This essay is based on the Premium Update posted on October 1st, 2010. Visit our archives for more gold & silver articles.

The concern in the U.S. is that if the Federal Reserve pumps more money into the system, its efforts will hurt the value of the dollar and possibly stoke inflation, two events that would drive demand for gold. Yet some investors are buying gold on concern that stimulus measures might fail, leading to even deeper problems for the global economy.

For many people buying gold is based on the lack of faith in conventional currencies. If the U.S. currency has the phrase "In God We Trust" printed on every dollar, some feel that an additional statement of belief should be added-"In Gold we Trust."

The US Mint recently announced that it has run out of one ounce Gold Buffalo coins. Even the fact that the US Buffalo is priced about 20% over spot, and was last sold for $1,560, has not stopped the flood of retail buying. Gold wholesalers are raising premiums on gold coins and some are out of stock.

Gold is particularly attractive since the Fed has cut interest rates essentially to zero. Gold is more attractive than money in the bank since you earn zero percent on your cash in the bank, and earn zero percent on your gold. By holding gold today you don't give up any interest on your cash and you don't give up any "missed opportunity cost."

But it seems that gold will need to consolidate before going higher. Once the correction is done, it's not out of question that the price of gold will reach $1,500. We seriously doubt that the recent run up is the final stage of the bull market. In fact, it seems that there are several more good years. We're looking forward to it, especially in silver.

This week's HUI gold stocks index (charts courtesy by http://stockcharts.com.) does not reveal a great deal of new information. Gold stocks are above the declining resistance level but have not surpassed the highs seen in 2008. Whether this will happen before or after gold's correction is unclear at this point.

In this week's XAU Index chart, we can see the breakout above the declining resistance level. This is bullish for the medium-term. Still - as mentioned in the previous paragraph - a consolidation could take place before the mining stocks breakout.

Precious metals could move above their previous highs (along with rallying metals) and then consolidate, or, mining stocks could under perform metals until the latter correct. Once the correction is completed, precious metals stocks would strongly break above their previous highs. As you may see, in either case, a second consolidation is likely to take place for the mining stocks as well as the precious metals.

The GDX ETF, which is a proxy for the mining stocks, provides us with details and positive confirmation of what we have discussed previously. The resistance and support levels are clearly visible and we note that recent moves have taken place on strong volume. The extremes of the trading channel have been touched on an intra-day basis, which is a positive sign for the weeks ahead.

Speaking of stocks - our Subscribers among other benefits receive our top junior lists, and one of our top picks last month - Gold Resource Corp. - has moved from around $14 to $18+, a gain of more than 25%, and our Subscribers' portfolios benefited from this upswing.

Meanwhile, currencies have been greatly affecting the price of precious metals lately and if the USD Index starts to move up, it could ignite metals' correction. This is exactly opposite to the general stock market, which seems to be moving along with metals and miners.

This would support gold, silver and mining stocks in continuing their recent rally, consolidating and then moving higher - most likely much higher.

Since our update two weeks ago, the Euro Index has continued to rally as expected. The consolidation period, which ended several weeks ago, has been followed by a consistent upswing. The expected target for this rally is around the 140-level, which is also close to the 200-day moving average. Obviously the rally is expected to continue since this target is above today's closing level. This also means further short-run declines for the USD Index as will most likely be seen on our next chart.

In the long-term USD Index chart, the recent downtrend is clearly seen and is bordered in the chart by the blue declining trading channel lines. We see a move below the August local bottom and also below the 80-level, which normally provides support. The target level for the current decline is close to 77 and a pullback/consolidation is probable once this level has been reached. This may be followed by further declines approaching the 2009 low, although perhaps ending slightly sooner - at the 75 level - when taking into account level pointed by Phi number applied to recent turning points.

The Euro Index conversely has continued to rally. Although the exact timing for the reversal of these trends is not easily identified, it could possibly be soon. Expected target levels for the dollar and the euro are 77 and 140 respectively. There is a good chance these will be reached in the next week or two and thus the trends will reverse temporarily.

We do not recommend trading the short-term move in precious metals as it is the final part of current rally, so chasing it could prove to be very tricky, however, if one will insist on doing so, it seems that silver should be preferred due to its behavior around local tops and the fact that the general stock market is also likely to move temporarily higher. It is important, however, to utilize protective trailing stops and stop loss orders to minimize one's risk. We believe that the more profitable route is to wait for the next rally, which we expect to take place very soon.

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Thank you for reading. Have a great weekend and profitable week!

P. Radomski

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Among other issues this week we comment on major players like Calyon Credit Agricole and Deutsche Bank, as they both raised bar for their outlook on gold. We also speak about inflation, which PIMCO sees as very likely in next 10 years and about something that looks like international currency war with dollar, renminbi and yen as major forces.

In somewhat shorter perspective we see gold, silver and mining stocks moving higher, however, many points from this week's analysis suggest consolidation. Is it going to happen or will precious metals ignite another powerful upleg without a minute pause? With Correlation Matrix we can trace latest swing in important correlation between gold and USD Index, which in turn provides details regarding the reply to the above question. The analysis of gold priced in Japanese yen (being to some extent different from other non-USD currencies), further validates our assumptions.

Additionally, this week's Premium Update includes our analysis of two of our unique indicators (one of them flashed a signal yesterday) including the SP Long-Term Junior Indicator dedicated exclusively to the junior sector. Speaking of juniors, this week's Premium Update includes our up-to-date rankings of top gold and silver juniors.

We encourage you to Subscribe to the Premium Service today and read the full version of this week's analysis right away.