One of the most interesting realizations I have gained from studying the financial markets is that success comes from developing a clear set of rules and sticking to them despite the current psychology and tenor of the market. Contrary to popular opinion, being successful in the market is not based on how smart you are or what university you attended; success is about sticking to your discipline and following a methodology.
One person who has greatly influenced me is Jesse Livermore. Livermore was very poor growing up and didn’t have a formal education like most of the fund managers today. He was extremely disciplined and he developed a rules-based methodology, which made him one of the most successful traders of his time. One of his famous teachings is: The smarter you are, the easier it is for the market to fool you. Many times the market does the exact opposite of what economists and pundits predict. Livermore found a simple method to follow a trend and monitor price volume, which helped him surpass the top traders of the time. However, Jesse Livermore ultimately committed suicide, and in the note he left behind, he stated that he considered himself a failure for not sticking to his own rules.
The recent subprime debacle and the 2008 market crash shows that the smartest academicians had absolutely no grasp of the dire situation that was at hand and continued to recommend the “buy and hold” doctrine. The Federal Reserve itself wasn’t admitting we were in a recession until many investors suffered a major loss. Meanwhile, behind the scenes, institutional investors were trading the volatility and making huge profits on the short side as technicals gave clear sell signals and shorting opportunities during the downtrend. The professional traders and institutions don’t subscribe to the “buy and hold” methodology even though they market it to the ill-informed public. Institutions and hedge funds go long and short and move to cash when conditions warrant it.
Using a basic set of technical rules and reviewing market tops, a technical trader is able to prevent a major loss and wait for less-risky opportunities to capitalize and increase gains.
Since October, the Gold ETF (GLD) had three failures at upper resistance and has not been able to make a major move into new highs. In early October, I warned of a major rally in the dollar and a rise in interest rates much to the dismay of market “experts” who were expecting QE2 to devalue the dollar and keep bond prices high. The exact opposite occurred. Bond prices plummeted, the US dollar rallied, and gold has been range-bound. My mining recommendations in precious metals, uraniums, molybdenum, and rare earths have significantly outperformed.
On Christmas Day, the Chinese central banks raised interest rates for the second time since October. I expected it at their last meeting on December 13, and I wrote that the pause was due to the holiday season and to wait until after the holidays for a hike. Obviously their decision to surprise the markets on Christmas Day demonstrates how urgent it was to curb irrational speculation, rising prices, and commodity costs. The Chinese also cut rare-earth exports, which is causing a major increase in these mining shares. In 2011, I expect them to keep looking for natural resources abroad to further fuel their growth and demand. This last rate hike was looked upon by the markets as weak, and commodities have skyrocketed since the announcement.
Again the market goes against logic. China’s rate hike should have been bearish on the price of gold but instead, commodities are soaring. Gold has bounced off the 50-day moving average and has found support, which is a very positive sign. This second test of the 50-day and the bounce after the raising of rates by China may signal that the three-month consolidation is over and that gold has finally found enough support to make the next leg into new highs. Investors are shrugging off the rate-hike news and moving back into commodities with full force. Technically, this is very bullish, and I am looking for a strong move into new highs. The next leg may be beginning, providing a better market entry point than in early October. New signals have been alerted.
What is so rare as a day in June, the poet asks? The answer … a sector in play, on a perfect day. The rare earth sector is experiencing an explosion of investment interest as China continues to place restrictions on Rare Earth Oxides (REO).
Resource investors are drooling over the potential price explosion like Homer salivates for donuts. Every year around this time a new craze emerges to capture the imagination. We lived through hula hoops, Beanie Babies and Cabbage Patch Kids. Now rare earths have become the latest “must have” for the holidays. The drums are beating strongly in the investment jungle and they are pounding out “rare earth-must have!”
It is vital for us to choose judiciously and not be swept up in the St. Vitus Dance of speculative fever. Have no doubt – the mania phase is upon us. It is being exacerbated by China using export quotas to bring to public attention a once arcane sector of the mining industry, propelling rare earth miners onto the front pages.
For many years end users relied on China’s production as mines outside of China were shut down due to the environmental issues involved. However a transition is occurring and assets outside of China are gaining a lot of investor interest. Of course share prices have doubled and tripled. The question on the table is which of these exotic metal miners will lead the sector as many companies are far from production and only a few could benefit from the near term supply crunch.
In the interest of time and space I will not belabor readers with metallic elements that end with “iums.” Suffice it to say rare earth oxides are critical in the manufacture of high tech equipment such as ipods, electric cars, wind turbines, magnets, lasers, cell phones and many other new uses. Demand in rare earths is expected to increase exponentially over the next generation. This immediately brings into prominence the importance of many of our industry leaders, names like Apple (AAPL) and General Electric (GE) springing to the forefront. Their use in hybrid cars and energy saving products is an integral part of the green energy push. Demand is increasing and China controls about 97% of these precious oxides. China will continue to issue quotas before the onset of the Lunar New Year in February. This may generate a price spike in rare earth stocks in the coming months.
Other countries are concerned of a supply squeeze, especially Japanese manufacturers like Toyota (TM) and Honda (HMC) whose success with their hybrid vehicles depends on having a supply or rare earth metals. Japan has already reported supply disruptions and expects to run out of rare earths by April of 2011. Japan must free itself from its present domination by the Chinese as its economy is highly dependent on the use of rare earths. Japan has shown its interest in rare earths with major deals outside of China. Sojitz, a major Japanese trading giant, recently made a deal with Lynas (LYSCF.PK) and Hitachi (HIT) and Sumimoto has signed agreements with Molycorp (MCP), the only near term producer in the Western Hemisphere.
Of the 200 or so rare earth companies that are being promoted only a few near production. Most companies are many years away and mining rare earths is extremely difficult due to environmental and regulatory issues and separation costs.
There is a growing scarcity of available precious metal mines in the world. The old majors such as Barrick (ABX), Goldcorp (GG), and Newmont Mining (NEM) are facing diminishing reserves in their existing mines. They are mature miners and their pockets are bulging with cheap dollars. Moreover, these majors are competing with the Chinese, Russians, Japanese, and Koreans who have all shown an interest in expanding their precious metals assets and diverting assets away from paper currencies into real assets. All of them know it is cheaper to buy growth rather than to find it; they’re like the Red Queen in Alice in Wonderland who must take two steps forward just to stay in the same place.
Sitting on cash and not converting it into resource growth can be deadly for a large company in this ebullient precious metals market. Many ponder why precious metal prices are rising, yet many majors are sitting on their laurels afraid to make the plunge to acquire projects. This has led many institutional investors and mutual funds to flock to the smaller explorers who are delivering the consistent results to the market that characterize growth. Many of the developers have underperformed, and this certainly has been an explorer’s market. I don’t have to work hard to prove this point.
The small miners have been significantly outperforming the large-cap mining companies. Investors are looking for resource expansion and growth. Many top companies are leaner and stronger with far superior assets than they were in 2007. Companies are able to expand developing discoveries at lower costs due to the weak economy and cheaper oil. Remember back in 2007, oil was up to $140 a gallon? Now costs are more inexpensive and precious metal prices are significantly higher. The operating margins have significantly improved. Some of these potential projects that were once marginal are gaining more interest as the high price of precious metals is improving the project economics of marginal projects. Now the question is who will be acquired. The best way to figure that out is to screen for the best mining companies using both a fundamental and technical approach.
I believe companies will acquire and invest in juniors due to fears of further bailouts in Europe and currency devaluations in the United States during 2010. Several US states are on the verge of bankruptcy. France is in danger of losing its triple-A credit rating and many European sovereigns have already been downgraded. The reaction to debt issues have been radical moves from central banks and governments to print and inflate asset prices at any cost. Deficits are soaring and investors are flocking to junior mining stocks. Many high-quality juniors have just recently made moves and are just beginning to return to pre-credit-crisis highs. If the majors do not act soon, many of these high-quality, high-grade projects will be swallowed up from the international demand for hard and real money. There are very few high-quality projects with production potential that suit the needs of majors. The majors are growing increasingly compelled to scour the planet for eligible deposits. The gold price has advanced over 25% this year, silver is up over 50%, and investors are curious as to which major will make the next deal. Discovery rates are dropping and there are a lack of viable low-risk deposits for a major. Faced with the prospect of declining profit margins and depleting mines, the majors must speed up the pace of seeking M&A activity. Such a search is not without risks. Venturing into foreign lands, dealing with unstable governments, operating in the midst of drug cartels and well-armed bandits, they pay top dollars for blue-sky potential in safe jurisdictions and close to infrastructure. Yet there are high-quality mines in the United States, especially in Nevada, that have been overlooked.
In 2010, majors began making moves that gave hefty premiums for blue-sky potential and high-grade assets. Recently the acquisition of Andean Resources by Goldcorpdemonstrated how confident the Goldcorp team feels in the potential upside of the Cerro Negro project. Investors looking to make money in the mining sector should study similar projects that have all the criteria that majors are paying top dollar for. The Cerro Negro project has high-grade exploration upside, low cash costs, and blue-sky potential in a mining-friendly jurisdiction.
In their urge to merge, these majors are overlooking suitable prospects in their own backyards. Here, in the safer, stabler turf of the United States, there are hosts of friendly candidates waiting to be acquired. One candidate which I have informed my readers about for several months is Fronteer Gold (FRG).
Fronteer has a huge land position in Nevada, second only to Newmont, and is consistently announcing high-grade results from its 100%-owned Long Canyon Mine. It has been impressing the markets by expanding the mineralization to the northeast, and in its last press release it showed high-grade mineralization to the west. This is demonstrating to the mining community what an incredible deposit this is becoming and how it is open in multiple directions.
The recent results also validate Fronteer’s move to acquire Auex Ventures in order to take 100% control of this asset. Fronteer has not just discovered a mine, it’s discovered a whole new trend in a mining-friendly jurisdiction near infrastructure. This mine has the potential to get huge. Drilling results are continuing to expand high-grade intersections of around 10 grams per ton. Now,with the recent transaction this past week of its Michelin Uranium Deposit, Fronteer is in a strong cash position and is the largest shareholder of Paladin Energy, a world-class uranium miner. This provides Fronteer with liquidity. At any time it can raise money through selling shares and not diluting shareholders to build its gold discoveries.
Paladin is the eighth-largest producer of uranium with a pipeline of uranium projects and is in a strong financial position. This is an investment for shareholders who believe we’re in the beginning of a uranium bull market. I believe in a couple of years the price of uranium will move much higher, placing Fronteer in a financial position to build world-class gold mines without needing financing or diluting shareholders. It also gives a concrete value to any potential suitor in case it should want to purchase Fronteer. Fronteer’s books have about $120 million of cash and around $250 million of Paladin Energy, an impressive balance sheet for an emerging-mine developer.
A few days ago the French upstaged the US mighty nuclear reactor construction industry under our very noses in broad daylight, making us appear as Homer Simpson napping at the control plant of Mr. Burns’ atomic energy plant in Springfield. Most of the media never mentioned the event. Only one gave it token coverage hidden on page A13 without realizing its true significance.
French President Nicolas Sarkozy signed a landmark deal with the Indian government to sell billions of dollars of nuclear reactors and fuel for the next 25 years, while the US is battling in hard economic times, beset by unemployment to maintain a grip on India’s extremely profitable and growing nuclear industry.
The French, Japan, Korea, and China are actively building reactors. In fact, India desires to develop nuclear electricity as a cleaner alternative to coal-based energy to satisfy the country’s increasing needs. India is on record as having about 4,560 Megawatts of nuclear power now, but wants to multiply that about 14 times by 2032.
President Sarkozy recently returned from Mumbai saying that the nuclear agreements are “very favorable to the French nuclear industry.” Moreover the French are building a state-of-the-art, new generation nuclear reactor in Finland.
The United States is constantly laboring to court India’s very profitable and blossoming nuclear energy industry. President Sarkozy has invaded the marketplace, which has been historically commanded by America. Admittedly, it is important to protect polar bear habitats, but simultaneously we should defend a sector in which we were pioneers going way back to the Manhattan Project led by Einstein, Bohr, Oppenheimer, and Meitner. These visionaries were thrown out of the “Fatherland” because they espoused a new physics that was antagonistic to the classical German rocket technology. This erroneous decision was later regretted by the Nazis as they failed in the race to build the atomic bomb.
There is another major crisis over the near term. America is one of the largest users of uranium and a lot of the uranium comes from Russia. More than 90% of uranium consumed in this country is imported. However, that program with Russia is coming to an end by the end of 2013 and the US will need to find alternate supplies. Time to wake up, Homer.
Yesterday, the Russian mining arm ARMZ purchased Mantra for almost $10 a pound of uranium in the ground. Mantra controls the Nyota deposit and will be able to produce 5 million pounds of uranium a year. This transaction signals that governments and institutional investors are scrambling for control of uranium assets in the ground. These transactions should continue over the next few months as alert foreign nations such as China and Russia are realizing the dire supply-demand constraints.
Russian uranium requirements have increased, evidenced this year by several acquisitions including Uranium One (UUU:TSX), which has just received its NRC license on its Moore Ranch project. Other miners in Wyoming are likely targets. The trend is signaling that the suitors will come from overseas as China, with its recent take-off agreement with Cameco (CCJ), and Russia, with its recent purchase of Mantra, seem to be the most active investors. I’m surprised that the US seems asleep at the switch with many danger signs being alerted.
Back in October I wrote about building positions in the promising uranium mining sector, especially domestic assets and specifically assets found in Wyoming. Wyoming is a mining-friendly jurisdiction and there are a lot of miners nearing production.
Some of the miners out of Wyoming nearing production have made huge percentage gains, such as Uranerz (URZ), UR Energy (URG), Cameco, and Uranium One (SXRZF.PK) as more mines are expected to receive permits to begin operation.
After QE2, analysts were looking for possible consequences of the Federal Reserve Bank’s actions. What has become apparent is that the Fed has created another bubble in China. Investors globally have transferred devalued US dollars and euros to buy Chinese property and equities. China has had to combat imported inflation with rapidly rising asset prices. An influx of capital has caused a real estate bubble, a rise in costs of basic goods, and excessive speculation in the commodity markets. The Chinese central banks will be observing the inflation data which should be coming out this weekend and will be compelled to act aggressively to prevent China from a bust similar to the housing crisis which occurred in the United States in 2007. Yesterday’s IPOs showed that irrational exuberance is here once again, none since I have witnessed since the late ’90s.
I never grew so fearful of the Chinese market until I began hearing the fanfare around yesterday’s IPOs. I began to read the marketing language and began to have strong feelings of déjà vu. I felt like I was reading something that I read almost 10 years earlier with a company called boo.com, which was labeled the next Amazon (AMZN). They were also underwritten by Goldman Sachs (GS). Boo.com burned through $185 million in 18 months and did not make any profits. Investors were wiped out. {FLIKE}IPOs are a measure of market sentiment. Companies come to the market as the future looks bright and they’re expected to expand. A pattern of IPOs begins to show over-enthusiasm and possible peaks in the market. The number of IPOs is a useful tool for technicians to confirm tops and troughs in the market.
Investors are obsessed with China, just like the IPOs in the late ’90s right before the tech bubble burst. They piled into two new IPOs, Youku and Dangdang, which are not showing much of any profit and only offering panaceas. This year approximately one in four IPOs are Chinese companies. Investors are expecting exponential growth, and even though these have been marketed as the next YouTube (GOOG) and Amazon, both companies have a long way to go; they are currently not making much profit at all. Lessons should be learned from the tech bubble: Highly marketed IPOs should be viewed as a contrarian signal. Ironically, these latest IPOs come at a time when the Chinese central banks are committed to fighting excessive speculation.
International markets are going to carefully examine China’s inflation data (to be released this weekend). This information should evoke central bank response by early next week.
The chart above shows the rapidly accelerating price appreciation of housing markets in China’s major metropolitan areas. China has already implemented regulations to curb rampant speculation in their housing market.
Many investors are unaware of the rising dangers of externally generated inflation. Month after month applications to start real estate operations from foreign entities are doubling. The carry trade has become apparent. Investors are exchanging easy, electronically printed money for Chinese assets.
The chart above illustrates the China 25 Index (FXI) and shows a possible “V” reversal top and negative divergence. This is when price breaks into new highs, then with no warning, the price breaks the uptrend and support levels. The FXI broke through the 50-day moving average and has already failed to regain the 50-day on the upside once. Until it regains that 50-day, I am cautious on commodities and equities. Ideally a break into new highs should show some follow-through strength, and this has not occurred. The Chinese markets are showing weakness, and this effect has morphed over to the precious metals and commodity markets.
It would be naive to think that a surprise hike in rates and a downturn in China would not put pressure on gold and silver. Gold (GLD) and Silver (SLV) are beginning to show signs of bearish reversals after a powerful move. Open interest in gold futures peaked on November 9, a major reversal day. A tightening policy in China could keep buyers away for a significant amount of time or until prices come down to a more reasonable level.
The demand and consumption of raw materials in China has a major impact on commodities. It used to be that one had to watch a sneeze from the US, but precious metals investors need to also be aware of a sniffle from China.
In my studies of the financial markets, I have found the study of trading tactics to be similar to my studies of military history and sports.
In 329 BC, Alexander the Great, in his mid-20s, led his army through the Hindu Kush mountains to Central Asia to expand his empire that covered 1 million square miles. He was a terrific military strategist who would often defeat his opponents psychologically in order to preserve his army, which for many years marched 30 miles a day across deserts and mountain ranges carrying heavy equipment. Alexander became the most powerful leader in his generation until his mysterious death at the young age of 32.
One of his classic battle strategies consisted of ordering his men to blow the war trumpets and yell their battle cries night after night so that a besieged city would need to prepare for war repeatedly. Eventually, the foes would grow tired of this daily routine and Alexander would monitor exactly when the enemies stopped reacting. As soon as Alexander saw the window of opportunity he attacked fast and hard and would decimate his adversaries.
