Based on the February 25th, 2011 Premium Update. Visit our archives for more gold & silver articles.

Economic and social developments across the globe are significantly affecting the capital market moves in the present scenario. Global markets, still fragile, could be tilted off course if instability in the Middle East spreads. Markets largely ignored the revolutions in Tunisia and Egypt, two countries that are basically not that significant on the global economic scheme of things. They don’t owe much money to western banks, nor do they export large quantities of commodities, such as oil. But markets certainly took notice this week of the violent upheaval in Libya.

Did you see what happened to the price of oil, gold and silver this week?

Gold closed at $1,402 on Thursday while silver moved above $34 - the highest price reached in 31 years. The rise widened the gold-silver ratio -- the number of silver ounces needed to buy an ounce of gold dropping -- to around 42, a near 13-year low. Oil climbed to the highest level in 30 months as Libya’s uprising reduced shipments from Africa’s third-biggest producer. The yen and Swiss franc strengthened, stocks declined and U.S. index futures dropped. Brent crude jumped 6.6 percent to $118.56 a barrel and futures for April delivery topped $103 a barrel in New York.

On February 14th we sent out a Market Alert saying: It seems well justified to move part of your long-term capital back to silver, as high-risk period is over, at least for now. With everything that has happened with precious metals this week, let’s not delay any longer and let’s turn to this week’s technical part and see if there is any risk period ahead for gold. Let’s begin with the analysis of the Euro Index (charts courtesy by http://stockcharts.com.)

In the short-term Euro Index chart this week, we have seen a move higher, but not above the early-Feb high. This is not yet a bullish development and continues to support the case for further development of the head-and-shoulders pattern. A downturn from here still appears probable.

The general trend continues to be the opposite of that seen in the USD Index and a local top in euro is still likely to be seen in coming days. That would be bullish news for the U.S. dollar.

The USD Index in this week is quite interesting. The main theme for the USD Index this week can be summarized as “although much has happened [on a day-to-day basis], little has changed”. The USD Index has moved to the long-term support line and this support line has therefore not been invalidated. Consequently, the trend remains up. A more detailed picture is seen in the short-term chart below.

In this week’s short-term USD Index chart, we can see that the short-term, rising trend channel has been broken. The USD Index appears to be closing in on a cyclical turning point and since the current short-term move is down, a local bottom is suggested relatively soon.

The rising short-term trend channel has been broken, but the long-term trend is still up, which is more important at this point.

At this point, the influence of USD Index on precious metals is not as clearly defined as it appeared a few weeks ago. Recently, a downturn in the USD Index coincided with much higher prices in precious metals. The previous positive correlation between these two markets seems to have been invalidated.

Overall, the influence upon gold in US dollars is not really visible at this juncture. However, from a non-USD perspective, a rally in the USD Index is likely to make the non-USD gains in gold much larger. Let’s have a look into the GOLD:UDN moves.

Considering the non-USD part, there is very little exciting news this week. Since no rally was seen in the USD Index, there is minimal impact on gold’s price from a non-USD perspective, even though gold rallied significantly from our regular USD-perspective. Once the dollar does begin to rally strongly, and we feel that it will, this ratio will likely catch up in a big way as was seen last April and also early 2009.

To have a clear idea on the currency impacts on gold market, we decided to include gold’s chart from the Australian dollar perspective this week since a while back it was the only chart showing any bearish factors. It seemed like a good idea to see what it tells us today.

Significantly, there appears to be an invalidation of the previous bearish sentiment as the price of gold in Australian dollars has moved back above the rising support level. The previous breakdown appears therefore to have been invalidated. While it is true that we really need to see a few more days of price action within the trading channel, this does seem likely to be the case from here.

At this time therefore, this chart is bullish.

While the gold market remains positive, let’s have an overview on the recent performance of the mining stocks.

The very long-term XAU Index is a proxy for gold and silver mining stocks. This week we continue to see a fight for new highs. Index levels have recently moved back and forth flirting with the 2008 highs.

Once all is said and done and a decisive move is seen in either direction, it is likely that a bigger move will follow. Based on past behavior here and signals from other charts, it seems more probable that the index levels will move higher.

This is in agreement with what we wrote in our Premium Update on February 18^th. We stated that based on silver’s price action this week, as well as the performance of mining stocks (closed above 2008 highs), it appears that a bullish move here is slightly more likely. We stand by this once again this week.

As with gold and silver, recent day-to-day and intra-day price action has been somewhat frightening for mining stock Investors. The situation however has not changed and we continue with our bullish sentiment for miners going forward.

Summing up, the USD Index declined this week but is still above its long-term support line. It is approaching a cyclical turning point and is still likely to move higher soon. Gold and mining stocks have also moved lower in the past few days but are still above their respective support lines. Respective trends remain up and recent price declines appear to be attributed simply to a short period of consolidation.

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

P. Radomski

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It’s only two months into the New Year and already we have had several attempted revolutions in the Middle East with two successful and another on the brink. All this has major ramifications for the price of oil, precious metals and currencies as we have seen in this week’s market action.

The USD Index declined, but at this point the implications for precious metals Investors are not really important. The opposite is the case with the general stock market and the current volatile action, as the way things play out here, could heavily impact silver, and thus also other parts of the precious metals sector. That's why we explain this situation in detail by featuring S&P 500 Index, Dow Jones Transportation Average (note the huge volume in the latter), and the financial sector.

Gold, silver and mining stocks moved sharply lower recently, but what really changed? In addition to providing you with our assessment of this week's price action (also from the non-USD perspective), we discuss mining stocks performance relative to other stocks, and price of gold from the Australian perspective. We encourage you to Subscribe to the Premium Service today and read the full version of this week's analysis right away.