seeing the clues that precious metals are telling us? This breakout might cause a powerful 10% move to the upside and a powerful four to six week rally.
Although you may start getting excited with the major gains you will be seeing from the late January buy signal and all the Johnny come lately analysts buying gold during this euphoric breakout, I ask you to not get overly optimistic as technical targets will be soon reached in gold, silver and my mining recommendations. Please reward yourself and take profits when technical targets will be reached. No one gets poor by taking profits.
Many investors have fled the yen (FXY) and are looking for alternative currencies to hedge their positions. The Japanese Earthquake may have many positive benefits to their local manufacturing. For months Japan was concerned about a rising currency and the falling U.S. dollar (UUP) as this affected their exports. Japan was intervening in the foreign exchange markets buying the U.S. dollar to prevent devaluation. A weak U.S. dollar and strong yen caused major concerns to Honda (HMC), Toyota(TM) and other export giants. This waterfall decline in the yen has not caused any rebound in the U.S. dollar as investors have sold yen buying gold (GLD) and silver (SLV) instead. The weakness in the U.S. dollar, a historical safe haven in times of uncertainty, is causing investors to reevaluate that status. This is definitely a catalyst for gold and silver.
The euro (FXE) is reaching technical resistance. Interest rate hikes in China and Europe will not derail this rally in precious metals as inflation is spiraling out of control. Investors are nervous about fiat currencies. Moody’s just downgraded Portugal and may consider further reductions in their bond ratings. If cuts are not made in the U.S. and the debt ceiling is raised, we may see the U.S. get downgraded. This will cause further weakness in the U.S. dollar and rising bond yields. All this may be negative for the global equity markets and will be carefully monitored.
Although investors are celebrating new highs in equities and commodities on Wall St., leaders in Washington are facing some serious decisions on how to balance the budget. The reckless spending in Washington is forcing lawmakers to make some important resolutions about raising the debt ceiling and reducing entitlements. This uncertainty of a shutdown of the U.S. Government combined with the Middle East Crisis escalating has caused investors to seek out the safety of silver and gold. Investors are seeking out the safety of precious metals as gold broke out of its cup and handle pattern and silver races towards my target from late January.
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