Similarly in football, a defense will line up at the line of scrimmage often faking a blitz, forcing the quarterback to call an audible. Eventually, after faking a few times, the quarterback lets down his guard, and that’s when the blitz comes and the major yardage loss occurs unexpectedly.
Similarly with the gold ETF (GLD). Last week it broke the August-to-November trend and showed a negative divergence, causing many technical analysts, myself included, to be concerned of a steeper correction. Since my October 4 signal, where I ventured out of bullion into the junior miners, the best way to play the gold market is through trading the oscillators. In August and September, gold had a steady climb higher. This was a trending market. We began seeing some key psychological bearish one-day reversals in October and the gold market began behaving volatile with a false breakout in early November. At that time I focused on my highly rated junior miners as I believed that their breakouts were more secure than the bullion due to the upside volume. After the false breakout we had high volume distribution days and broke the August-to-November trendline. The battle cry from the “bears” was heard. Bulls supported gold but the enthusiasm and volume was nowhere near the previous sell-off. Now we’ve just broken highs, but on recent breakouts there has been a lot of profit taking. This signals an area of key psychological resistance. A lack of volume on the breakout and high volume reversal is signaling that the bears’ battle cry is heard again. Will this be the real deal?
What has been completely overlooked or not mentioned during this sizable run up in stock market profits, including the precious metals sector, is the imminent advent of tax-loss selling. Every year around this time, as sure as snow falls in Vermont, more than ever, there are reasons why this unmentioned event is apt to at least modestly affect stocks before the year end, especially precious metals. Gold has risen over 18%, silver has shown a rise above 50% on the year. Price are reaching new highs, but can they be maintained? I believe we may see more volatility as a breakout on GLD must be monitored especially as investors who have made impressive gains may decide to take profits before the end of the year. The reasons for this are manifold. Tax-loss selling is an annual event. It takes on added significance in that investors have the shadow of increased taxation looming ominously. So tax-loss selling is apt to be more severe, in view of the possibility that the Fed has already murmured that there may be a tax increase. Not to worry they say, the Fed will try to make it “gradual.”
Already the Debt Reduction Commission is on record as citing the need to increase taxes and saying they agree with the bold steps to save the economy. In 2009, China has dealt with imported inflation from the eurozone and the United States which have both had to essentially print money to save the markets. Both currencies came under pressure this year as investors fled to precious metals. The US and European economies are weakening with high unemployment yet food costs and hard assets are soaring. This current economic situation could exacerbate, affecting the quality of life for many. Right now we are in the midst of a euphoric period reminiscent of the phrase “happy days are here again.” Oddly enough the rosy news is occurring smack in the middle of the holiday season. Do not be misled: tax-loss selling will occur as investors rethink 2011 and the investment challenges ahead.{FLIKE}A most important factor that is occurring as 2010 winds down and 2011 looms is that the Federal Reserve Board is launching a full-on offensive on the American economy called QE2, impacting every household. This action is a latter-day version of the Battle of the Bulge in World War II. The bulge is not in the average citizen’s pocket; it’s in how much it’s going to cost global investors and their portfolios. QE2 is nothing more than a metaphor for the profligate printing of dollars. We can not avoid this having a significant effect on every one of us; it will prompt many to take profits now in 2010 as the price of gold challenges new highs. Many have large profits, and investors should be aware year-end profit taking.
In 2009, GLD moved from a low of approximately $80 a share to $120. In December of 2009, we saw some profit-taking without any warnings except extremely overbought readings. Be careful as this recent break to new highs has not shown much enthusiasm. Most of the excitement has been in silver, uranium, and some top-quality junior miners.
In 1883, a historic cataclysm of 10 days shook the world and vaporized Krakatoa, an island between Java and Sumatra. An umbrella of ash rose 50 miles high and sent sonic reverberations seven times around the world. Deaths numbered 120,000. Scientists of that time were awed by the magnitude of nature’s forces that were being unleashed. They speculated that one day ways would be found to harness this energy. Even the Bible concurred with the physicists, that all inert matter contained particles of energy that if harnessed could provide inexpensive and abundant energy to replace the coal, steam, and oil that fueled the industrial revolution of that era. Now, if Faraday and Boyle could return to 2010 they could witness the fulfillment of their most visionary dreams with the advent of The Nuclear Age.
International demand for uranium is rising. Knowledgeable investors who made a killing when uranium reached $136 a pound in June 2007 are once again in the accumulation mode. The Russians, Koreans, and particularly the Chinese are investing in joint ventures all over the world to gain control of future supply.
In fact, our contract with Russia to dismantle nuclear warheads expires in 2013, not far away. This will further exacerbate the supply and demand deficit. China is likely to purchase offtake agreements with uranium miners who don’t have any.
It’s important to find the miners who are in the driver’s seat. This is the miners’ market to catch a solid bid at higher levels. Certain miners who are close to production with uranium that’s not yet purchased are set up to reap the benefits of this hot sector. Recently, uranium hit a 24-month high of $61 a pound. Typically, when uranium begins to make its upward move it does so with atomic force, giving large profits to the lucky holders.
It’s interesting to note that only eight mines in the world yield more than 50% of global production. Moreover, in reality, there’s not a lack of uranium deposits, but there is a lack of assets that possess production potential. Already in the United States there are a 104 plants with more coming. China has 11 plants and is constructing another 28 reactors. This doesn’t include the facilities existing in France, Germany, Japan, Iran, among others. Today’s nuclear plants are sophisticated, safe, and efficient, far removed from the fossils of yesteryear.
As gold got overbought in October, and I saw a coming rally in the US dollar, I focused on the junior uranium miners in Wyoming as many miners were expected to receive licenses. Some of the miners out of Wyoming have made huge percentage gains — such as Uranerz (URZ), Cameco (CCJ), and Uranium One (SXRZF.PK) — as mines have begun to receive permits to begin operation. Earlier, Uranium One received its NRC license on its Moore Ranch Project and recently Uranerz received its draft license on its Nichols Ranch project.
(Click to enlarge)
Uranerz has doubled in the past month. Once miners receive their licenses their shares should be rerated by Wall Street. Wyoming produces the largest amount of domestic uranium with Cameco’s Smith Ranch Mine, which is also the largest US facility. Not all of these mines will move to production and only a select few have no local opposition and other key permits.
When time permits, I like to relax with a good mystery story. One of my favorite masters of the genre is Sir Arthur Conan Doyle, creator of Sherlock Holmes. A few days ago a story appeared on the front page of China Daily that is worthy in emulating the masters great classic: The Dog That Did Not Bark.
He might have entitled today’s story, “The Gold Trade That Did Not Rise.” The photo reveals the Premier of China Wen Jiabao and Russia’s Vladimir Putin exchanging firm handshakes and smiling broad, Cheshire grins:
The article reads:
China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade…since the financial crisis however, we began to explore other possibilities…The yuan has now started trading against the Russian rouble in the Chinese market while the renminbi will be allowed to trade against the rouble in Russia…This follows a global trend after the financial crisis exposed faults of the dollar denominated world financial system…it is aimed at the risks the dollar represents.
A mystery arises not in why the Russo-Sino action was a front-page feature on an international newspaper, but why the price of gold dropped instead of rising in the face of a discredited dollar. For the past few weeks, I have been calling for a rise in the dollar to give my readers a better reentry point for my stock selections.
I feel that some possible clues to this enigmatic action may be that the two leaders fired a warning shot across the Ben Bernanke bow. It was not to decimate dollars of which the Chinese hold major amounts. The message from Russia and China is a warning signal to the US to be careful of further debt monetizations. Moreover, there have been widely disseminated reports of dissension within the Chairman’s own team on his persistent weak dollar policies and the possible long-term negative side effects. We see that the banking system within PIIGS nations are up against the ropes and many countries are adopting austerity measures rather than receiving bailouts. The warning from Russia and China to the US is clear. Further quantitative easing will be met with swift economic actions. Other measures to support an economy must be utilized rather than debasing a currency.
In conclusion, make sure that you are wearing solid technical parachutes. I am closely observing this extended trend line on the gold chart, which should act as resistance to the upside as the previous support trend line now acts as resistance. I am expecting a reversal and break of $1,340 to confirm the negative divergences between price and momentum and change of intermediate-term trend.
In a recent article, I wrote about important trend changes in the dollar and gold.
An important inverse inter-market relationship is continuing between the US dollar and gold. They have both broken trendlines simultaneously and are threatening a counter trend move. Other than yesterday’s spike on a conflict in Korea, the dollar and gold have moved inversely and one appears to be bottoming while gold threatens to make a topping pattern.
Most traders use trendlines to determine when a trend changes, but many forget to follow that important line after the break has occurred. Smart traders have been monitoring the extended trendline on the dollar and gold this past week. It will be used to determine if this trend reversal is confirmed or if there is a chance of a technical failure. A failure occurs when price reverses back below the line. This creates an exhaustion point. It is crucial to monitor for these patterns. A failure did not occur in the dollar, as it has bounced higher on geopolitical fears in Korea, rising rates in China, and eurozone bailout concerns. This trend may continue higher, which may limit gold’s upside targets.
An extended line reverses its role of either support or resistance. In the case of the dollar, the downtrend line acted as resistance or a “ceiling” on the price. Last Tuesday, it was broken to the upside. After Tuesday, the US dollar has found support at the 50-day moving average and its new support, the extended trendline. It’s important to know that traders have monitored this technical level closely and the extended trendline has proven to hold support. This signifies the dollar may have much further to run. This could also signify pressure on precious metals in relation to the US dollar as a trend has been broken and a break of October lows could confirm a potential head-and-shoulders top.
Every precious metals investor should be concerned about China, one of the world’s fastest growing economies, raising its rates and rising yields. Changes in the rates affect stock prices. China is leading the world and we can see the fears are profound as sell-offs this week were much stronger than any of the relief rallies. If China’s market corrects then the commodity market, which was fueling the equity market, could experience a severe correction. It’s a domino effect.
Despite the Fed’s enthusiastic plan to monetize debt and artificially keep interest rates low through bond purchases, yields have risen aggressively for the last 13 weeks. The QE2 program was designed to lower interest rates to improve borrowing and liquidity. Instead the opposite occurred, QE2 is initiating higher borrowing costs. I don’t believe it is coincidence that Ireland’s debt problems surfaced following QE2. China is now on the verge of raising rates to combat imported cheap dollars to bid up Chinese assets, which is putting pressure on markets globally. Rising rates kills equity and commodity markets, which are heavily built on margin borrowing. The Long Term Treasury ETF (TLT) broke through the trend it had from May until the end of August. This previous trend was largely a result of a deflationary crisis where investors ran from risky assets like the euro to the dollar, and long-term Treasuries were pushing yields to ridiculously low levels. As fear in the markets decreased, due to a temporary stabilization in Europe and the US, investors ran to equities and commodities.
International reaction to QE2 has not been positive. There is an increased risk of emerging markets combating inflation, which may slow down the global recovery. Fears of China and emerging markets raising rates make investors unsure where to turn.
Asset classes have reacted negatively to China’s expected move. Distribution is apparent through many sectors and many international markets. Rising interest rates have a direct influence on corporate profits and prices of commodities and equities.
When studying interest rates it’s not the level that is important, it’s the rate of change. Interest rates have had a dramatic increase these past two months and we may see that affecting the fundamentals in the economy shortly.
The recent downgrade on US debt from China, who is our largest creditor, signals demand for US debt has been waning. I’ve been highlighting the decline inlong-term Treasuries since the end of August. This rise in interest rates puts further pressure on the recovery as the cost of borrowing increases. Economic conditions are worsening in Europe and emerging markets in reaction to quantitative easing and imported inflation. Concerns of sovereign debt issues are weighing in Europe. As yields rise so do defaults and margin calls.
If the 200-day is unable to hold the bond decline and we continue to collapse, then rising interest rates could negatively affect the economic recovery. Borrowing costs to insure government debt are reaching record levels internationally. Ireland is expected to take a bailout. Greece, Spain, and Portugal are in danger as well.
Commodities have significantly moved higher along with the equity market for September and October as investors left Treasuries to return to risky assets due to the fear of debt monetization through QE2. Global equity markets have been rising. But the question is, how long? This makes investors reluctant to take on debt, which is the exact opposite of what the Fed’s goals were. Rising yields could lead to a liquidity trap and deflationary pressures.
Last week I warned that the US dollar was reaching three-year lows and to expect a dollar bounce. The dollar has bounced higher as risk aversion has returned with Ireland on the verge of needing a bailout and China raising interest rates to combat rising inflation. There are growing concerns of the Fed needing to raise interest rates ahead of schedule. The previous euphoria in commodities appears to be waning and the technicals are demonstrating the fundamental challenges facing commodities.
There are negative divergences of momentum and price on both the dollar and gold to indicate counter trend reversals may be developing. I have alerted to be 100% defensive since the November 9 high volume reversal. (See Fed Creates Parabolic Move in Gold, Silver)
Understanding momentum gives a trader clues that the trend may be changing ahead of the actual trend breakdown. Divergences in momentum signals the enthusiasm may be receding and the attitude of the crowd is changing. At the beginning of a new trend there is a lot of excitement, but as the price continues higher demand weakens to the point where a major reversal occurs. Just like when you throw a ball into the air, the initial force wears off until it reverses direction and falls back. This loss of upward or downward momentum is being signaled in both the dollar and gold. Momentum changes trend often ahead of price.
A new low was made in the US dollar after the election and the Federal Reserve’s QE2 announcement. However, the momentum didn’t confirm the new low made as it made a higher low on the RSI and MACD. This signals that the downtrend may be ending and that may have been an intermediate low.
Negative divergence between momentum and price forecast further weakness for gold. Unexpected by many, the dollar is appearing to be the winner of the QE2 trade. Jesse Livermore said, “The smarter they are the easier the market fools them.” At the top in gold and the bottom in the dollar, the smart and easy trade was the wrong trade. Being long the dollar at a time when $900 billion is poured into the market is highly counterintuitive.
The dollar has bounced higher as risk aversion has returned with Ireland on the verge of needing a bailout and China raising interest rates to combat rising inflation. There are growing concerns of the Fed needing to raise interest rates ahead of schedule as Treasury prices have had a bearish reaction. The previous euphoria in commodities appears to be waning and the technicals are demonstrating the fundamental challenges facing commodities as momentum deteriorates.
The dollar broke through its five-month downtrend as investors are concerned of an Ireland bailout and emerging markets raising rates to combat imported inflation. Now we’re seeing political opposition to the Fed’s last move to pump $900 billion into the economy.
Gold at the time of the QE2 decision was perceived as indestructible as investors worried about a currency devaluation war. As targets were being reached I issued a sell signal and cautioned about getting caught up in the euphoria. I had the four-word famous response, “This Time Is Different.” It was at this point in the precious metals rally where the rain clouds began getting dark beginning in late July. As bottoms and tops take time to form, patience is required when issuing a sell or buy signal. A top is now being confirmed as trendlines are being broken.
After trading through both bull and bear markets and witnessing hysteria and panic, I’ve learned that whatever method you use to buy stocks, you must have a discipline to sell. When I buy, I look for support levels and oversold conditions so that a reversal could bring about a major gain and the downside risk is calculated. As I wrote in my buy signal in gold in late July, the conditions were ideal for a major move to the upside. Now the conditions are reaching the extreme opposite, it’s overbought and surpassing measured moves and upper resistance lines which mark prior turning points.
The majority of traders become reckless at extremely overbought levels and are often stuck when markets correct to find support. They abandon their methods as their accounts grow in value and don’t factor in how events may change. Right now gold is the easy trade as most of the reports from the media outlets are bullish for gold and silver in light of the second round of quantitative easing (QE2), but is it the prudent trade? Could events trade in Washington or globally which could put short-term pressure on commodity prices?
The most dangerous trade is the painless trade, when siding with the consensus. People have a herding desire when coming to the market. They feel most comfortable when others are doing the same. This is the characteristic that’s the downfall for most traders as the market humbles the greatest number of people. The best trades are the uncomfortable ones, when you go against the crowd. The best way to remain emotionless is sticking to a plan. If one has a method, he can avoid the psychological challenges that the markets present during panics or hysteria. Although it may not be popular, it eventually works out as the panic subsides.
Many investors are now buying precious metals aggressively and borrowing on margin, which I believe is too late and dangerous. Many are concerned that they’ve missed the boat and are panicking into the gold and silver market. It’s important to have a technical mechanism to move to the sidelines as latecomers chase the market higher. The volume on the Silver ETF (SLV) is reaching record highs and I’m concerned about a climax top. It’s very hard to sustain a move of this magnitude without a major correction. Although it takes courage taking profits during a bubble, I’ve learned through many experiences how important it is to stick to a method and sell into strength. There’s significant risk of a correction and limited potential on the upside short term.
After being in the precious metals markets for years, I’ve learned its volatility. I’ve seen great euphorias followed by panics. Gold and silver is reaching a level of euphoria, so stay tuned for any signs of weakness.
Ben Bernanke has officially announced quantitative easing and the markets are reacting with rising prices among all asset classes. QE2 is practically an economic tool to artificially raise asset prices to prevent deflationary forces. When asset prices decline due to a lack of demand you have deflation. Quantitative easing essentially is a preventive approach for central banks to prevent deflationary forces. This techniques is used when a central bank can no longer lower interest rates due to it being too close to zero, so they just print money devaluing the currency and raising asset prices across the board.
Once started with quantitative easing it’s very difficult for an economy to get off of it. As with many drugs, the high is great but the hangover comes the next morning and the repercussions are unknown. This is unchartered territory where you have a major devaluation of the world’s reserve currency. For every action of the central banks there are reactions.
Now we’re seeing a reaction with sovereign debt issues resurfacing in Europe as tensions grow over debt restructuring, bank bailouts, and budget issues. Borrowing costs are rising because unlike the Fed, the European Central Bank didn’t purchase debt. The ECB will need to address these concerns of a declining dollar and rising borrowing costs leading to a potential liquidity trap.
