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