The market wires are ablaze recently with news that all is well in the relationship between Athens and the elites of the Eurozone. The Greek bailout is a fait accompli. The markets have responded with a relief rally that has taken the pressure off of stock and commodity markets internationally since the beginning of July.
All is quiet on the Western Front, one would think. The nagging question is: where is all this money to bail out debtor nations going to come from? Indeed, the Greek Canary is singing. Perhaps we should pay attention to its song as he is being accompanied by the melody of the steady beat of the printing presses.
It has been the contention of my firm that QE3 is being skillfully engineered by our economic mavens. It matters little what moves are being played in this masterful chess match. What is of import is the end game.
The moves en route to checkmate may be devious or disguised. The important consideration is the players' basic strategy. The skillful chess master makes his moves by whatever deceptions are necessary to achieve his tactical goals. At the same time, his opposition is guided into a snare.
Readers should avoid becoming pawns in what is essentially a series of moves designed to entrap the unwary player.
Questions must be asked. Was the current move into cash, treasuries, and liquidity the way to go as QE2 expired? Is gold and silver bullion the proper play? Or is it time for the miners to play catch up?
As we ponder over the economic chessboard, we sense that the basic direction is toward the use of economic stimuli in whatever guises are necessary.
A few weeks ago, we saw the oil market surprise in order to bring down commodity prices as a fiscal stimulant. We also saw the successive margin rate hikes from the Comex in silver. Recently, the Fed was off the hook for a couple of months.
Heretofore, the Fed was criticized as facilitating the rise in commodities. Recently they posed as a stabilizer of prices while monetizing mounting debt burdens. In line with this, increasing the US debt ceiling becomes a done deal. Politicians can now go on their vacations and present themselves to their constituencies as the saviors of their cherished entitlements.
Gold pulled back to its multiyear trend support. Oversold levels were hit and we have witnessed a rally over $100 an ounce in two weeks. A healthy consolidation is expected and welcomed after such a move as it moves to our late January 2011 target of $160. (See this video from ©thestreet.com predicting $1600 gold, $40 silver.)
This healthy correction in precious metals and commodities, and the dead cat bounce in the US dollar have been normal and necessary. It was from these oversold conditions that a major up move formed in late June similar to what we saw in August-September 2010 and February-April 2011.
The gold miners are showing good relative strength versus the bullion. The critical $52.50 retracement level showed support as it tested 2011 lows.
The recent successful retest and reversal regaining its long term trend indicates that the summer “goldrums” (© Gold Stock Trades) for miners may be ending. Many of our mining recommendations showed that a bottom was forming ahead of bullion. Just like miners began reversing lower before bullion in April, they began turning higher before bullion in this recent move higher. We are witnessing the divergence between miners and bullion close as the undervalued equities have shown impressive relative strength. Do not be surprised if precious metals and miners consolidate after such an impressive reversal over the past few weeks.