This may lead to a replay of the May flash crash where there were reports of banks refusing to lend to each other. It’s the beginning of a global trade war where countries engage in competitive protectionism through currency debasing. Interventions and market manipulations lead to market crashes.
A weak US dollar is an additional tax on the American consumer as many are still faced with poor job opportunities and falling home values. A devalued US currency puts pressure on emerging markets, which need a strong dollar to make their products competitive.
Today gold and silver made a breakout from the three-week consolidation from early October. In early October, I mentioned precious metals would have a pullback. Over three weeks gold pulled back and this latest quantitative easing has pushed the price up to the upper resistance level again. This isn’t a point where I buy or add to positions as during the past two years gold has made 20% to 30% runs and given about half of those gains. In this market — where interventions and manipulations are occurring — chasing markets could be treacherous. Taking profits when the news and the consensus is bullish is the disciplined trader’s approach. When everyone else is comfortable I get cautious.
There have been some exciting mergers and acquisitions (M&As) within the junior mining sector over the past few months. As gold and silver settle from the previous move, many projects will be re-rated and acquired by majors that are struggling with decreasing resources. I believe the industry is undergoing consolidation and we’re seeing the beginning of a major international race to control future gold and silver ounces in the ground. The bull market in gold and silver is intact, and though we may see some short-term pullbacks in bullion prices, the junior mining sector will continue to outperform.
Investors are aware that the sector is ripe with takeover candidates as the junior miners outperformed bullion since the late-July rally began; not until mid-September did they underperform. Now it seems like the previous uptrend is continuing after finding support at the 50-day moving average. Junior explorers are gaining interest as investors transfer their strategically devalued fiat currencies into valuable precious metals resources in the ground.
As the dollar collapses to three-year lows, I expect more companies to acquire projects or consolidate to gain control of and leverage their exploration assets. The Federal Reserve has been quite vociferous about its goal of pumping the economy with more cash. And it appears the US is leading the race to devaluation, as many emerging markets have been critical of the Fed’s dovish actions. This is creating a domino effect wherein other countries are now forced to devalue their currencies in order to prevent the collapse of their own economies. A devalued currency helps an economy by making its products cheaper domestically and increasing exports.
The recent surge in M&A activity suggests the mining industry is predicting the price of gold will continue to appreciate for the foreseeable future. High-quality projects with high-grade mineralization and low cash costs are receiving a premium. As the price of gold rises, high-grade deposits with good assets will be accelerated into development and production.
I expect aggressive miners to buy out partners to gain 100% control of projects in order to expedite resource and reserve growth. When a miner controls the project completely, it can be more aggressive with resource expansion and development of a discovery. It also has leverage to the expansion of the resource. Particularly in an industry that’s interested in growth stories, companies are hungry for large open discoveries to replenish their reserves.
One company that’s taken a 100% control of a discovery is Fronteer Gold Inc. (FRG). The company bought out AuEx Ventures, Inc. for a premium due to the upside leverage to the expansion of the Long Canyon Project. The Long Canyon Project in Nevada has great potential for expansion because it’s completely open in all directions, is high-grade, and has exceptionally low cash costs. The cost to get this project into production is very low because it’s a heap-leach operation.
The $100 million cost is well within Fronteer’s ability to finance the development completely. With its asset base in Nevada, Labrador, and Northwestern Turkey and its current cash position of over $140 million, there should be no dilution to shareholders. This is a rare situation in the junior mining sector where investors constantly face share-dilution risk when companies need to raise capital to fund exploration or develop projects.
Long Canyon has been compared to an early stage version of Newmont Mining’s (NEM) Midas Gold Mine, which is a huge Carlin deposit. Carlin deposits continue to expand because they usually have deep, underground sulfide roots. Fronteer has not yet discovered these at Long Canyon. Both Fronteer and AuEx believe Long Canyon and West Pequop may be connected by a huge sulfide root system. And both believe what’s been found to date on both sides of the mountain is on the periphery of the main deposit. The closer the company gets to the center of the mountain, the higher the grades. Fronteer is now looking for the sulfide roots as it’s expanding a near-surface, high-grade oxide and trying to fast-track the project into production.
It seems Fronteer is getting a better view of where the high-grade stuff is located in Long Canyon. I believe the Pequop District could be Nevada’s next major mine with multimillion ounces of high-grade gold. A new resource estimate, expected in early 2011, will take into account the progress of the 2010 drilling program, which has expanded the project’s size and grade. I expect further drill results to continue to drive cash costs down and bring further recognition to this world-class discovery.
One company that I’m convinced is catching the eye of majors is International Tower Hill Mines Ltd. (THM). The company has resources of more than 10 million ounces (Moz.) gold on its Livengood Project in Alaska. As gold has made a significant move in 2010, International Tower Hill Mines has consolidated. Now, with the recent volume surge and break of the upper resistance line, I believe International Tower Hill Mines could continue the 2009 price trend and outperform bullion as the company develops different mining options that drive down costs.
I believe the company has the best development project in Alaska. In my opinion, it has the greatest chance of becoming a successful and operational mine. International Tower Hill Mines has what many of its competitors are struggling for: a favorable permitting and infrastructure situation. The mine is close to infrastructure, right off a central highway, and doesn’t have the same permitting issues as other major mines being developed in Alaska.
After many years of investing in mining companies and seeing the downfall of many mining investments, I’ve realized these two features are key to success. The Livengood Project is on an all-weather highway in a major mining center. The state of Alaska is also proposing a natural gas line that would connect and provide power to the mine. And there are no native claim issues. In addition, the project is in the top 2% of gold discoveries with more than 10 Moz. gold. The big producers are looking for large deposits to expand their resource bases, but they don’t want the risk associated with projects that have permitting issues or that lack infrastructure.
Down the road from Livengood is Kinross Gold Corp.’s (KGC) Fort Knox mine, which produced more than 260,000 ounces of gold in 2009. It’s only natural to assume that when a suitor comes to make an offer for Livengood, Kinross — with the infrastructure and labor force already there — will make a counter offer. The Fort Knox mine life will be nearing completion as Livengood begins.
International Tower Hill Mines has come to long-term trend support and broken to the upside. Major volume is moving in, and the second uptrend may be beginning. As it moves closer to a prefeasibility study and improves the project economics, the share price should receive a premium.
The global credit crisis and the low-interest-rate environment facilitated by central banks are causing more producers to find ways to utilize cash positions to gain resources with huge growth potential. This fiscal environment of currency devaluation and quantitative easing, which may continue for some time, will force the producers sitting on large cash positions to acquire more assets. There’s a lack of major discoveries, and companies showing impressive, high-grade results have seen huge share appreciation.
On September 27, I wrote an article mentioning that uranium and molybdenum miners were poised for a breakout. See Finally Time for Caution in Precious Metals.
Since that article the molybdenum and uranium miners have made huge gains because of supply concerns globally. While investors are concerned about a global currency devaluation, a global race is occurring to control molybdenum and uranium assets.
The primary molybdenum miners, such as Thompson Creek (TC) and General Moly (GMO), are up today on speculation that China will curb molybdenum production as it classifies the metal as a natural resource. General Moly released its earnings today and mentioned that China remains a net importer of 5.5 million pounds year to date. This development will have a huge impact on the global supply of molybdenum as China is the largest producer and supplier of more than one-third of the global supply. These primarily molybdenum producers will receive a premium as molybdenum is usually a byproduct of copper production, which is usually fixed. Primary molybdenum producers will receive a premium for their assets as demand accelerates.
The price of molybdenum is more than 50% off pre-credit crisis highs, yet demand is seriously exceeding supply. China has imposed mining quotas in the past and is expected to curb exports again in 2011. Even though it produces 50% of the world’s steel, China only consumes 30% of the global supply. If it consumes more molybdenum similar to other producers it will demand a much higher amount of imports. It has a need for high-strength steel, which requires molybdenum. China’s recent stimulus, which focussed on infrastructure, requires a large supply of molybdenum as it’s needed for bridges, power plants, and pipelines.
This trend has a huge impact on many emerging markets that were relying on the Chinese supply. Korea and Japan are under pressure to find supply for their own needs. Other growing economies that require high-performance steel are going to look for ways to control future supply.
Recently, the Chinese government accelerated and approved funding through Hanlong Investments for General Moly’s Mt. Hope project, accelerating the funding and showing its commitment to the project. Mt. Hope is the largest and highest-grade primarily molybdenum project in development. Shares have soared on the news and the enthusiasm from the government.
I expect to see more transactions to occur in natural resource stocks in 2011, especially in molybdenum and uranium. Buying these assets provide investors with a hedge against currency devaluation and leverage to emerging-market growth. As many nations will be forced to devalue their currency to increase economic growth, major natural resource assets will gain interest from countries experiencing economic growth. Shareholders in these key junior mining companies that control these world class assets may receive a premium in 2011 and beyond.
On October 7, my technical indicators were signaling a major reversal about to occur in gold and silver. Seeing that one-day outside bar reversal in gold and silver on huge volume right before the jobs report raised huge red flags. It indicated to me that some of the smart money was hedging their long gold and silver bullion positions for a correction and a possible dollar manipulation from Washington. I warned to beware of getting caught up in the gold and silver hysteria.
That day was a signal to take profits after the major move as gold and silver are now correcting on fears that the next round of quantitative easing will be significantly less than expected.
On October 13 I wrote:
…many investors are pricing in a major move from the Fed. I’m not so convinced, as equity markets are higher and the dollar has moved significantly lower…I believe the investment community is expecting too much from the Fed and it appears the Fed is doing an excellent job stimulating the markets just through speculation of a move rather than the actual move itself.”
Now we’re seeing a huge sentiment change in precious metals as the dollar is being supported by a report that expects the quantitative easing to be significantly less than expected come the next meeting on November 3.
I warned readers at the end of July to purchase gold when it was oversold and to take profits as the precious metals market was getting overheated. Sentiment on gold was way too bullish. Many noted analysts from major Wall Street firms were raising targets right before the gap down in gold. Usually, that signals exhaustion of the trend. A gap then followed by an outside bar reversal was very bearish and increased the probability of a pullback.
Selling pressure has returned to the precious metals market as investors may not have the stimulus that was expected. Treasuries are also declining even with the major purchases from the Fed. What will occur when the Fed needs to exit these purchases? And what if foreign governments refuse to buy our debt? This could send interest rates soaring, which could put a lot of pressure on the housing recovery and the economy. Yesterday, the commerce minister from China, and even voting members of the Fed, came out with very strong words about the consequences of a rapid devaluation.
This less-than-expected quantitative easing may present another buying opportunity for long-term precious metals buyers as the manipulation to support the dollar continues. This is only temporary as sovereign debt issues continue to plague the world’s economy and central banks will be forced to inflate. Eventually the Fed will have to pump, but right now, with the markets close to all-time highs and the dollar bouncing off lows, is not the time. The financials and housing are showing the foreclosure crisis isn’t over. Bank of America (BAC), JPMorgan (JPM), and American Express (AXP) are showing relative strength weakness as the markets are close to new highs. This signals we may have more defaults and foreclosures. I don’t expect the Fed to act as expected until the markets correct and we see more credit issues, bank failures, and sovereign debt issues.
Banks are in a serious downtrend unable to regain the 200-day moving average while copper (JJC) and the S&P 500 (SPY) are near or above new 52-week highs. Recovery hopes seem to be weakening, evidenced by the banking ETF (KBE) unable to hold support or break through the 200-day moving average. High volume distribution signals we could be in for a major decline in financials and housing.
When we see a major downturn in the market or in the financials, look for another round in quantitative easing to resurface and a buy signal to be generated for gold and silver.
A stronger dollar will put pressure on the equity markets, which have been driven largely by sectors that benefit with reflation such as miners and basic commodity producers. This short-term pullback in the gold and silver miners that has been expected with this dollar bounce will produce new buy signals in the next few weeks.
Treasury Secretary Timothy Geithner is trying to give support to the currency as tensions have grown on a devalued dollar. This past week he stressed the importance of a sound currency. The US definitely wants to devalue the dollar in a slow and steady way. The plunge in the US dollar, which is still the world’s reserve currency, created a lot of international tension and speculation into gold and silver. The Fed wants to slowly devalue the dollar, not create a panic. If it’s collapsing too far, too fast then the Fed or Geithner will come in and make comments to support the dollar. The November election and next week’s Fed meeting could make a significant impact on the bullish dollar trade. I believe the fiscally conservative candidates will gain a lot of support. This could have a bullish impact on the dollar as an expectation of less spending and printing will provide some support for the dollar.
The collapse of the dollar has caused other countries such as Japan to intervene in the markets to support the US currency as a weak dollar curbs demand for Japanese exports.
Although I’ve called for a dollar bounce over the past week I want to reiterate that I don’t believe the move will be long-lasting. The currency crisis is in early stages and quite often there are violent corrections that provide long-term holders a great buying opportunity. Investors should be aware of the massive buying in the dollar ETF (UUP). This signals a major move going into the dollar as it tests all-time lows. It could signal a bottom.
This bounce in the dollar and correction in gold is to shake out weak hands from the long-term trend. It also hurts investors who have been buying in at very overbought levels. Throughout this 10-year bull market in gold it has been a series of two steps ahead with one back. Now we’re in the retrenching stage, which is what I warned about exactly two weeks ago. Major moves when sentiment levels reach extremes is accompanied by powerful reversals, which we’ve observed this past week in the dollar and gold. This past week we saw a major gap down and a break of the 20-day moving average. I do believe this short-term downtrend could continue for a few weeks to work off overbought conditions and to shake out late comers and investors who are over leveraged.
Look for gold and silver to move to support and create a new buy signal. Patience is key to buying gold and there continue to be times along this bull run where gold is oversold and out of favor. I’m looking for those key areas.
Uranium miners that are close to production in Wyoming are gaining a lot of enthusiastic interest from investors over the past few weeks. Some of the miners out of Wyoming have made huge percentage gains such as Uranerz (URZ), UR Energy (URG), Cameco (CCJ) and Uranium One (UUU:TSX) as more mines are expected to receive permits to begin operation. There are thirteen mines being developed in Wyoming. Wyoming produces the largest amount of domestic uranium with Cameco’s (CCJ) Smith Ranch Mine which is also the largest U.S. facility.
There have been recent developments with the recent issuance of the Moore Ranch project to Uranium One which is partially owned by the Russian Government. Just recently Uranium One’s Moore Ranch received its NRC license, which is the first uranium mine to be permitted in several years and was a major milestone for the industry. Unfortunately for them due to Uranium One being largely owned by the Russian government, congressional members wrote a letter that shows their concern of U.S. uranium possibly supplying Iran. America is one of the largest consumers of uranium and a lot of the supply of uranium comes from nuclear warheads from Russia. More than 90% of uranium used in this country is imported. However, that program with Russia is coming to an end by the end of 2013 and the U.S. will need to find alternate supplies. Investors realizing this crunch are buying these miners with great enthusiasm. Right now the new mines from Wyoming are key to the future of power generation in the United States. Investors are seeing this concern about future local uranium supply. A concern is that many foreign countries are controlling U.S. uranium which is vital to this countries future power generation. These small miners will be acquired at premiums or be subject to hostile takeovers in 2011 as they move closer to production. Cameco (CCJ) recently had an off take agreement with China which will also put pressure on supply over the next few years. I expect more agreements with miners to be announced as foreign investors scramble for future supply.
I believe these assets provide dollar diversification in low risk mining jurisdictions. Uranium could move parabolic as more power plants are built and there is not enough uranium available.
Wyoming is a friendly mining jurisdiction and many of these projects are in-situ mining, which means they have to dispose of water. Groundwater contamination is the greatest concern for local residents. Investors must research which projects have local support and permits for water disposal as the Environmental Protection Agency could hold a project up for this reason.
Although many commodities have reached new highs the uranium stocks are just beginning its major move. The growth in nuclear and the supply demand constraints will drive uranium prices very high. These uranium miners who will progress into production The U.S. has over 20% of its power comes from nuclear power plants. There has also been bilateral political support to increase nuclear energy to reduce carbon emissions and is an essential component of the clean energy push. Expect to hear more news of acquisitions as miners make progress and move closer to production.
Last week before the jobs report on Friday I wrote an article that concluded, “The weakness in the dollar will also put hawkish pressures on the Fed. Many are expecting more quantitative easing but the market may have a surprise if the Fed changes its language to support the dollar and curb the speculation into gold and silver.” (See Will Tomorrow’s Job Report Be Bullish for the Dollar?) Today, one week later, Ben Bernanke said, “…factors have dictated that the FOMC proceed with some caution in deciding whether to engage in further purchases of longer-term securities.”
This was a major change in the language and came in at a crucial time to support the US dollar from entering new all-time lows. Pressure from the rapidly declining dollar led Ben Bernanke to also speak today about not knowing the economic effects of these policies. This sent long-term treasuries lower along with housing and financials. The dollar gained some strength over the cautious statement.
I believe he’s well aware of the economic effects which are clearly being felt in the markets, a deteriorating dollar, higher prices of commodities, and an extremely weak recovery with high unemployment. Now I’m also seeing signs of a collapse in long-term Treasuries through two factors — less demand from foreign buyers and less purchasing power by the Fed. One of the actions the Fed has been doing to keep interest rates low to stimulate growth is buying long-term Treasuries. However, the market is nervous that the Fed may be cautious of the extent of those purchases.
Although Bernanke indicated there are some very large deflationary pressures, the long-term Treasuries are indicating that it will be much harder for the Fed to raise its debt at these low rates. The long-term Treasury market is indicating that the spending and deficits the US is getting itself into may demand higher interest rates. The US is selling a huge supply of Treasuries to finance the debt it’s using to spur economic growth. This is creating an artificial glut and demand seems to be decreasing — especially since many investors are moving into precious metals and natural resources as the safe haven at the moment. Long-term Treasuries were a safe-haven asset during the credit crisis of 2008 and the recent European sovereign debt crisis. However, the long-term Treasuries are showing signs of weakness as investors are losing faith in the financing of record deficits and a pullback of purchase by the Fed.
