We are currently preparing the "Letters from subscribers" section for tomorrow's Premium Update, however since the markets are moving lower it seems that it will be useful for you to read one of our replies right away.

Question:

"Overall, it appears increasingly likely that the European Central Bank may be forced to resort to a major bond purchase program to rescue Italy and the euro currency (FXE). This implied instability of the currency and effective money printing are decidedly euro bearish. And since the euro is by far the largest driver of the composite exchange rate of the U.S. dollar, this is decidedly bullish for the greenback. It should be noted that these developments are also supportive of other safe havens or stores of value including the Japanese yen (FXY), gold (GLD) and silver (SLV)."

Agree or disagree at this point? Why is gold continuing to react negatively in this environment?

Answer: We agree that at some point ECB is likely to make a massive purchase of bonds. However, whether or not the value of Euro will be impacted negatively and USD positively in the short-term is a different matter. This information can be already mostly "in the price", meaning that if almost everyone is expecting this outcome, they have already positioned themselves accordingly and the price moves that should result from the announcement of such news have already been seen. There is also something called "buy the rumor, sell the fact" phenomenon, which means that Euro would decline up to the moment when the bond purchase would be announced and it would rally soon after that as the tensions would subside". Some investors may actually believe that this move would be good for euro in the long run (as it would help struggling European economies) and could buy the currency based on that.

That's why market timing is usually a matter of psychology, not cold logic, and that's why in addition to paying attention to major shifts in the world economic and political environment, we analyze charts.

So, the overall implications for euro and dollar, and the way these currencies will move from here are not that obvious.

Moving to the precious metals - yes, that is a bullish fundamental factor for the sector and something that will support gold, silver and mining stocks prices' rally moving forward. However, it doesn't mean that the metals will move up without any corrections and consolidations. When people get too greedy and/or many momentum traders enter the market for a quick rally, the price gets ahead of itself and it rises very fast. Then, when momentum traders finally decide to take profits, the price falls. All of that takes place regardless of the fundamental situation.

Is the current move really a decline? No, at least not yet. It's simply a consolidation.

In the October 28th Premium Update we wrote the following:

"This price gap [for the GLD ETF] was roughly between $170 and $173, and, actually, the $173 level has provided support and resistance in the past. We are likely to see a pause in the current rally once these levels are reached.

Summing up, once the $1,780 target is reached, a short-term consolidation appears likely and gold's price could move back to $1,700 or even $1,680. This appears to be the maximum downside target area."

In the November 4th 2011 Premium Update we wrote the following:

"In the short-term GLD ETF chart this week, there is still an important resistance line in play, the 38.2% Fibonacci retracement level based on the whole September decline. Price levels here have approached this line which also coincides with the upper border of the September price gap. This could make the resistance level a bit stronger and result in some sideways trading or a pause in the rally."

So, is today's decline something unexpected and should make you concerned? No, and as you will see in tomorrow's Premium Update, it can be viewed as a part of a bullish cup-and-handle pattern resulting in much higher prices.

Tomorrow's Premium Update will include much more detailed discussion of the points made above. As always, we'll keep you updated if anything changes.

Thank you.

Sincerely,
Przemyslaw Radomski