Based on the August 5th, 2011 Premium Update. Visit our archives for more gold & silver articles.

President Obama’s slogan changed from “Yes we can” to “Yes we cave”, as heard on one of the Late Night shows this week. It only took the threat of financial Armageddon to get both sides to work together and get the debt ceiling legislation passed. So the U.S. avoided economic disaster, as if $16 trillion in debt is not economic disaster. Congress waited until the last minute, taking an unnecessary risk in a fragile economy and engaging in political brinkmanship that has raised fears in the rest of the world that America is in for a long period of political instability that could have profound consequences for global growth, investment and diplomacy.

Although the week looked promising to bulls after the Washington deal was signed, investors have been scrambling for havens on fears the US economy is facing a double dip recession and worries about the Eurozone and a focus on a slew of downbeat global manufacturing news. (So what else is new?) Stock markets have been taking a major hit and gold has surged to new highs marching into record territory Wednesday, with gold for December delivery rising to a high of $1,675.90 an ounce.(It was only a few weeks ago that we admitted to a bit of a thrill when gold crossed the psychological level of $1,600.) Gold investors didn’t need any additional incentives to buy gold but it probably helped that South Korea's central bank bought 25 tons of gold over the past two months in its first purchase in more than a decade. Events are unfolding in a dizzying speed. Tuesday’s 2.6 per cent slump for the S&P 500 was the biggest single-day drop in a year, pushing the benchmark below its 2011 starting point and taking its losing streak to seven consecutive days in which it fell a total of 6.8 per cent.

Ironically, the deal to cut federal spending signed into law on Tuesday, doesn’t actually reduce federal spending since the new law does not address federal spending on health care. The Congressional Budget Office estimates that the federal debt is likely to exceed 100 percent of the nation’s annual economic output by 2021, largely because of the rising cost ofservices such as Medicare, Medicaid and Social Security. Bill Gross, founder of Pimco, put it, the debt is not just on paper, it’s also walking/living liabilities in the form of people. “I call these liabilities “debt men walking” because as long as 330 million living Americans require promised entitlements – the $66 trillion that wear shoes are as much of a liability as the $10 trillion on paper,” he wrote.

By the end of the 10-year deal, the federal debt would be much larger than today as both the government and its debts will continue to grow faster than the American economy. The debt ceiling deal doesn’t stop the U.S. from going over the fiscal cliff,” says Senator Rand Paul, a Republican from Kentucky. “At best, it slows us from going over it at 80 m.p.h. to going over it at 60 m.p.h.” he wrote in an open letter.

Whether it is about the global economy or about one’s private investments, the speed of events is definitely crucial. To have our finger on the pulse of the precious metals market, let’s move to the technical part of this week’s essay. We will start with the long-term Euro Index chart (charts courtesy by http://stockcharts.com).

In the long-term Euro Index chart this week, we see that the Euro Index reversed direction and invalidated the previous breakout above the declining short-term resistance line. It now appears to be attempting to invalidate its previous breakout above the long-term declining resistance line which is now a support line.

The index level is still well above the ultimate support line at the level of 139. A move below this support line would have very negative implication for the European currency. This would also likely have a bullish impact on the dollar.

In this week’s long-term USD Index chart, we see that the breakdown below the rising support line has been invalidated and the index is making an attempt to move above the upper border of the declining trend channel. There have been several attempts previously to move above this resistance line but none have succeeded. It appears that nearly everyone is skeptical at this point about a USD Index rally and we are as well (we generally don’t like the idea of being on the same side of the “boat” as the majority of investors, but it seems to be appropriate at this point). We prefer to wait for a confirmation of a breakout before commenting on any substantial rally taking place from here.

In the short-term USD Index chart, we see that a local bottom recently coincided with a cyclical turning point and the index has rallied since. Additionally, we see no breakout yet above the resistance level created by last November’s low and multiple smaller local highs seen in the past few months. Simply put, the jury is still out as far as where the dollar goes from here. Volume levels in the UUP ETF (which is not featured this week) suggest that the odds of a move higher from here are quite high. This would have negative implications on the precious metals sector and especially upon metals.

In our essay on gold & currencies (July 29^th, 2011), we stated the following:

(…) important days appear to be ahead in the currency markets with the euro’s breakout and the dollar’s breakdown subject to being confirmed or invalidated soon. Whichever way things turn out will likely determine the trend in both markets for at least the short term. What is more, the action in currencies may have important impact on precious metals as the relationship between gold and the USD Index seems to come back to normal. Any possible action could add fuel to flame as the situation in gold remains mixed and tense this week with a slight bearish bias.

For the time being, it seems that the influence of the currency markets on precious metals is even more important than before. What is more, the bearish bias seems to have been strengthened by the recent action in the USD Index.

The main issue at the moment is that the signals from the currency markets do not stay in tune with the price movements of gold itself. The most bullish point in this recent move is that it is not only visible in terms of the dollar but also on the non-USD side as we’ll see in our next chart.

In gold’s long-term chart from a non-USD perspective, we see a confirmation of the breakout seen on the USD side. This is important in that it makes a decline below the $1,600 level appear even more unlikely. The upside target rewards appear to be quite attainable in just a matter of time. It seems well worth waiting for based on the downside risk present today. The upside potential is quite significant, but we will leave details (as well as analysis of silver, mining stocks and the general stock market) to our Subscribers.

Summing up, significant changes were seen this week as the Euro Index has invalidated its breakout and the USD Index has done the same with its breakdown. This bullish development for the dollar, if confirmed, could have bearish implications across the precious metals sector. With gold having moved higher, the short-term situation for the yellow metal appears mixed at this time as a number of possibilities exist concerning gold’s next move. This does not affect the long-term outlook however, which remains bullish.

Thank you for reading.

P. Radomski

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While the situation in USD- and Euro Indices is interesting, the one on the general stock market is critical.

Stocks moved sharply lower this week and precious metals' reaction was peculiar to say the least - gold was barely affected while silver and mining stocks have truly plunged. In today's Premium Update we deal with this situation and let you know what we think is likely to happen next. We also provide targets for both: gold and silver and also for the general stock market. Actually, in silver the history appears to repeat itself...

Other interesting things that happened this week (and that we elaborate on) include the fact that gold did not decline significantly given a sharp move up in the USD Index and the fact that at the same time platinum moved significantly lower. On top of that, we've just seen a signal from one or our proprietary indicators.

Additionally, this week's Premium Update includes our top gold & silver junior rankings and answers to Subscribers' questions regarding i.a. QE3, insider sales, and miner's underperformance. This is one of the biggest Premium Updates ever created and it is actually the biggest in terms of charts - 2 mega chars were included and this should put many things into proper perspective. We encourage you to gain access to our latest Premium Update right away and read the full version of this week's analysis right away.