We may be approaching a significant decline in long-term Treasuries which could send long-term rates higher. These higher rates could continue to put pressure on the housing market. Many homeowners are unable to take advantage of record low interest rates to refinance due to negative equity. Now with higher rates this will continue to put pressure on the housing market and bank stocks which haven’t confirmed this recent rally in the equity. Please see Treasuries Break Long Term Trend Support as Gold, Silver Rush Continues where I discussed the potential breakdown of US Treasuries. Their recent lack of participation in the market rally indicates that the housing and financial crisis isn’t over yet. Defaults are expected to rise with higher interest rates on adjustable loans. Click to enlarge
I believe that interest rates will start moving higher and we may see a major collapse in Treasuries, housing, and financials over the next couple of weeks. The long-term Treasuries have broken trend support and the 50-day moving average is on high volume. Now is an important time to prepare for a rise in interest rates during a weak economy.
These past few weeks, as the equity markets rallied based on the belief of further quantitative easing by the Fed in November’s meeting, the dollar has collapsed, which I warned readers about a couple of weeks ago. Since that time, gold and silver have had a historic and parabolic rise as investors feel the Fed will continue to ease through the end of the year. Investor sentiment has reversed completely over the last eight to 12 weeks, since I signaled a buy on gold. There are no concerns as bullish sentiment on equities and precious metals reaches record levels. Investors feel the Fed will solve everyone’s problem by devaluing the US dollar. The temporary Band-Aid isn’t fixing any of the core problems. Unemployment is still high and housing is weak. Neither the financials nor the homebuilders are participating in this rally, which leads me to suspect this entire rise in the markets isn’t sustainable as it’s been on low volume and key sectors haven’t yet participated.
In countries where there’s a huge deficit, the only solution to pay back debts is through a devalued currency. Japan has recently intervened to try to devalue the strengthening yen. A strengthening currency to countries with huge obligations can heighten the risk of default, which many countries are facing. Also, a strong currency puts pressure on international corporations that export products abroad. A weak dollar will cause the products to be more expensive to American consumers, hurting demand and growth. More sovereign debt defaults in emerging markets are expected. It appears that many investors ran to the dollar from the euro after the European Debt Crisis. I expect something similar to occur now. The euro is reaching a key resistance level and is overbought. This means a pullback should occur. The US Dollar is extremely oversold and at long-term support. The bearish sentiment on the US dollar is extremely bearish, which indicates a reversal should occur.
As global economies feel the consequences of the United States’ actions, I expect further fallout from weak economic growth and the sovereign debt burdens in Europe. Many investors are pricing in a major move from the Fed. I’m not so convinced, as equity markets are higher and the dollar has moved significantly lower. Investors should realize that unless we see another sovereign debt issue or another bank failure, another major round of easing is unlikely at this point. I believe the investment community is expecting too much from the Fed and it appears the Fed is doing an excellent job stimulating the markets just through speculation of a move rather than the actual move itself.
This last easing from the Fed has met with some more critics and it has definitely increased international tensions. The US dollar has collapsed and is now testing long-term support. I don’t know at this point if the Fed will be so quick to act the next time around unless there’s another deflationary crisis.
Technically the dollar is due for a bounce and investors should look for any pullbacks in gold and silver as a buy point. Instead of the risk associated with buying bullion at these extended prices, many juniors that would be extremely profitable at lower gold and silver prices haven’t broken out yet.
I believe these junior mining companies are presenting a great buying opportunity. Remember on these recent parabolic moves, the faster it goes up, the faster and harder the correction. Last Thursday showed a huge volume reversal day. This indicates to me that some of the smart money are hedging their long gold and silver bullion positions for a correction. Although we may see further upside, the move is about to get exhausted as it has taken out many technical targets and measured moves. Be careful of getting caught up in the hysteria.
An important point that sellers did not understand in July was that Federal Review Panel did not weigh the economic affects at all. Their duty was only to make environmental recommendations in case the project was approved. The British Columbia Approval was based on the fact that Prosperity is crucial to the future economic growth of the Province and that those positive outcomes far outweigh the environmental impacts.
In the article I noted that the mining industry brings in over 8 billion dollars to British Columbia a year and Prosperity is a crucial decision which the entire mining is carefully observing. Prosperity is an essential project for the Province as it will bring in more than 400 million dollars a year in revenue. It will create a lot of jobs and boost not only jobs for miners but in all the mining related industries. A new mine has a domino effect for the economy as it is the foundation for local industry in British Columbia.
Last Friday Premier Gordon Campbell made an important plea to the Prime Minister in highly publicized speach to approve the mine. This gave a huge signal to the mining investment community that this decision from the Prime Minister will have powerful ramifications.
The ramifications of the Federal Government overturning a Provincial decision would spur a lot of tension in an area which has been hit hard from a weak economy due to the downturn in forestry.
Investors are now seeing the broad based support especially local political support that Taseko is receiving and the importance of this mine to be constructed from very powerful people in the Province.
This has sent Taseko’s shares soaring to new highs as investors price in a go ahead from the Prime Minister.
Now Taseko is approaching a major breakout point which could significantly send shares higher on approval from the Prime Minister. The decision should be released soon and I expect the Prime Minister will support the Province’s decision. Since my original recommendation on Taseko from May of 2009 Taseko shares have soared more than 333%. If you are interested in new recommendations and how to trade mining stocks using technicals and fundamentals please sign up for my newsletter at http://goldstocktrades.com.
In Advance Decline Suggests Stimulus Hasn’t Worked I wrote about how the Federal Reserve and Washington DC will do anything possible to save the markets from a bear market before the November election. Unemployment is high, defaults on homes and credit cards are rising, and record amounts of taxpayers’ money have gone to bail out failed banks. The last thing Washington wanted was another bear market before a November election. An emergency job bill was passed and the Fed started pumping money into the system. Now we’re beginning to see the outcome of the Fed’s actions as the world looks at a deteriorating dollar and the tension that surfaces with volatile exchange rates. Recent job bills and quantitative easing may help tomorrow’s job report, which could put some hawkish pressure on the Fed to change its stance.
I believe over the next few weeks volatility could increase as a major shift in Washington may occur. Although the equity markets are up, the dollar and the economy haven’t shown improvement. The Tea Party movement and politicians who push tax cuts and less government spending are gaining recognition. I wouldn’t be surprised if there’s a shift in power, which may be bullish for the dollar, or another intervention from overseas to continue purchasing the dollar. Tomorrow’s job report could provide relief to the oversold dollar as additional government jobs were created through recent legislation and massive cash infusion from the Fed. The dollar could have a dead cat bounce.
Japan and China are facing pressure on growth from a devalued dollar. A cheap dollar is hard on businesses exporting to the United States. Japan is especially in a precarious situation where it has had to intervene to prop up the dollar in order to support growth. It was short-lived as the yen dropped only to rally to new highs a few days later. This may lead to further easing by the Japanese and purchases of the dollar. Japan hasn’t needed to do this since 2004.
The Fed needed to ease this past summer as equity markets were on the brink of double dipping. Central banks had no problem to devalue as well since the European Debt Crisis led a rush to the US Dollar and at that time the euro was collapsing and the dollar was high. The threat of deflation after the May flash crash was very high and markets were on the brink of heading into new lows before an election. The Fed injected a lot of money into the system causing a dollar collapse, a rise in US equities, and a major breakout in precious metals.
Bullish sentiment in gold is reaching very high levels and if this deterioration of the dollar continues we could see more sovereign debt and liquidity issues. This could be bullish for the dollar. The weakness in the dollar will also put hawkish pressures on the Fed. Many are expecting more quantitative easing but the market may have a surprise if the Fed changes its language to support the dollar and curb the speculation into gold and silver. The jobs report tomorrow will prove to be a key figure on which the Fed will base its decision. Just remember, in every bull market there are two steps forward followed by a step back. We may be entering that step back in precious metals.
We have all heard the saying “buy low-sell high” as the mantra of making money in the market. To apply this cliche is much easier said than done. Adhering to this rule is not an easy task and without the use of technical tools to determine buy points and targets, an investor can get caught up with the hysteria of a parabolic move. Now gold and silver is making huge advances as it continues the trend into new record territory. I wrote an article that discussed the original buy on gold as it came to long term support and also wrote articles discussing the coming break out in gold and silver from the cup and handle pattern. Since these moves gold and silver have made historic and powerful moves.
As prices rise in precious metals so does confidence. All over the news I am hearing how the world banks are printing money and that gold and silver could move exponentially higher. Positive news for hard assets including yesterdays massive quantitative easing by Japan and the United States commitment to keep on flooding the markets with cheap dollars is making gold and silver investors very comfortable. Whenever confidence increases like this it is time to prepare for profit taking. Risk is being increased and “Johnny Come Lately” analysts are advising to jump on the bandwagon. I refuse to follow this mad crowd at this time. A successful speculator knows when to enter a trade when at the time the investment is unpopular. Don’t follow the crowd and be prepared for exit signals as we are reaching technical targets.
Unfortunately the majority of investors tend to follow the crowd and do not have technical targets that will take profits after a reasonable move. Just like in popular culture there are fads that come and go, so too in asset classes. Be careful of the hype that is accompanying the trade now.
As gold and silver reach overbought territory, I am providing detailed targets to my readers on where to take profits from our buy points at the end of July. I have recently been focused on some miners which have pulled back and ready to outperform even if gold and silver have a pullback. These miners will be extremely profitable at significantly lower gold and silver prices. Miners are just beginning their break outs and many have not caught up with the bullion price yet.
The movement in gold and silver bullion is getting extremely emotional. Yesterday’s gap up after a significant move signals we may be close to the coming pullback in gold and silver bullion. Make sure to check out my free newsletter at http://goldstocktrades.com to find out key technical signals. Don’t get comfortable now if you have considerable profits and be alert for any reversals.
Even though gold and silver have broken into new 52 week highs platinum, copper and other base metals have not broken into new territory. If one is looking into dollar diversification at the moment I would look into other hard assets that have not moved as parabolically as silver and gold has. Platinum and copper are showing strength signaling that the massive printing will encourage the global economy to gather steam. Although gold and silver are en vogue now from a technical standpoint other commodities which should also benefit from quantitative easing should be considered as they should catch up with gold and silver. Platinum and copper are about to make the golden cross, which is the 50 day crossing the 200 day moving average to the upside. These two metals may break out and catch up to the other hard assets in performance. As gold and silver reach parabolic levels other hard assets which are not overextended may provide a better risk to reward investment.
A couple of weeks ago I mentioned the the dollar was on the verge of a collapse. The dollar has significantly fallen since that time and is now reaching extremely oversold levels evidenced by the stochastics and RSI. So a dead-cat bounce may be beginning in the dollar, which may put short-term pressure on equities and miners.
Could we be on the verge of the next deflationary crisis? Ben Bernanke said he’s still concerned about deflation. The financial system is still under pressure with high unemployment, foreclosures, and defaulting credit. There will be further sovereign debt issues from Europe and further weakening in real estate as defaults continue to rise. This tug of war between deflation versus inflation seems to be an ongoing cycle and we may have further news out of Europe surface soon.
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You can observe the chart of the dollar the cycles of deflationary periods versus inflationary periods. The dollar is reaching extremely oversold levels and a price floor, which means we may see a dead-cat bounce. This may put pressure on gold and silver temporarily. It will provide further market entry points for precious metal investors who enter the trend when gold and silver is on sale and oversold, reaching long-term trend support.
There may be further dissent from central bankers to complete a new round of asset purchases unless we see further debt issues from Europe. Many are concerned about the deteriorating dollar and the rise in gold and silver. This indicates investors are concerned about the stability of the US currency. This lack of confidence in a sustainable recovery will put into question the past monetary easing of the Fed. The quantitative easing isn’t making a sustainable recovery and producing any real economic growth. Although the equity markets have recovered, it’s been a direct result of the dollar collapse. The housing market isn’t showing signs of any improvement from the record low interest rates and still hasn’t been able to penetrate its 200-day moving average.The unemployment rate is still high and the devalued dollar is putting further pressure on wage earners.
The falling dollar also has hurt emerging markets that rely on a favorable exchange rate in order to export goods. Recently the Bank of Japan had to intervene to push the yen lower. However that was short-lived as the market shrugged off that news item and reversed higher. Although the Fed’s monetary policies may be good for the equity markets, they’re not making a significant impact on the average American. The rapid decline in the dollar will spark further pressure on emerging economies especially in Asia. This decline in the dollar will increase merger and acquisitions in the natural-resource sector as many Asian nations who are becoming net importers of certain commodities are trying to increase their supply. Although the downtrend in the dollar is confirmed a short-term bounce from these oversold levels may occur, which may provide further buying opportunities in gold and silver.
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The S&P 500 is appearing to show signs that the rally is losing steam. The MACD is making a bearish crossover and the significant rise without any pullbacks shows an extremely volatile move that could see a nasty pullback. The breakout of $114 — which I didn’t expect to occur — seems to be a fake breakout. The breakout occurred without forming any real base. Thursday appeared to be an outside bar day, indicating that the uptrend of September is losing strength. The price volume action is bearish and now the MACD has made a bearish crossover. Stochastic indicators have also signaled a sell signal from extremely overbought levels. Caution needs to be exercised.
Although gold and silver may be under pressure from a weak equity market and dollar dead cat bounce, I believe it will provide another opportunity for precious metal investors to enter the trade at a more reasonable level.
In these articles I mentioned a target of $21 by the end of the year. Right now silver has reached that target after making an explosive move higher. Silver has made a 15% gain in 5 weeks. I have found having targets and taking profits at overbought conditions is crucial in a trading strategy. As a trader it is of primary importance to understand long term trends and in a bull market to add to positions when they are on sale and take profits when it is receiving a premium. Using oscillators to determine warning signals to buy and sell are extremely helpful but needs to be used carefully. Breakouts could lead a momentum indicator to stay at an extreme ratio for an extended period of time which is the case for silver and gold at the moment.
Using momentum indicators forces me to prepare for a correction or prevents me from buying into a frenzy when a stock is overextended. These indicators help me to trade against the market herd, and become contrary at extreme buying frenzies. Many contrarians make calls too early as irrational markets tend to stay irrational too long for most investors to stay in them. Nevertheless, when used in conjunction with other technical tools it can provide excellent market entry points that are high reward and low risk when structured correctly.
The best way to play this market is to buy gold and silver when it hits the support trend line and is oversold, and take profits as it approaches the rising resistance line.
Silver’s move has been parabolic and is very overbought. A healthy correction or sideways consolidation may be coming to provide an opportunity to work off this rise and pullback to support. It has had 5 up weeks with a 15% gain from my buy signal at $18.30. It has also been overbought for an extended period so to sustain this rise without a correction is highly unlikely. To enter at this point would not be prudent according to my strategies.
Instead there are some miners who are coming out with great news that are oversold at the moment. I believe these miners will outperform even if bullion corrects. Mergers and acquisitions are increasing with the recent purchases of Andean Resources by Goldcorp outbidding Eldorado Gold, Kinross buying Redback, Continental Minerals being bought out by Jinchuan Group . A weak dollar combined with emerging market growth will cause more interest from overseas to buy natural resources. Base metals have been performing very strong. There have been some recent breakouts in some uranium and molybdenum plays which I will be telling my premium readers about in the next couple of days. Most of the gold and silver miners I follow have resources with low cash costs and close to infrastructure. A lower gold and silver price will not impact these miners as much as other miners with higher cost projects.
To find out about which specific stocks I am researching go to my website at http://goldstocktrades.com.
Disclosure: I own gold and silver bullion and mining stocks.
The Federal Reserve declared war on deflation Tuesday, stating that they will provide additional accommodations should any deflationary signs occur. I wrote several weeks ago that Washington will provide the relief necessary to rescue markets before the November election. Please click here to see article.
President Obama is in the process of changing his entire economic team before the election while voters are expressing concern and outrage over high unemployment and the real estate foreclosure crisis. There concerns are valid as our unemployment rate is much higher than reported. Although published economic reports should be studied, the most important criteria is price action because that shows the true supply and demand of the global market.
There are additional ramifications of yesterday’s statement from the Federal Reserve. China and Japan have a seriously appreciating currency versus the dollar. The dollar is gapping down to new lows. Usually a weak dollar has been bullish for stock markets as investors were less risk averse. However, I don’t believe this will be the case this time. Sovereign nations are extremely concerned of the devaluation and are scrambling to stabilize their own economies. I believe this devaluation of the dollar will have an impact on emerging markets ability to grow and we could continue seeing a fallout of a deteriorating U.S. currency. 
Recently the S&P 500 has made a significant rally and many are calling the concerns of several weeks ago overblown. I am still unconvinced. One reason in particular stands out, there has been no breakout of resistance in housing stocks. The homebuilders index etf (XHB:NYSE) still has not broken through the 200 day moving average to the upside. The 200 day Moving Average is a key long term indicator of trend by investors and mutual funds. It appears that the momentum indicators are signaling that it may actually encounter resistance and turn lower.
Until I see a move above $16 I am still unconvinced that our economy has improved. It failed at the end of July and is approaching key resistance here. The amount of defaulted homes coming on the market are immense and climbing. There are millions of defaulted homes on the market. This may take years to work off.
Monitor the chart of the homebuilders closely and wait for a confirmation breakout before getting excited about this market. There is way too many bulls at the moment and would not chase this overbought market. I believe a correction is close at hand and this rally may be a trap.
Since the emergence of the European Debt crisis in April 2010, treasuries have been in a strong uptrend as investors have been seeking protection from risky assets.April to August 2010 was a deflationary period, similar to the fourth quarter of 2008 when treasuries soared higher before the massive government stimulus. Stocks have been in a five month correction. Now, in September 2010, long term treasuries are suffering a correction and break of long term trend support.
Long term treasuries are unable to find support at the 50 day moving average. I highlighted a few weeks ago that treasuries appear to be making a top as the Chinese cut back on U.S. debt. The massive efforts from Washington to prevent a double dip appear to be putting a respite in the decline in equity markets. It also appears that The Fed will continue to easy monetarily during this crisis as they meet tomorrow and is expected to accommodate further. The Fed has already stated that they will keep interest rates low well into 2011. This is very bullish for silver and gold.
Efforts to deflate the currency have succeeded and now the dollar is challenging new lows and breaking through support. Treasuries have corrected considerably along with the dollar. Although the policy makers in Washington have revived the equity markets, the long term effect on the dollar and long term debt will be detrimental. The markets are at resistance now and are very overbought. I would consider being careful on this rally as a deteriorating currency and high unemployment will put pressure on the consumer.
The precious metals long term uptrend is in fact the best place to be during this ongoing debt crisis. Now there is a massive flow to silver and gold. I would not go chasing it now with the masses. There will always be corrections and sales on gold and silver in a bull market as I highlighted to my readers four weeks ago right before the rally. Silver is especially overextended and could have a healthy pullback. There will be sales in the future as profit taking is imminent as it is overextended over its 50 and 200 day moving averages. Subscribe to my free newsletter for trading signals and strategies at http://goldstocktrades.com.
It appears that the strategies from the central bank are now reflating the economy as gold, silver and base metals have reached new highs, while the dollar and U.S. treasuries are correcting considerably. I believe the trend of sovereign debt defaults will continue and central banks raising their positions in precious metals. This is the beginning of a major rush into gold and silver
We are currently seeing a huge transfer of capital into gold, silver and mining stocks. I believe the best way to invest in emerging markets is to buy gold, silver and base metals that these countries are now importing rather than exporting. I also see the possibility of the equity market, dollar and treasuries decoupling from silver and gold as they have made extremely upside breakouts since our bullish call on precious metals at the end of July. It has made an explosive move and is extended way above support and moving averages so a pullback is inevitable. I am a long term silver bull but at this point would wait for a healthy pullback and secondary buypoints will be alerted to my readers first at http://goldstocktrades.com.
Gold broke out of a classic cup and handle pattern yesterday right before the Bank of Japan announcement. The Yen has significantly strengthened since June as this is extremely difficult for the Japanese export companies. The economy in Japan is weakening and they are facing their own sovereign debt issues which have not yet surfaced. However, what is more important is how the markets are reacting. This reaction in the yen may be short lived. Although it might be a short term bandaid the intervention efforts may be too little for the global forces of supply and demand. There is little support for the dollar as evidenced by the U.S. Dollar Chart.
Today the selling in the yen did not transfer to purchasing U.S. Dollars. It seems as though yesterday and the past several weeks there has been a major rush into precious metals. The dollar’s chart is giving warning signs of an imminent collapse. Certainly the dollar has not reacted positively to this announcement.
The dollar is slicing through its 200 day moving average and the 50 day clearly has acted as resistance. A major transfer of dollars into precious metals are occurring. A death cross is imminent on the dollar and this is occurring simultaneously to a new high breakouts on silver and gold.
Usually a weak dollar has been bullish for stock markets as investors were less risk averse. However, this is not the case this time. Even though the dollar has fallen since June the markets have failed to rally significantly. Instead precious metals and mining companies have broken out of key resistance.
The S&P 500 has been in a sloppy and volatile base for four and half months. The poor price volume action tells me a breakout above $114 is highly unlikely. A third failure may be imminent as overbought conditions are combining with previous resistance.
This cup and handle pattern in gold is extremely bullish and could be the beginning of a next leg higher. It is a sign of a major consolidation and this recent breakout may bring in more investment interest by institutions who are concerned about currency and sovereign debt issues. A major transfer of capital is moving from currencies, bonds and equities into precious metals.
Gold’s (GLD) pattern is very rare and this setup tends to indicate a major move into hard assets.
If we see a decoupling of the dollar versus gold continuing, expect to see more buyouts of resource companies from Asia. Right now we are seeing a massive transition of wealth from the dollar to silver and gold.
Price volume action is showing weakness on this rally and there is a good chance we could see a third failure at the 200 day. Many times, before bear markets ensue you can encounter three or four failed rallies above the 200 day before the primary bullish trend is reversed. Markets take time to transition from a bull to a bear market. Bullish mania wears down as repetitive failures shows a market that is losing confidence. On each subsequent rally the amount of bargain hunters dwindle. Price volume action is poor on this rally attempt. If we see another failure- which I believe may occur- we could see a major trend change.
Stochastics have been really accurate in this rangebound market. Oscillators are most valuable in trading markets, not trending. The S&P currently is a trading rangebound market while precious metals are in a steady upward moving trending market. Since May the SPY has been in a trading range that only would have been profitable if one used oscillators. On the other hand, in trending markets like gold which is in a steady uptrend the use of oscillators or stochastics should be secondary as those conditions shift as new high territory is reached. In trending markets it is more important to rely on moving averages and trend support to make buy or sell calls.
Be careful of selling gold or silver solely on overbought conditions. Gold (GLD) and Silver(SLV) are in very bullish patterns breaking out into new highs in an upward trending market. Whenever you see a breakout into new price territory on strong volume, momentum indicators need to be relied upon less. Gold and silver have both shown tremendous relative strength and I believe will provide continued safety during a market downturn.
I believe gold and silver will continue to perform strong compared to other assets. This summer has been hard on the equity markets and quantitative easing has been necessary for the Federal Reserve to maintaing momentum in this market. New job growth has been weak and we are not out of the woods with the European Sovereign Debt issue. Junior mining stocks who are translating cash into resources is where I want to be at the moment as they have held up well during this summer correction.
Gold is finding support at the 4 week moving average and is forming the handle on the cup. I believe gold and silver could have a very strong rally as the general public becomes aware of the junior mining sector and the value of gold and silver as an asset class.
Point and figure charts are one of the oldest and purest charting methods in the field of technical analysis. Point and figure charts are not commonly studied and practiced by technicians today as in the past. However, I use it as a simple indicator of areas of supply and demand and to indicate new trends. Warren Buffett said, “There seems to be some perverse human characteristic that likes to make easy things difficult.” Especially in the field of technical analysis, analysts seem to love making complex formulas when in reality it is completely unnecessary.
Point and figure charting is a simple method of plotting price alone. It helps the chartist understand support, resistance and specific congestion areas. Congestion areas are areas of price where there was a previous battle of supply and demand. Often times when the price reaches this area it is difficult to break through. However, when the breakout does occur a major move begins. These charts are excellent at identifying specific price and relative strength breakouts.
Silver has just made a triple top breakout which signifies a possible major trend higher. Triple top buy signals are very powerful and hint at a move higher. Unlike bar charts projections are based on a horizontal count rather than vertical. This silver triple top breakout which may occur shortly could initiate a rise to $27. This target is also confirmed by the bar chart analysis which I showed on Sunday’s update. On the point and figure relative strength chart a breakout has already occurred.
Usually relative strength breakouts precede price breakouts and confirm the move higher.
Never in history has the gold to silver ratio been so high and a reversion to the mean could mean a significant move in silver.
The global debt crisis and the war on deflation by the Federal Reserve is causing precious metals to approach a key resistance level. Gold is nearing a 52 week high while silver is close to breaking $19. A break above these levels on high volume could be the beginning of a major move higher.
Gold and silver has been a safe haven asset. Many concerns were expressed if miners would collapse in a weak equity market. However, since the last Federal Reserve meeting, gold and silver has shown impressive relative strength compared to the overall market. The Federal Reserve discussed the increase of treasury purchases to keep interest rates artificially low. They also made it clear that every attempt will be made to prevent deflation. This low interest rate environment and weak economic outlook which may continue for some time has encouraged investors to move money out of equities into safe haven assets such as gold and silver. Gold and silver is also gaining interest as investors are realizing bond yields are too low and may be risky at these level.
The Fed’s greatest fear is deflation, high unemployment and a move into new lows in equities before the election. If the S&P continues to deteriorate and unemployment data comes in negative, I expect an announcement of more central bank interventions to reflate the economy. This next round of quantitative easing could cause a massive rush into gold and silver.
Many are concerned of the safety of fiat currencies during a global debt crisis. The global economy is built on spending and investing. Many investors were concerned if a downturn in the equity market would drag down junior miners. These past couple of weeks have proved that is not the case. Junior miners have made major moves higher. A breakout into new 52 week highs in the miners is highly probable especially as the price of bullion breaks out.
The saucer (cup) and handle pattern is the chart reader’s favorite pattern. Great performing stocks tend to have a strong base before an extended move. Gold’s (GLD) pattern is very rare and this setup tends to be very profitable. Similarly to what we saw in September of 2009, I expect a major breakout. Is this pattern showing investors that a major event may be brewing? Time usually tells the tale as news or events are announced after the breakout.
High quality gold and silver explorers are making major moves already. It is important to pay attention to the gold and silver junior miner sector as we may be setting up for peak gold and silver. High quality explorers with mineable assets should be followed as gold and silver discoveries are rare and producers are paying a premium for these properties. These miners tend to have great leverage to the price of bullion especially if we see more government interventions and quantitative easing.
Yesterday, Fronteer Gold, a stock that I have recommended to my readers bought out Auex Ventures to control completely the Long Canyon Project. The Long Canyon discovery is high grade and open pit. Fronteer is consistently coming out with impressive results from this project. Long Canyon represents continued resource growth as it is expanding and open in all directions.
A major move in bullion could cause these explorers to make large percentage gains. If you haven’t researched high quality junior miners yet, now is the time before a major move.
The global debt crisis and the war on deflation by the Federal Reserve is causing more producers to find ways to invest their cash. This low interest rate environment which may continue for some time will force producers whom are sitting on large cash positions to acquire more reserves. Mergers and acquisitions in the mining sector have increased over this past year due to a lack of major discoveries as well as supply and demand changes in emerging economies.
We have seen a trend of investments from Asia to purchase stakes in mining companies. In 2009 the Chinese Investment Corporation, a state owned company, took large ownership positions in Teck Cominco and Penn West Energy Trust. Recently in June, China National Nuclear signed a contract with Cameco to supply 23 million pounds of uranium. Hanlong Investments took a large stake in General Moly, one of the leading North American molybdenum developers. Korea Electric Power signed a deal with Denison Mines another uranium developer. Sojitz bought a 25% interest in the Taseko’s Gibraltar Copper Mine. Then recently we saw BHP Billiton trying to make a deal with Potash Corp. and Kinross, a large producer buying Redback, an exploration company. This trend should continue through 2011.
Investors should be studying the companies that are receiving premiums and position themselves accordingly to make potentially large profits. Junior mining companies that are sitting on large assets that are still relatively cheap or overlooked should be considered. There are still many companies with strong assets that are trading way below value. This is an exciting and highly profitable time for the companies with assets close to production in the mining sector.
For producers it is more efficient to acquire explorers to replace their reserves rather than rely on their own exploration team. I am focussing on the junior mining sector whom are close to production rather than the large producers as they will receive large premiums on their assets.
Following the mining sector on a daily basis the evidence of keen interest to acquire resources is apparent. There is a search for real assets and natural resources. Foreign countries are looking for natural resources to diversify their holdings and supply their emerging economies. Large mining producers are searching for replaceable reserves of gold, silver and industrial metals. As the U.S. attempts to reflate their economy at all costs, precious metals and natural resource assets should receive a premium.
The Gold Miners are close to a major cup and handle breakout. It also appears to have set up an ascending triangle pattern. A breakout from this pattern could lead a major move into new high territory.
The strong trend in gold miners is signaling that interest rates will stay low as the Federal Reserve makes every attempt to reflate the economy. Precious metals prices should stay high which would make producing mining companies highly profitable.
Silver had very powerful break out today as investors are seeking assets that are safe and will retain value during a debt crisis. Silver is seeing demand at these price levels as it is historically cheap relative to gold. If the ratio came down to the levels it was in 2006 it would be close to $27 an ounce. Silver is soaring because investors are realizing this is a hard asset, it is money and it is historically cheap compared to gold.
Gold has reached overbought conditions from my July 28th buy signal. Right now gold is a bit overbought while silver is at an interesting buy point, having found support for the fourth time at its long term 200 day moving average. Today’s breakout of the symmetrical triangle, a very bullish chart pattern, is a sign that silver has built up a lot of internal strength and could break out into new three year highs. Remember, silver is significantly below all time highs while gold has already broken into new highs.
While I am bullish on gold, I believe investors could see a higher percentage move in silver. I have also alerted my readers to a specific mining company which has recently found a major discovery in Mexico. Pure silver discoveries are very rare. Silver supply is mostly produced as a byproduct which makes supply very inelastic. A new pure silver discovery in a silver bull market could receive a nice premium.
I believe silver will make a major move on this break out. Investors are looking for a safe haven, protection and value in silver. Gold has already made a significant move and is quite overbought, while silver has not participated to the same extent. The gold silver ratio should move to historical norms which could mean a major move for silver.
If you do a study of the point and figure chart of the relative strength of silver versus the S&P500 since 2001, its strong uptrend is apparent. Each time silver falls back into support, it breaks out and makes significant rallies.
The break above the red bearish resistance line and a double top breakout coupled with the daily chart symmetrical wedge pattern demonstrates that silver has reached a critical juncture and could make a nice move.
The rise in equities from March 2009 to April 2010 lacked one key ingredient in a bull market: volume confirmation. There were many technicians who pontificated why the lack of enthusiasm of the uptrend existed. Some said that it was the 2008 de-leveraging of hedge funds that caused the decreased participation. I was never convinced of this far fetched argument because on each correction volume increased significantly. I’ve been skeptical of the claim that this time will be different. While studying charts over the years, one indicator I am always loyal to is volume. It is the enthusiasm in a market which shows if a rally or decline is convincing.
The H&S pattern is one of the most reliable chart patterns. The S&P 500 is showing an apparent head and shoulders top with volume confirmation. One way of affirming the validity of this formation is by checking the volume on the right shoulder, because the right shoulder is the first rally in the bear market. The low volume shows a lack of confidence in the previous bullish trend.
The sharp breakdown of the S&P 500 following after the rising wedge pattern tells me that this bear market is likely to continue. Several indicators, namely the bearish death cross, break in trends and poor price volume along with the bearish head and shoulders pattern and rising wedge all combine to weigh heavily against equities.
GLD is experiencing a “v” formation after coming to long term support and a 50% fibonacci retracement. On July 28th, many of you have read my views and why I believe gold was at a buypoint, contradicting the consensus of market timers at the time. Now I believe gold is in need of much needed respite in the trend and a shakeout before continuing into new highs. Gold buying has also gotten some TV airtime from a few famous commentators who are now turning bullish on the metal. That really concerns me, as it is a contrary indicator. We may see a healthy correction so that GLD can clear the previous resistance and make a move into new highs. A healthy correction could also provide an excellent market entry point for a trader who wants to add to their gold holdings before a new breakout. If you study the move into new highs from September of 2009 you will see the coil formation where it had three pullbacks to support. These formations are bullish as they provide the conditions to generate a high percentage move. For specific stock selection visit my website at http://goldstocktrades.com.
GLD is overbought and if you are trading short term, do expect a pullback to at least the 50 day moving average to find support or possibly shakeout the traders who bought in after it crossed the 50 day moving average.
The S&P 500 broke out of a bearish rising wedge pattern last week after failing to hold the 200 day moving average four different times. My bearish views were confirmed last week with a high volume breakdown after the Federal Reserve gave a sour report on the state of the economy. Trading became highly volatile before the announcement. In previously published articles, I warned that the Fed would ease and do everything within their power to flood the markets with cash, which has been bullish for gold and mining stocks. The several gap downs on the S&P are hard to short as the market may rally to try to fill those gaps. Although I have downside targets, I would look for a countertrend days to enter if going short.
Today’s break of the 50 day moving average was a key move as the probability of the 50 day moving average to cross the 200 day moving average to the upside is diminished. Many were concerned that the bearish death cross would be a whipsaw, meaning markets would revert higher. However, the bearish death cross is becoming more confirmed and pronounced as the 200 day begins sloping over.
Stocks key technical break today of the 50 day moving average on high volume shows there is little support as the risk appetite wanes. The rally in treasuries are showing signs of a double deflationary dip, similar to the 2008 bear market as investors fear that the economy is on shaky grounds.
I believe that the chances of S&P moving into new lows are very high. Today’s break of the 50 day moving average is confirming both the bearish head and shoulders pattern and death cross.
The S&P market action is demonstrating that the two day rally above the 50 day was not strong enough to maintain support. Now the 50 day will once act again as resistance. Volume did come in higher signaling major distribution. However, when a market transitions from a bull to a bear, each subsequent failure at the 200 day drives out the bulls who still believe that the decline is a buying opportunity. After the third or fourth failure usually a full blown bear market begins.
Despite the Fed’s promise to amp up the struggling recovery by flooding the markets with cash and the latest jobs bill from Congress benefiting government and union employees, their major constituents, investors are losing confidence in Washington’s attempt to prevent another bear market. I expect a breakdown into new lows over the next few weeks.
Despite all the weakness in the equities market, many mining stocks I am following closely are breaking out as gold is on its way to test new high territory.
Fronteer Gold which I have highlighted to my subscribers came out with their best drill results yet at their Long Canyon Project. This project is being viewed as one of the great new high grade gold discoveries in Nevada. These results in Nevada will be part of a new resource estimate on this project which should be a driving force for this company over the next few months.
China decreased their holdings in U.S. Treasuries by a record amount in a U.S. government report issued yesterday. Treasuries at the moment are experiencing a steep rise as the U.S. is financing its staggering debt level by offering its obligations to other countries. China has historically been the largest holder of U.S. debt as a means of promoting a strong dollar, but the unattractive yield along with reckless government spending seems to be causing the Chinese to rethink the risks and benefits of holding U.S. government bonds. On one hand, they need to make sure the U.S. currency does not devalue but on the other hand they need to protect themselves from a treasury bubble.
There seems to be a major investment shift away from treasuries as the Chinese are skeptical of the U.S. debt situation. The Chinese are looking to make strategic investments in natural resources. China may not be public about their policy move, but they are taking significant steps to increase their position in mining and energy companies. In 2009 the Chinese Investment Corporation, a state owned company, took a large ownership position in Teck Cominco and Penn West Energy Trust. They are looking for mining stocks to diversify their holdings. This major policy shift from Asia transferring assets from U.S. debt to natural resources could spread. We could soon be seeing a top in U.S. Treasuries and more acquisitions for premiums in the junior mining sector. In fact, a couple of the companies I followed last year had major investments from Asia. As demand has exceeded supply, they have been compelled to import certain commodities such as uranium and molybdenum rather than their traditional role of being the exporter.
Treasuries have made an enormous run, but the recent gap up and reversal could mean that it has exhausted its move and may be headed lower. This gap up and reversal, which made railroad track-like formations in the chart should be observed cautiously. High activity days with a jump in volume or price call for close monitoring. The manner in which price reacts to the gap is crucial. If we see a two-day reversal pattern after a gap up where it closes near the opening of the previous gap, it is a sign that buyers are doubting the previous day’s jump.
Long Term Treasuries spiked higher during the “flash” crash and has proceeded higher for the past four and a half months. Although a two day price pattern is not reason enough to go short, it does raise a warning bell of caution when combined with the overbought reading.
Now the rally from April is 12.5 percent above the 200 day moving average. It has also reached its upper resistance line. As I indicated above, the buying from the Fed and overseas will abate and we may soon be at a juncture where treasuries have exhausted their move. There are negative divergences with momentum which price usually follows.
China’ s move to decrease their holdings may be starting a trend that could influence other countries as the scramble for basic commodities and hard assets continues. This commodity search should spread to U.S. mining companies, especially as the dollar and treasuries weaken. I expect an increase of acquisitions in U.S. gold, silver and base metal mining companies in the next few years.
Several weeks ago I wrote about the death cross phenomenon. The death cross occurs when the 50 day moving average crosses the 200 day moving average on the downside. These patterns, when combined with other technical indicators can predict major market downturns. You may have read articles from the bullish camp and from many technicians contending that the death cross is not a proven or a contrary indicator. I however assert that this warning indicator prevented many wise investors who heeded its signal from losing their life savings in 2008.
The recent Post-Fed free fall is confirming the death cross as this will be the third major failure of the 200 day moving average. When a technician starts seeing bearish signs, it is important to look for subtle clues in chart patterns. In this case the clue was the bearish rising wedge: it is a rally that trades up on decreasing volume. This bearish rising wedge took place concurrently with the right shoulder formation of a head and shoulders pattern. This breakdown coupled with bearish price volume action confirms that selling pressure far exceeds buying. When all these signals happen at the same time, you can expect a rapid downturn to follow. This correction is putting pressure on the 200 day moving average slope. If that moving average begins to slope down, it becomes a heavy area of resistance and will confirm the death cross from early July. The odds of a long term downtrend are becoming highly probable. These signals could possibly indicate the start of a twelve to eighteen month down cycle.
Gold, on the other hand, has shown great relative strength despite the general markets correcting and negative sentiment about the economy from Washington. On July 28th, I wrote that gold was reaching major long term trend support and when everyone was selling, it was exactly the time to be buying. That day proved to be a pivot day for gold.
Gold is breaking out compared to the general markets and especially to the Euro. It has significantly rallied over the past couple of weeks and has broken above its 50 day moving average which showed little resistance. Now that 50 day has been broken to the upside, it should act as support as it builds a base to challenge new highs.
Junior mining stocks that corrected significantly in the 2008 downturn have shown great relative strength during these past two weeks, demonstrating that this time will be different. July 28th was an inside bar day, or Harami pattern, which shows a loss of momentum of the previous downtrend and reversed higher. It is clear to see the uptrend and strength of junior miners during these past two weeks as the Fed has made it clear our economy is rapidly weakening. The Fed will continue to ease and print money which should be excellent for junior mining gold and silver stocks.
We may expect that during this crisis more people will become aware of the benefits some of these explorers can offer to shareholders during a currency devaluation. Some of these companies are significantly outperforming the bullion and investors should become aware of these strong junior miners.
The trade deficit widened unexpectedly this month after the dollar reached extremely oversold levels, which was quite surprising to Wall Street. Usually, a weaker dollar should lead to an increase of exports of U.S. goods; however, the exact opposite occurred. This further signifies the global economic slow down despite record government stimulus, a devalued dollar and artificially induced low interest rates. The market and the employment situation are no better off now than they were previously.
Despite Washington’s attempts to prevent a depression through spending, investors are beginning to lose hope in what the Fed and Congress are doing to prevent a collapse of the markets into new lows. Yesterday, as predicted, the House created a $26 billion job bill that will supposedly prevent government layoffs and expand the job market for government workers. Washington is trying to alleviate high unemployment by creating more government jobs. That is not real job creation. Incidentally, the previous employment numbers were mildly inflated due to the recent influx of temporary Census workers and did not accurately reflect the true numbers of unemployed Americans.
Investors believe that sustainable job creation is through small business growth. The markets, as well as the American people are looking for leaders who will cut government spending and institute tax cuts for small business owners. Entrepreneurs who are trying to innovate and meet consumers’ demands in a struggling economy should be supported with meaningful tax breaks. This spurs authentic growth and innovation. I expect the market and the American People to vote in candidates who are committed to these principles. The people are losing their faith in the current leadership, as evidenced by President Obama’s approval ratings dropping to their lowest point in his entire tenure.
The Fed has committed to buying long term treasuries, which would artificially keep interest rates low. They are desperate to get capital flowing again, but it comes at a cost. Eventually, markets move back to their former equilibrium and long term trends. If you push down a spring as far as it goes, it eventually snaps back harder than before and reverberates. We may not see it for a while, but eventually long term treasuries will crash. Right now investors are flocking to treasuries for security and safety. However, just as the market is losing faith in the Fed’s handle on the economic situation, bond holders will ultimately lose faith in government bonds. We may see a drop in treasury prices along with continued high interest rates over the next several years and possibly even decades as our children and grandchildren face the burden of credit downgrades.
My fear of a devalued currency and lack of confidence in Obama’s handling of the economic situation are the reasons I am bullish on specific mining exploration stocks that are converting their strong cash positions into high grade copper, silver and gold resources. I have been following this sector for over nine years. I gather that during the next five to ten years, precious metals will see a lot of growth as investors seek hard money and hard assets.
Today’s major collapse in the equity market was significant. Last week, I mentioned that the dollar was extremely oversold and that the Euro and U.S. equities were about to correct considerably. Today we are seeing the beginning of a new downwards trend in global equities and a flight to safety. Investors are worried that efforts from Washington will do nothing to prevent a slowing economy and a huge trade deficit.
Yesterday’s weakness in gold was only relative to the dollar and U.S. treasuries. Compared with the Euro, there are technical signs of a major move upward in the price of gold. We could see a resumption of the market patterns that we saw in April and May when gold and the dollar rallied together as investors were seeking shelter from government defaults and sovereign debt crises. The relative strength trend of gold versus the Euro is an important indicator of the true price action of gold. Right now, it is showing signs of a bullish move higher after finding long-term support.
Although Gold was down slightly to the dollar it gapped up today versus the Euro after reaching an important 38.2% Fibbonaci Retracement and Long Term Trend Support. MACD supports that Momentum has shifted. RSI Crossed 50 today also a bullish sign.
The November 2010 election is right around the corner. As the Democrats praise the federal stimulus and Barack Obama as the savior of the American capitalist system, Republicans who also initiated a bailout now reveal where the money was spent frivolously and recklessly in order to gain votes. Regardless of which party gains power, the fact remains that government spending has increased exponentially and it has not positively effected the job market one iota. The job market is, frankly, terrible. Our children and grandchildren are likely to experience high inflation, high unemployment and even higher taxes, the very problems that Greece and Spain are struggling with now. The only solution the Fed is offering is to throw more money into the system to prevent a downward deflationary spiral.
The strategy of my choice for protecting assets is in quality junior mining companies with great management, a strong cash position and expanding resources.
The European crisis demonstrated that now, instead of the credit crisis being just a private sector issue, entire governments are defaulting. Due to reckless spending in many areas, these countries have positioned their constituents with a great burden. Spain is now facing close to 20% unemployment. There are states in the U.S. that are running huge deficits and in danger of defaulting. A downturn in a highly leveraged global society such as ours has the potential to be devastating.
In order to for the Democrats to win the November election, they will do everything possible prior to the big day to inflate the stock market. I suspect within the next couple of weeks, we will see a second “jobs” stimulus and quantitative easing actions. They need to act quickly to inflate asset classes, the stock market and Joe the Plumber’s 401k plan if they want a shot in the next election. A “jobless” recovery is going to be a major flaw to the Democrats control of Washington.
This rally is not broad based at all, lacking volume and market breadth. Market breadth tells us if this past rally was broad based, meaning that in a healthy market price corresponds to the amount of stocks participating in an uptrend. It is concerning when you observe a disparity between the stock price and the advance decline line. This usually indicates a “fake” market, because only a handful of stocks are participating. A sustainable market is one in which many participate. The advance decline line gives you a clue ahead of time if a rally can endure .
The Nasdaq is lacking broad participation. The Nasdaq’s advance decline line, which is more correlated for the small cap companies, needs to get involved with this rally before this market turns bullish. Even though price was close to three year highs, the advance decline line is not nearly the same level as three years ago. This is a false rally with a few select large cap international stocks moving progressively higher. The U.S. will enjoy a real recovery when we see small caps participating and moving higher. Obviously, we are not there yet.
Today’s negative job report could be the catalyst to start another leg down.
Over the next few months we are going to see formidable efforts by the Congress, the Federal Reserve and the White House to prevent the economic fallout that the markets were teetering on during the European Sovereign Debt crisis. If these markets are not successfully restored in time, we can expect a major political change in November. Has the stimulus really been effective? Looking at this chart, it appears that this is not the case.
Gold and silver may make a major move in the next few weeks. I’ve said before that gold was at a major buypoint due to long term trend support. The jobs report was very bullish for gold investors. The Fed is expected to make another stand and gold, silver and base metals should outperform considerably.
Disclosure: I am long gold and silver mining stocks.
Economic sentiment rose to a 28 month high in Europe after the panic sell off earlier this year when the Euro collapsed. A major rally has ensued after the most severe financial panic in the Euro’s history. Now the rally is pushing higher, but have the concerns dissipated? I am extremely concerned about this rally off of June lows for several reasons. I do not believe that the economies in Spain, Portugal and Greece will be saved without major restructuring, and the chance of credit defaults are extremely high. A strong Euro hurts European companies that are trying to export goods. It harms companies’ revenues and affects employment. Spain is now suffering from high unemployment, a real estate crash and the very likely chance of a credit downgrade.
It is interesting to observe the dichotomy between Europe’s handling of the debt crisis versus the United States. While Spain, Portugal and Greece have been forced to cut spending, President Obama has increased unemployment benefits and expanded social programs. The U.S. is estimating a $1.47 trillion deficit this fiscal year ending September 30, and $1.42 trillion in 2011. The U.S. is spending frivolously while the Europeans are taking aggressive steps to cut expenditures, which is weighing heavily on consumer confidence and economic growth. Over the past couple of weeks when concerns of a double dip increased, Ben Bernanke has discussed additional quantitative easing and fiscal stimulus to prevent another financial collapse while Trichet is forcing governments to cut expenditures to stem off the aggressive selling of the Euro and the concerns of a breakup of the European Union. As you can see, there is a global effort to prevent economic collapse and the manipulation at play is obvious.
I don’t believe this will continue much longer. The Europeans will have to follow the United States’ lead and devalue their currency in order to prevent political unrest and the breakup of the European Union. I suspect the rally in the Euro to come to an end soon, as the austerity measures imposed will have to be lightened. Spain has millions of people out of work already-over 20% of their population. Let’s not ignore what can happen in Europe when unemployment rates skyrocket.
The Euro’s rally and the decline in the dollar have been good for U.S. equities which were breaking into new lows in early June, with a break of 1040 on the S&P 500. The S&P has moved higher and is on the verge of breaking a major resistance point of 1130.
Comparing the Dollar to the Euro, the relative trend has just hit an important area of support at the 50% fibonacci retracement and the dollar has just hit its 200 day moving average. Due to the oversold condition of the Dollar and the overbought condition of the Euro plus important support for the dollar at the 200 day and 50% fibonacci retracement on the relative strength chart, I suspect an upcoming correction in the Euro.
Further bailouts in Europe, credit downgrades and defaults are expected to continue into the second half of 2010, which will see selling pressure on the Euro. These events could push those seeking a safe haven away from the Euro. In the past, that safe haven has been the Dollar and treasuries, but if you can tell by this game, there is only so much back and forth that can take place before the global currency crisis is revealed. At that time, true money that translates into hard assets will be extremely valued.
New Gold (NGD) has been a long term recommendation for my readers since May of 2009 when it was selling at $2.50. I have always been impressed by the quality of assets New Gold owns. New Gold is unique in the mining sector as they are leading the sector in increasing production and reducing cash costs. In two years, this company has gone from being in debt to having a comfortable net cash position.
They have three operating mines in mining friendly jurisdictions and cash costs have significantly decreased. Costs are expected to go down further when New Afton in British Columbia and El Morro in Chile get started. Both mines have huge amounts of copper. The copper byproduct decreases the cash costs of the gold to almost nil. It becomes pure profit. Their major development project, El Morro in Chile is one of the world’s major gold copper mines and New Afton is an exciting mine that has close to a billion pounds of copper reserve and a million ounces of gold.
The El Morro project is joint ventured with Goldcorp and is one of the world’s largest gold copper mines, with 6.7 million ounces of gold reserve and 5.7 billion pounds of copper. Like New Afton, this is also a large gold and copper mine that will add huge profits in New Gold’s future and decrease cash costs due to its high amount of copper. This is clearly a company with impressive assets and growth ahead.
Recently the share price has come down due to a negative decision by a Mexican Court regarding one of their three mines, Cerro San Pedro, a massive mine with a million ounces of gold and 50 million ounces of silver. It was over a technicality in the original Environmental Impact Statement, even though the Cerro San Pedro mine is internationally recognized for its standard on minimizing its affects on the environment. Actually the whole case is over a land use issue not environmental issues. Prior to this decision, New Gold received an injunction to continue operations while the legal issues are being resolved. Due to past precedents, during the appeals process New Gold is likely to continue operations.
It is important to realize that this locale is dependent on mining as a way of life. There are over 1600 jobs that are reliant on the mine remaining open. The government certainly doesn’t want this mine shut down as it indirectly contributes half a billion pesos to the Mexican government, which is battling many problems including unemployment and crime. A skyrocketing unemployment rate in the region could be chaotic. The economic health of the region requires the mine to remain open and running. Recently a newly elected council of landowners in the area are challenging the old council who started the legislation by attempting to drop all litigation against New Gold.
I believe this will be resolved in due time with New Gold revising the Environmental Impact Statement, or that the decision eventually will be overturned. This may become a long, drawn out affair. However, I highly doubt that this mine will be shut down during this process as it would spur an economic disaster for the local area.
New Gold (NGD) has been one of the best performing stocks in the mining sector. They have a top management team, with directors who have built major mining companies and resolve minor setbacks. I believe this will be one leading gold stock over the next several years because they have the assets and the financial condition to grow. This pullback is a great opportunity for a long term holder. Notice how it has pulled back to previous resistance at $5 which is now support. Also it has come in play with the long term upward sloping trendline which it has touched 5 times successfully. It is currently close to historically oversold levels. Coming in play with support, coupled with the oversold conditions provide long term investors a prudent market entry point. Subscribers who have followed my advice in my free newsletter at goldstocktrades.com are now up over 100%.
Gold is now reaching long term trend support after falling the last few weeks as investors returned to bid up the Euro and equities. The bounce in equities, especially financial, retail and real estate may be short lived as volume indicates that there is not much conviction from major investors on the upside. Gold has recently been the safe haven as investors sought shelter away from the Euro when it was having the sovereign debt issues. Now that those issues have been quelled, gold has had some selling and it has now reached an oversold condition and a long term trendline which is acting as major support.
Stock prices move in trends. In a bull market, it is quite often easy to identify the ascending bottoms. Being familiar with trendlines allows the investor to enter long term bull markets when they are oversold and at key support. An investor must always be aware of a stock’s underlying long term trend. This can be counter-intuitive and awkward, as most times when it comes down to support you have to think against the market herd and buy when others are selling. It’s like buying a winter coat in the heat of summer. Gold is on sale, and presenting a low risk, high reward trade, but it requires non conformity with the crowd which is not an easy task for anyone. Many of us like to be in what’s hot now situations, rather than seeing the bigger picture and entering into a trade when it is uncomfortable.
Gold is now at my buy point of the rising long term trend support line. GLD touched that line 6 times, which signifies that this trendline is a reliable point of support. The significance of this line is that it is not steep, which also brings a higher probability that GLD will find support here. It is also oversold. Continued weakness here and a break below this long term trend would be troubling and highly unlikely. If there is a break most likely it would be exhaustive, meaning that it will shake out a lot of shares before the next move higher. I do not see $1200 as a top in gold as there are no technical signs of a major top.
On the other hand, financial stocks may be finding key resistance here following a low volume rally. As investors are digesting earnings reports that claim credit is improving and lending is increasing, consumer confidence is weakening and the unemployment rate is still very high. A jobless recovery is what many are considering we are experiencing. It seems that this recovery has been good for wall street while main street has not seen an improvement. The financials have found resistance at the 200 day moving average and have now failed four times, significantly breaking through this point of resistance. Historically speaking, after a few failed rallies a major drop could occur.
At the writing of this article, housing has also had a significant reversal after recent data showing an increase in pricing in some metropolitan areas. Investors are selling home building stocks on positive news, which indicates that there is some caution over what the real estate market will resemble after the home buyer tax credit expires. The chart shows a clear reversal and I expect that the rally in equities will be coming to an end and that gold’s poor summer performance will be different this fall as many weak hands were shaken out. An explosive fall rally into new highs is expected as I still have a target of $1400 by year end.
Disclosure: I own shares in gold and silver mining stocks.
As investors debate the validity of the stress test to gauge the financial health of European banks, the market has definitely signaled clues on the charts that we are nowhere out of the woods yet with the sovereign debt issue. Since the European Crisis began at the end of April, the news out of Europe has rattled the markets on high volume sell offs, break of trends and moving averages. It is interesting that now, with the stress test showing positive, investors are hesitant to jump back in. This is indicating there are still other major concerns and that many of us don’t have faith in the stress test or published government reports.
One lesson I’ve learned as a trader is that if you don’t know what the trend is, don’t make a guess. Even a four year old child who looks at a price chart on gold can spot the uptrend. However, in the case of the major market indices- where you have a declining 5o day moving average below the 200 day moving average, and when you are seeing poor price volume action- it is best to be cautious. There can be impressive rallies before a bear market begins. The Dow Jones Industrial Average is overbought and has crossed the 200 day moving average on light volume. This has come after major bouts of selling from institutions including the infamous “flash crash in May.”
The way I measure how excited a market is through volume. A break above key support or resistance on low volume indicates that the move was not convincing and should send warning signs as a “fakeout”. This market is indicating that the moves higher are basically due to a lack of sellers and any further news items which may be negative will bring the bears back out.
Housing is an area which is seeing very little demand right now. This is the industry which initiated the financial crisis we are in and it should be showing signs of strength in an economic recovery. Much of the rise in housing was the result of government intervention in the form of tax breaks offered to buyers. The rise in treasury prices and the weakness in housing indicates that many people are not borrowing.
Although housing appears to have a double bottom, I am a bit suspect of the lack of volume. It would be premature of me to call a buy signal on housing, especially since it has not tested the 50 day moving average as resistance after the bearish death cross of the 5o day crossing the 200 day. Housing needs to turn positive before any real rally can begin. Right now housing stocks are still bearish and a convincing break above the indices would change my mind, but the probabilities of that occurring with these overbought conditions and lack of volume are low.
There was a report this week about executives of bailed out banks who were paid $1.6 billion dollars of taxpayers money. As investors realize the staggering debt and the stagnant economy we are facing because of high taxes and increasing government intervention into the private sector, there will be major move away from cash and towards gold and silver. At that point gold and silver could move significantly higher. I believe that time may be closer than many sources would have you believe.
To summarize, some indexes have broken the moving averages to the upside but on low volume, as I have shown in the first chart. To me, this indicates that smart money is staying on the sidelines until the trends are more observable. Right now, my bias is that this rally is a fake-out and I will not become bullish again until I see a break above 10,600 on the Dow as well as a bullish golden crossover of the 50 day crossing the 200 day moving average to the upside. Volume is a crucial part of this equation. If there is some major accumulation coming coupled with the 50 day moving average sloping higher, then I will reconsider my position. However, at the moment I am still bearish on the markets and am bullish on silver and gold.
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Trading against the market herd, also known as going contrary can be quite profitable, but timing is another challenge entirely . Many contrarians make calls too early as irrational markets tend to stay irrational too long for most investors to stay in them. Nevertheless, when used in conjunction with other technical tools it can provide excellent market entry points that are high reward and low risk when structured correctly.
In these past few weeks since my article on the death cross and why specifically this cross is quite bearish due to other technical signs, I have been bombarded with emails and links to Barron’s and Marketwatch which claim the death cross when back-tested is a contrary indicator with no statistical advantage. Word to the wise, be careful of what you read in the widely published media reports. A technician worth his salt knows if a death cross is real and if you need to be wary of a market downturn, similar to the market decline of 2008.
Remember that Barrons, CNBC and MarketWatch are in the business of advertising, which depends on their circulation. Many of their ads are supported by major corporations who want their readers to be bullish rather than bearish.
What has concerned me lately in gold was the amount of media promoting the possibility of gold skyrocketing during the recent Sovereign Debt Crisis, where many fled the Euro to buy treasuries, the dollar and gold. Today there was speculation that may threaten banks who are not lending. This is becoming a deflationary crisis and investors are now concentrating on treasuries. Mortgage rates are at all time lows, lending is drying up and housing starts are plummeting. There are worries about U.S. Debt, higher taxes and increased government intervention in the private sector. This shakeout in precious metals is giving investors another opportunity to jump into this bull market without being caught up in the hysteria. To enter the trend with additional capital, it would be wise to buy when the conditions are oversold.
I have written about the use of oscillators to show short term buypoints in an uptrend. I am seeing this happening again with gold. Gold is about to hit an 18 month trend line, which has been successfully tested 6 times. This is a valid and significant trend line that needs to be monitored closely. Oversold conditions coupled with long term trend support leads to highly profitable times, as indicated in the chart below.
While learning to trade, I was taught to be a patient lion waiting for the best possible opportunity to pounce. Lions wait intently until they are sure of optimal results: a profitable trade. Now as a trader of gold and silver, I see opportunity approaching. The best way to play this market is by buying gold and silver when it hits the lower support trend line and is oversold, and selling as it approaches the rising resistance line. This rule forces you to enter when the conditions are oversold but still in an up market, giving you very minimal downside risk. Each time gold has rallied into new highs, the first correction to that trend line has been the counter trend bottom in the next major move.
Investors should be concerned if there is a break in that trendline as it has proven to be valid over the past 18 months. There are many similarities with silver.
I believe silver is a great buy here at $17, especially as this is a true deflationary hedge. Eventually the public will want real money, which is gold and silver. Silver has the possibility of making a major run as it is way below all time highs. During this time when it is oversold and coming in play with long term support, I would position myself for a move higher from the $17 area to $21 by the end of 2010.
Fears of far-reaching government oversight in the financial industry and weak economic data coming out of Philadelphia are contributing to today’s modest decline in the market. Many fear that this bill will hurt the financial sector as more government oversight is required. The bank bill implies that the government can have access to control banks when they are in a vulnerable situation.
Weak economic data from Philadelphia also disappointed analysts. I am concerned that the same people who termed “too big to fail” and bailed out these big banks causing huge amounts of debt for future generations are designing the legislation to “prevent” it in the future.
These last few weeks I have been warning subscribers about this decline and the possibility of a major drop following the very bearish death cross. For timely updates and specific recommendation please subscribe to my free newsletter at my website at http://goldstocktrades.com.
After a six day rally U.S. equities became quite overbought. I use oscillators to time market entry. Oscillators are used to identify short term market extremes. If the trend is moving lower, I will use the oscillator to tell me when the market is overbought for a short entry point. The recent market bounce with six straight up days gave extremely overbought readings. This means this recent rally went too far too fast.
The indexes now have downward sloping 50 day and a flattening 200 day moving average. Poor price volume action continues to plague this market as the rally has been on low volume which shows a lack of support from institutional investors. The slope of the 200 day moving average turning negative will confirm the death cross and a failure to break through the 200 day and continued weakness will be another bearish confirmation.
Yesterday, those overbought conditions were signaled and it coincided with the Dow reaching the 200 day moving average. Today’s downward reversal from the 200 day is indicating that this counter-trend rally is completing. Traders might want to think of going short at this point as most traders who were shorting when the index broke to new lows have covered. It is also an opportunity to move to cash if you still have long positions.
Moving averages are used by many traders to identify trends as they smooth out price action and act as key support on the way up, and resistance on the way down. In fact, it is one of the most widely used technical indicators and extremely popular among high frequency traders because it is so clear cut and easy to program. It allows the trader to ride a trend higher and to cut losses short.
The death cross is a popular signal that when used properly can cut massive losses short. The death cross is so popular because many institutional investors use the 50 day moving average as a medium term average and the 200 day as the long term moving average. Basically, the crossover method signals a sell signal when the shorter term moving average crosses the longer term moving average to the downside. A buy signal is identified when the short term moving average crosses the long term average on the upside.
Crossover methods are easy to program into a computer. However, I must warn that one must use additional clues to create a sell signal. There are frequent whipsaws and failures when you use the crossover method in isolation.
Chart reading is an art that requires discipline, experience and study. Crossover methods used exclusively, such as by a computer program, will not produce the same results of an experienced technician who looks for other pieces of evidence to confirm the bearish crossover.
Although some believe this signal is nonsense, and show back-tested data with computer models, it does not show the crossovers used in conjunction with other technical signals.
If the crossover signal is confirmed with a head and shoulders breakdown, a cross into new lows, and poor price volume action, which is occurring now, I will patiently wait on the sidelines and look for prudent short points when I see a price reversal and as the price comes up to certain resistance. If all these signs are coming together the probability of a whipsaw is significantly reduced.
It is also important to note that a death cross is further confirmed if the 200 day begins sloping downwards after the break. This will act as resistance on the way down.
A look at the death cross of the Dow in January of 2008 showed many of the signs of a market top and trend change.
The 200 day which acted as previous support was violated on high volume and was followed by three failed railies at the 50 day moving average before crossing over. If not followed investors would have lost more than 60% of their portfolios.
Now is not the time to look for bargains but to protect your portfolio by selling on any bear rallies.
I believe that this rally will be shortly coming to an end and we will continue to trend lower in equities. Use these rallies to prepare for shorting opportunities.
Disclosure: Not currently shorting or investing in inverse etf’s at the time of writing this article.
These past few days as the market indices broke through the head and shoulders neckline, I have had a barrage of emails asking if it was too late to buy inverse etf’s after my original short sell recommendation on June 21st 2010 .
My response to many readers is that if it is apparent to everyone to short that is the time to cover. It is dangerous to short when stocks are going into new lows as often time there are powerful dead cat bounces where covering takes place.
No one knows how to sell at the top or buy at the bottom. The only person who knows that is a liar. Often at tops every chart looks bullish, earnings are fantastic and every newsletter writer is bullish with new price objectives. Similarly at market bottoms charts look awful, stocks are experiencing losses and every newsletter writer is telling you to run for the hills. Be aware of the obvious because when it is evident to everyone that is when you have to be contrary to the market crowd.
Last week everyone was buying puts and shorting the market when it was an obvious head and shoulders pattern with a very bearish declining neckline. The slope of the neckline determines the bearishness of the pattern. It is important not to short when it is obvious and breaks the neckline. I look at key areas to short on counter rallies. Price volume action is very poor and I expect a few more days as it rallies to the resistance trendline and 50 day moving averages for additional short sale points.
The goal of a trader is to find key areas of support to buy when the stock is moving up and specific points of resistance to sell short. Markets don’t top or bottom in a day. Often there are several signals to show that a market trend is changing. During those times there are often major counter trend rallies to shakeout the weak or inexperienced short traders who bought as the index dropped into new lows.
The cross of the 50 day and 200 day is called the cross of death for a reason quite often there is a major break to the downside over the next few weeks.
This past week as many analysts and publishers recommended to go short as the index broke the neckline of the head and shoulders pattern. I disagreed. I would definitely not recommend shorting into new lows but shorting at the end of a counter trend rally or where there is overhead supply where many investors want to get out.
If you are looking for possible points to go short stay tuned over the next few days as I will be sending out an alert to free subscribers.
Late Friday, the Federal Review Panel came out with a recommendation that will be forwarded to the Prime Minister and his cabinet assessing the environmental impact of the mine. The Federal Review Panel did not weigh in the economic affects of this project. They made environmental recommendations for Taseko to take if the mine is approved.
I believe the Prime Minister, along with the Cabinet will support the British Columbia Provincial Approval based on the opinion that the economic benefits far outweigh the environmental impact.
The mining industry is crucial to British Columbia’s Gross Domestic Product and brings in over 8 billion dollars to British Columbia a year. A major concern is that the construction of new mines has been declining. Many mines are closing and there has been a rapid decline of economic reserves. This has seriously affected poverty levels and unemployment rates.
Prosperity is British Columbia’s flagship project that will bring in 400 million dollars of revenue a year and get many back to work. Now the cabinet has recommendations from the panel on what Taseko should improve if the project is approved. The project is very popular in British Columbia and I do not believe that the Prime Minister and Cabinet will go against British Columbia’s approval. Their approval was based on the belief that the massive economic benefits would far outweigh the environmental loss to the local community. If the Prime Minister rules against the Province, it will have devastating effects not only on British Columbia, but on Canada and its status as a friendly mining jurisdiction. This status brings in huge amounts of investment capital which is crucial for economic development.
The news related break of the moving averages might appear negative but this decline has not shown to be high volume correction. I expect there to be a move higher as many sold off with the news coming off the wire and do not understand the macroeconomic effects of this project. Subscribers are still up over 100% even though many should have taken profits when I recommended and kept the 15% trailing stop loss which I also made sure for subscribers to have. If you did not take profits with the 15% trailing stop loss and are still holding, I would recommend waiting until September until the Cabinet and the Prime Minister make their decision which takes into consideration other variables than the environment alone and not feed into the panic selling.
Stocks went down sharply today on concerns over consumer confidence and indications that show that the economy is stalling in China. China has been a leading market in this recovery and its bull market has helped the price of industrial metals and base metals.
Over the past few weeks I have highlighted that the market has given signs of a major deflationary crisis and economic slowdown. Today these signs became apparent with a significant sell off on high volume and a break into new lows for the S&P 500 and Nasdaq.
Today major institutions sold equities and sought shelter in treasuries and the dollar. Gold and silver both sold off early in the day but gold fought back and closed up and silver was able to recoup some of its losses. Gold and silver are still in a uptrend and above both the 50 day and 200 day moving average. Gold and silver miners also appear to be close to a major breakout.
The S&P 500 and Nasdaq had a significant break of previous lows on high volume. I alerted readers several days ago to buy inverse etf’s when the markets failed to regain the 50 day moving average for the second time. Many times after this second failure the market has a major breakdown. The time to short is when the averages fail at the 50 day not when it makes new lows as many less experienced traders are doing now.
Many traders are fearing that silver and gold may be a top here as they are comparing 2010 to 2008. I understand that fear and am monitoring that situation closely. I have received a lot of requests to comment on the situation.
At the moment I believe that we will not see a correction in precious metals like we saw in 2008. There has been a global concerted effort for governments to devalue currency and assist the economy with unprecedented spending and cheap dollars. The Euro is on the verge of a collapse and there are major sovereign debt issues that is spreading to more countries. I do not believe the U.S. government will be immune from those debt issues. The United States has high unemployment, weak consumer confidence, a huge amount of debt and poor GDP growth.
Gold miners appear to be on the verge of a major breakout into new pre credit crisis highs.
The chart above shows the relative strength of the gold miner etf to the S&P 500. A break to 51 on that chart would show great relative strength to the market. During this market downturn since May 6th miners and bullion have shown good relative strength which does not make me conclude that we are having a repeat of 2008.
Major mining indexes appear to be approaching a major breakout point fueled by the sweeping overhaul and takeover of banks. Banks have been under pressure from a continuing recession, high unemployment, a weak housing market and now more government oversight and audits. This does not help a recovery process for housing or financials. These are two industries where I need to see strength to believe in a real economic recovery.
Financial are under a lot of pressure. In the past 6 months, the financials have had 7 major weekly distributions verse 1 major accumulation which leads me to believe that this bearish crossover could lead to a major financial decline. Notice how the financials when it broke into new 52 week highs it was on low volume which means it didn’t have the momentum to really hold those highs. This is also evidenced by the declining momentum indicators. The financials had 5 major weekly sell off in the 8 weeks of April and May. The bearish crossover pattern plus the failure of the financials to hold the 200 day leads me to be long term bearish.
On the other hand Silver, Gold and Miners all appear to be reaching new breakout points.
Silver is very close to a 3 year breakout and I would not be surprised if over the next couple of weeks silver makes a move into new 36 month highs. If this move breaks $19 on silver, which is a major resistance level my target would move to $30 an ounce. Silver has shown increasing demand as it has found support at the rising trendline support and is at the verge of a major breakout.
The connection between the financials and silver is showing that more investors are moving away from investment vehicles which are exposed to debt, government regulation and weak economic growth. Investors want their assets in real money which is silver and gold. Keep an eye on $19 silver and a breakdown of XLF past $14.
El Gallo’s story is continuing to impress the mining community. U.S. Gold has invested a lot of capital into drilling El Gallo this year and believe that by 2013 they can be producing up to 10,000,000 ounces of silver a year plus 35,000 ounces of gold. This drilling program has been extremely successful. They have expanded the mineralization and are now showing a potential to connect different zones to have one large shallow open pit mine. In two weeks the initial resource estimate will be published which should add momentum to this gold and silver growth story.
UXG’s shares have significantly outperformed mining stocks and gold bullion this year. Since our initial recommendation from last May, UXG is up close to a 100%.
Even though UXG at the moment has little institutional sponsorship other than the CEO himself, I believe the investment community is coming to realize that the company has an impressive growth story. That has been highlighted technically over the past 12 months. You are welcome to view archived posts where I have shown the incredible strength these past 6 months.
Since investing in the mining sector since 2001 I have found relative strength to be a key indicator of where capital is flowing. It is easy to identify which companies are experiencing increasing demand compared to a benchmark. Since I consider myself a miner of mining stocks, I spend hours researching the mining companies which have the greatest ability to outperform gold bullion and the mining sector. Even in a great precious metals bull market one can underperform if not aware of how to use technical analysis and relative strength.
This chart shows the relative strength of UXG to the gold and silver index. Clearly the breakout to new 52 week highs is confirmed by its bullish strength. The longer the outperformance of price and the confirmed breakout leads me to believe its growth story going forward.
Using relative strength one can evaluate if this recent breakout in UXG is sustainable. The chart above shows a major breakout for UXG confirmed by relative strength. I believe that this stock can significantly outperform the sector over the next few years as did Goldcorp did from 2001-2005 while Mr. Mcewen was CEO.
Over the past 6 months UXG has significantly outperformed Mcewen’s former company Goldcorp. While Goldcorp is up less than 15%, UXG is up close to a 100%. This further emphasizes how important it is to use relative strength to really profit in precious metals bull market.
Price volume action is excellent highlighted by the big volume breakouts. I believe UXG is a great long term growth story. New investors who want to get in should wait for a pullback as it is short term overbought.
The United States is facing a crisis of a rising dollar and a recession where basic industries over the past several months have experienced a nasty decline. This condition is a concern for policy makers as the federal stimulus appears to be wearing off. The economy seems to be slowing and cash, treasuries, silver and gold appear to be the area of strength.
One bellweather blue chip Alcoa is down over 25% the past 6 months.
In January after breaking into new 52 week highs Alcoa experienced a nasty reversal and has been in a 6 month downtrend. Meanwhile, the U.S. dollar is rallying as well as gold and silver. This is a major deflationary sign.
Yesterday’s move to disconnect the yuan to the dollar was a mutual decision for both governments to stem the global deflationary crisis by devaluing the dollar. The U.S. government has done everything they can to prevent a deflation by keeping interest rates at all time lows, buying back treasuries to keep mortgage rates low and a massive federal stimulus. Now this latest move is another attempt to use China to decouple its currency, devaluing the dollar.
Although yesterday’s attempt appeared to be bullish as every media outlet believed that this would help global economic growth and the U.S. Economy, the market showed that government intervention can not subdue nature’s law of supply and demand.
The reality is years of bad debt and easy money need to work its way through the system. Eventually the markets and forces of supply and demand will reach equilibrium. Now investors are protecting their wealth by moving into gold and silver and I have done the same.
Economically sensitive equities and basic materials need to be avoided. It is an important time to preserve wealth by being in gold and silver during this next downturn.
Gold appears to be making a very bullish crossover pattern on its relative strength chart compared to the S&P 500 index. Each time it has made this pattern over the past 3 years with both moving averages pointing upwards has been very lucrative to gold investors.
The transportation averages had a nasty reversal today to further prove that movement of goods is under pressure. Transportation is the clue to see if economic recovery is continuing. Today’s reversal is evidence of weakness and further proof that businesses and individuals are holding onto their cash.
Today showed strong resistance and failure at the 50 day. This is an extremely bearish pattern. We must be defensive.
There are key points and days to consider heavily when following markets and deciding which direction to play. If you study charts you are able to see patterns that repeat themselves over and over again.
One key shorting opportunity that I have seen before major market declines is the second failure of the 50 day moving average. Today’s nasty reversal where it closed down after being up for most of the day fits this criteria especially when it coincides with the failure of the 50 day moving average.
The volume was above average and this leads me to once again be bearish on the market. Now is the time to short or buy inverse etf’s such as REW or SH to protect against another decline. It is not wise to be long this market. Trailing stops should be monitored closely. Now is the time to short not when the market reaches new lows.
Copper is an extremely useful indicator which shows the strength of the global economy and whether the economy is growing or decreasing. At the moment Copper is flashing a “red alert!” A very bearish crossover pattern means that copper could go lower for many months.
This pattern is taking place with a broken trend, weakening rsi and momentum. All these signals together makes the chance of a fakeout, bear trap or whipsaw less probable. Next target is $250 which is the 50% retracement.
The bearish copper pattern is taking place at the same time as an extremely bullish cup and handle breakout on gold. Many investors are finding gold and silver a better place to be right now rather than equities or commodities that are more susceptible to a weak economy.
I especially like silver here and have recommended UXG U.S. Gold which has made a huge discovery in Mexico. UXG is one of the leading stocks in the market right now up a 108% in the last 6 months. Although it is extended and I do believe there will be a pullback I am still extremely bullish on this company. In the next couple of weeks more news will be coming out summarizing the massive amount of work UXG is doing in Mexico.
Silver is going to follow gold and breakout into new highs and when that breakout is done a huge move could follow according to my point and figure charting. As you can tell by this chart that as the global economy is in danger people are buying silver. This is a sign of deflation, when the general public hoard silver and gold rather than being exposed to debt.
Silver is making a long term ascending triangle which is a bullish pattern and hasn’t violated any trend lines or moving averages. I predict silver on this next breakout could catch up with gold.
In a real economic crisis silver is a much more practical item as an alternative currency as it is much cheaper. A middle class person could easily cash in some dollars to by a roll of silver dollars verse buying gold coins.
The market is also predicting that interest rates are going to stay low as central banks fight deflation and hoarding of precious metals. This is illustrated by the move in utilities to reverse the bearish crossover signal. This signal is usually bearish unless there is a significant reversal close to the crossover.
Utilities is a sector which is extremely sensitive to higher interest rates. When this sector rallies it usually predicts low interest rates. The fear of bad debt globally and deflation is causing a rush to gold and silver and an easing from central banks.
U.S. Gold (UXG) continues to be one of the best stocks in the overall market completely bucking the previous correction. Please read my previous post from last week where I highlight the 4 major reasons this stock is moving and why I believe it will continue higher. Click here for previous post.
We will have pullbacks but the next target for UXG is pre crash highs of $7. UXG is leading the precious metals market as it is at the top of the list in performance over the past 6 months.
Best Performing Stocks
Symbol
Company Name
Percent Change
Chart
RVS
Riverstone Resources Inc.
114.81%
GMO
General Moly, Inc.
84.34%
APLL
Apolo Gold and Energy Inc
81.82%
UXG
US Gold Corporation
79.27%
FRG
Fronteer Gold Inc.
70.54%
BCLE
Bio Clean International In…
50.00%
ANV
Allied Nevada Gold Corp.
47.70%
RIC
Richmont Mines Inc.
36.37%
DPM
Dundee Precious Metals Inc…
34.37%
SA
Seabridge Gold Inc.
34.19%
Notice two of our recommendations are up there General Moly and U.S. Gold. New Gold would be up there as well with a 90 % gain but for some reason bigcharts doesn’t classify it as a gold stock. Taseko is up close to 200% gain for the past year.
Since 2001 I have used technical analysis and specifically relative strength to focus on tomorrow’s leaders in the mining sector. Having a discipline and following strength in a sector that is filled with shameless promotion is key to making gains. Fundamentals analysis alone will not achieve the same investment return.
Here is a chart from our recommendation point of 6/2/09.
Subscribers have close to a 90% gain and I appreciate all the subscribers who waited patiently through the correction where we gave back a 45% gain. I believe in holding on to winners. Stocks that I recommend have potential to make huge gains, but one has to patient as stocks correct and create another base before blasting into new high territory as in the case of UXG.
Today the major indices made an important move to regain the 200 day moving average and clear resistance on higher volume. After making 2 previous attempts to cross the 200 day the markets are appearing to have made a successful double bottom. The double bottom pattern would be more confirmed if the volume on today’s breakout was above average.
Nevertheless, it was higher than the previous day which means the bulls have won the short term battle and are in charge.
Also the Dow made a double top breakout on the point and figure and a break of a trend line.
Many leading stocks are showing bearish signal reversals on today’s rally which means it may have legs especially aerospace and defense stocks as the Middle Eastern Situation between Iran and Israel intensifies. Any short positions need to be covered and additional buy recommendations will be coming shortly.
The rally was good for gold today and I expect a breakout to new highs shortly. Gold is making an ascending triangle and I expect a breakout to new highs in the short term. $122.50 would be the next breakout with a measured move expected to $137.5.
In baseball if you swing and miss three times then you are out. On a chart if you see three failed attempts to break resistance…get out or short.
Each time the SP5oo tries to regain the 200 day moving average it fails and it is immediately hit with selling. Sellers are in control and the market is still in correction mode.
Today Moody’s downgraded Greece’s debt which caused the market to give back early leads. The chart shows a picture of a move up to the 200 day on low volume. This means there is very little buying going on. In order for me to gain confidence in the markets I need to see a break through major resistance levels with conviction and that moment is not apparent yet.
Quite contrary three failed attempts to regain major support has failed. This causes me great concern because in a bull market the 200 day acts as support. In this case it is acting as resistance, which is typical of bear markets..buyers beware!
On the front page of all the media outlets is the question if gold is in a bubble. I ride bubbles and look for beginning signs of bubbles. Bubbles are irrational, but there is an old saying that markets are irrational a lot longer than one can stay solvent.
I believe gold is nowhere near a bubble top and believe now is the time to profit on the next major asset class ready to run through finding the strongest mining stocks in the sector. I use relative strength to find those companies.
Gold is in a classic cup and handle pattern. The cup and handle pattern has historically led to major market moves.
You can see by the graph the major breakout from the six month saucer on excellent volume. Notice how the volume dries up on the handle. Now I expect a major breakout and a run to $136 on GLD or $1375 an ounce.
Compared to other bubbles gold appears flat.
This a chart of the oil index verse the gold and silver index. Notice the run in oil before the credit collapse. This run lasted almost 5 years before it topped. Meanwhile for the past 15 years the XAU has been relatively flat and yet it has had a nice run we have not seen the run up like other asset class bubbles.
I believe there are signs that we may be moving into a peak gold area and would not be surprised if there is a global rush to gold as investors lose faith in fiat currencies.
The recent collapse of the euro only preludes what will eventually happen with the dollar and treasuries. Now many people have run from the Euro to dollars, but I believe that is temporary. Now is the time, before the masses rush in, to buy gold and specifically the strongest mining shares which I highlight here. This is not the time to be bottom fishing other markets. I believe to stick to strength. This chart above gives me the confidence to know that we have not entered bubble territory yet.
The cup and handle breakout is a classic pattern which stock market traders search for constantly. A cup and handle pattern means that the stock has made a consolidation where many of the weaker holders sell their shares. Then as the stock breaks into new highs a handle is formed. It is formed because many investors who bought at the previous high are now trying to get back the capital that was initially invested at the previous high. Then a handle is formed. A handle should move sideways or slightly down so investors who bought at the previous high can get back their capital. Once this handle is completed the stock has very little selling pressure and buyers now gain control and push the stock into new highs. Many times the percentage gains are impressive.
Sometimes a stock forms a triangular pennant after a breakout as in the case of U.S. Gold (UXG). These triangular pattern in a handle are bullish and provide investors an opportunity to get in before a major run.
My ideal buy point is after the breakout of the cup when the handle pulls back to key support. Right now is a good opportunity to add shares before a breakout at $4.31.
There are four upcoming events that could make this stock move.
1) 20 drilled hole results from El Gallo in 2 weeks.
2) El Gallo Initial Resource Estimate in 4 weeks.
3)Additional Results From Regional Exploration in 6 weeks.
4)El Gallo Economic Assessment by year end.
I am excited by the results coming out in mid July from the regional exploration. UXG invested a lot into Mexico this year knowing that this land package could contain a massive amount of silver. I am excited for the next few weeks both from a technical and fundamental perspective.
After following and investing in the gold mining sector since 2000 I have tried to identify the major leaders in each run and greatest candidates for my capital. I am looking at great relative strength to the price of gold. This indicator shows me that this miner has great leverage to the price and even if gold stays flat this miner will outperform.
Today New Gold (NGD) made a triple top breakout relative to gold and shows great relative strength. One of the reasons NGD is outperforming even though it has exposure to base metals is that the street is becoming aware of its amazing portfolio of assets, decreasing cash costs and major institutional insiders such as Pierre Lassonde and Seymour Shulich. These are the type of investors who recognize value and growth both of which NGD has.
Today NGD was put on FTSE Gold Mines Index which is an important step in NGD’s growth story as its market cap has improved significantly since our original recommendation at 2.50 last May. Precious metals are outperforming the general indexes. When I see breakouts in specific miners relative to gold this is a huge buy signal and believe NGD will move higher.
NGD has the financial strength to withstand a market downturn and it seems that the investment community is becoming aware of NGD’s assets and growth story.
On May 28th I wrote to subscribers to monitor the Dow Jones Transportation Average for failure at the 50 day or a break below the 200 day moving average. If any of these two signals occur then this will confirm we are changing trends and will be followed by a bear market where we could have a major retracement of 2009′s impressive rally.
The Dow Jones Transportation Average failed at the 20 day and yesterday broke the 200 day with strong downside volume. The bears are in charge and I hope all subscribers are in defensive mode with inverse etf’s and gold and silver stocks.
U.S. Gold (UXG) is one mining company where the CEO puts his money where his mouth is. Rob Mcewen believes UXG will be on the SP500 and his aggressive drilling in Mexico is proving to the investment community that he has a major mine there. Rob owns 21% of the shares much more than any other CEO in the business.
The chart shows that in the past 6 months UXG has been outperforming gold. It is showing great relative strength. I believe it will continue to do so as new areas in Mexico start drilling in June and he is continuing to show expanded mineralization. Expect more positive results and outperformance of UXG especially how active they are drilling.
Chart shows a strong breakout on good volume and now it is making a bullish continuation wedge. Look for an upside breakout.
The failure to regain the 200 day moving average and the market breadth is very negative. Indicators remain very sold but the overall bearish breadth and the breakdown of many indices I use make me bearish.
I am opening positions in short inverse etf’s such as DXD and SDS to protect my equity positions. I have been stopped out of everything except TGB, GMO, UXG and NGD.
Gold is very strong right now, but I expect silver to follow soon. With all the debt the USA is getting itself into I can not buy treasuries or the dollar.
The chart I want to highlight is the investment grade bonds etf. These are the top most secure investment instruments and when I begin to see a major trend change that is telling me smart money is extremely cautious over sovereign debt and the overall global economy. It also tells me the market is concerned over debt downgrades from major companies.
The investment grade bond etf LQD which invests in the most secure debt of major blue chip companies has finally broken below the 200 day moving average and long term trend support. Momentum is waning and price volume action is poor.
Markets are showing continued weakness and an inability to rally off these extremely oversold levels. There are signs of a major market downturn from the global credit concerns.
I recommend holding good gold and silver investments and to protect now using inverse etf’s such as SDS the short SP500 and DXD Short Dow.
ing us appear as Homer Simpson napping at the control plant of Mr. Burns’ atomic energy plant in Springfield. Most of the media never mentioned the event. Only one gave it token coverage hidden on page A13 without realizing its true significance.
The French, Japan, Korea, and China are actively building reactors. In fact, India desires to develop nuclear electricity as a cleaner alternative to coal-based energy to satisfy the country’s increasing needs. India is on record as having about 4,560 Megawatts of nuclear power now, but wants to multiply that about 14 times by 2032.
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Gold Breaking Out Vs. Euro, Relative Strength Chart Shows Trend Change
In Market Analysis on August 12, 2010 at 3:04 amThe trade deficit widened unexpectedly this month after the dollar reached extremely oversold levels, which was quite surprising to Wall Street. Usually, a weaker dollar should lead to an increase of exports of U.S. goods; however, the exact opposite occurred. This further signifies the global economic slow down despite record government stimulus, a devalued dollar and artificially induced low interest rates. The market and the employment situation are no better off now than they were previously.
Despite Washington’s attempts to prevent a depression through spending, investors are beginning to lose hope in what the Fed and Congress are doing to prevent a collapse of the markets into new lows. Yesterday, as predicted, the House created a $26 billion job bill that will supposedly prevent government layoffs and expand the job market for government workers. Washington is trying to alleviate high unemployment by creating more government jobs. That is not real job creation. Incidentally, the previous employment numbers were mildly inflated due to the recent influx of temporary Census workers and did not accurately reflect the true numbers of unemployed Americans.
Investors believe that sustainable job creation is through small business growth. The markets, as well as the American people are looking for leaders who will cut government spending and institute tax cuts for small business owners. Entrepreneurs who are trying to innovate and meet consumers’ demands in a struggling economy should be supported with meaningful tax breaks. This spurs authentic growth and innovation. I expect the market and the American People to vote in candidates who are committed to these principles. The people are losing their faith in the current leadership, as evidenced by President Obama’s approval ratings dropping to their lowest point in his entire tenure.
The Fed has committed to buying long term treasuries, which would artificially keep interest rates low. They are desperate to get capital flowing again, but it comes at a cost. Eventually, markets move back to their former equilibrium and long term trends. If you push down a spring as far as it goes, it eventually snaps back harder than before and reverberates. We may not see it for a while, but eventually long term treasuries will crash. Right now investors are flocking to treasuries for security and safety. However, just as the market is losing faith in the Fed’s handle on the economic situation, bond holders will ultimately lose faith in government bonds. We may see a drop in treasury prices along with continued high interest rates over the next several years and possibly even decades as our children and grandchildren face the burden of credit downgrades.
My fear of a devalued currency and lack of confidence in Obama’s handling of the economic situation are the reasons I am bullish on specific mining exploration stocks that are converting their strong cash positions into high grade copper, silver and gold resources. I have been following this sector for over nine years. I gather that during the next five to ten years, precious metals will see a lot of growth as investors seek hard money and hard assets.
Today’s major collapse in the equity market was significant. Last week, I mentioned that the dollar was extremely oversold and that the Euro and U.S. equities were about to correct considerably. Today we are seeing the beginning of a new downwards trend in global equities and a flight to safety. Investors are worried that efforts from Washington will do nothing to prevent a slowing economy and a huge trade deficit.
Yesterday’s weakness in gold was only relative to the dollar and U.S. treasuries. Compared with the Euro, there are technical signs of a major move upward in the price of gold. We could see a resumption of the market patterns that we saw in April and May when gold and the dollar rallied together as investors were seeking shelter from government defaults and sovereign debt crises. The relative strength trend of gold versus the Euro is an important indicator of the true price action of gold. Right now, it is showing signs of a bullish move higher after finding long-term support.
Although Gold was down slightly to the dollar it gapped up today versus the Euro after reaching an important 38.2% Fibbonaci Retracement and Long Term Trend Support. MACD supports that Momentum has shifted. RSI Crossed 50 today also a bullish sign.
Disclosure: Long Gold and Silver Mining Stocks