I doubt that when the great American poet Robert Frost wrote his famous poem "The Road Not Taken" that he had anything remotely related to investments in mind. The nice thing about literature and poetry, unlike the world of investments, is that you can interpret a poem any way you want and always be right. Frost talks about a lone traveler faced with a fork in the road who must decide which path to take. Frost's traveler is a contrarian.
I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I,
I took the one less traveled by,
And that has made all the difference.
It has been almost seven years since I purchased my initial part of the long-term bullion holdings, and back then it was a lonely road. It was definitely the one "less traveled by." Those of you that have been following the suggestions made in Premium Updates and Market Alerts have profited from the upward trend of gold and silver since we first began recommending accumulating holdings in both.
Is the U.S. dollar also standing at a crossroad today, and if so, what are the implications for precious metals?
The dollar could be at a crossroads with two roads diverging in different directions. One road is a final plunge following the recent small rally. The other is a break out to the upside from the severe downtrend it has been jammed in since early March. Should that take place, a rally could gain strength from panic short-covering. Sentiment (in terms of positions taken by Commercial and Non-commercial parties as measured in the Commitment of Traders report) for the dollar is universally bearish. Forex Options and Futures markets show US Dollar sentiment at near-record bearish extremes against almost all major counterparts.
I suppose that your e-mail inbox is inundated with newsletters with headlines such as: "Dollar forced to Abdicate," "End of U.S. Dollar Global Reserve Currency," "Faces of Death: the U.S. Dollar in Crisis," to name just a few.
Could this one-sided positioning in the futures marker suggest that the USD is near a major turning point?
If you follow the fierce debate that has erupted in recent weeks between the two major camps in monetary circles you get the sense that both sides are passionate in their beliefs. The gold bulls/dollar bears believe that the gold is poised to take off while the dollar is perched for a collapse. The other camp - the gold bears/dollar bulls - claim just the opposite.
You don't need the results of a sentiment poll mentioned on CNBC recently that nearly 98 percent of all respondents were bearish on the U.S. dollar. Just listen to the people you know talk about the greenback. I doubt you will find even one among your acquaintances who is bullish on the dollar. The public is worried that the only way to handle America's massive debt is with stealth devaluation over a long period of time.
Is it possible that the policy markers in Washington will allow the mighty dollar to plunge to new depths? Sure it is, if the only alternative is to admit that the previous monetary policy was wrong and that a crisis should have taken place many years ago along with higher unemployment in the past, and publicly state that the U.S. Citizens now have to pay for all that with even higher unemployment and lower standard of living.
Let's go back to the CoT analysis. As I already mentioned a month ago the CoT analysis (just like everything else) should be put into proper perspective before putting your money on the stake. While commenting on the CoT situation in gold, I wrote the following:
The remarkable thing that is often overlooked in the CoT analysis is that since two previous huge rallies took place when the CoT was unfavorable. Therefore, it seems logical for one to expect a similar thing also here. Guess what - that is exactly what we see today. The latest CoT report shows that the net short position of the Commercial Traders has reached a new extreme. The popular interpretation is that a sell-off is inevitable, but such situation is precisely what we've seen near the beginning of the 2005-2006 and 2007-2008 massive rallies.
I wrote the above when gold was under $1,000 and many CoT analysts warned about the coming plunge, which would have made you miss sizable gains since that time. However, I did not quote the previous update with the "told you so" approach. I quoted it because I wanted to emphasize the influence that using numbers without regard to anything else can be unprofitable. Getting back to the USD situation - the CoT reports indicate near-record bearish extremes, but... Isn't the U.S. Dollar also near its all-time lows? The difference between 76 and 72 on the USD Index is huge only if you focus on the short term. Taking a look at the 20-year USD Index chart reveals that the dollar is indeed near record lows.
Please take a look yourself (charts courtesy of http://stockcharts.com)
USD Index
The point is that if the price is extremely low, then similar readings from the CoT reports are to be expected, and thus don't prove a bullish point here. They would, if the value of the USD Index was much higher, and the sentiment was extremely weak, but low prices simply correspond to low sentiment, also in terms of CoT reports. Consequently, there is no divergence that would indicate higher values of USD Index ahead.
Don't get me wrong - if CoTs would indicate that a move lower is likely, that would be a strong bearish signal given that we are already low. However, the situation here is asymmetrical, meaning that negative CoTs at this point are neutral.
This week I have prepared several USD charts for you, as the current situation on this market is crucial for precious metals and related equities. Let's move to the 5-year chart, as it helps to put one more thing into perspective.
This time I'm referring to the pattern that is visible from the long-term perspective - the falling wedge, which is generally a bullish sign. Once we take the size of the whole pattern and the time that it took to develop into account, we see that there has been just one similar phenomenon in the past. However, back then, a massive plunge followed - not rally.
I realize that this is just one analogous situation so it's difficult to say anything about any rules as far as falling wedge patterns on USD market are concerned, but my point here is that the "bullishness" of this pattern should not be overestimated. With falling wedge or without falling wedge - the trend is in place until there is a confirmed breakout, or breakdown from it.
Having said that, let's zoom in to see the significance of the recent move in the dollar.
What we have seen in the past few days is a move above the multi-month resistance level, which may mark a beginning of a counter-trend rally. The key word is "may", as the "breakout" has not been confirmed yet. The value of the USD Index is currently just at the resistance/support lines after a small move that did not take the USD Index far from the upper border of the trend channel. The rally would be likely, if we had seen the U.S. Dollar closing above the 76 level for 3 consecutive days, which did not take place.
The value of the RSI Index suggests that a local top has been put, so the signals are mixed.
The short-term chart reveals that there is another resistance line just below the 77 level that may stop another small rally from here. As mentioned above, the RSI Indicator that has been useful in the several few months in timing the local tops is currently suggesting USD is forming one right now.
In the previous Premium Update I wrote that since June, more or less the beginning of each month marked some kind of extreme on the dollar market. Most times it was bottom after top, and top after bottom, but two previous times marked local tops, so it is difficult to tell which of these two extremes is more likely to take place at the beginning of November.
When I wrote the above a week ago, the USD Index had been trading sideways near the 75 level, so it was too early to say which of the two extremes is more probable to materialize during next several days. Right now, with USD Index at 76 level, the odds are that we will see local top during the next few days, not a bottom. Either way, the situation should become much clearer in the next several days. Naturally, I will send out a Market Alert, should the situation require it.
Gold
Moving on to the metals, by focusing on the long term, we see that the price of gold has just briefly tested the previous 2008 high.
The test was sharp and priced reversed quickly, which on one hand flashes a green light that the previous top has been verified, and on the other hand proves the strength of the bull market. In other words, although price is lower than a few weeks ago, it's a bullish phenomenon.
There are also other bullish factors on the above chart, and these are the RSI and Stochastic indicators. The Relative Strength Index is rather popular, so I won't go into details here - the point is that it is currently right in the middle of its scale (near 50), so a rally from here is certainly possible. It is not undervalued nor screaming "buy gold on margin!" but it is nowhere near the overvalued level marked with the red horizontal line.
The other indicator that I featured above is the Stochastic indicator. It is not very useful in timing tops in gold, as it tends to stay in the overbought territory for weeks before the top is put, but it is not a top that we are focusing on here, and as far as local bottoms are concerned, this indicator is much more useful. Please take a look at its performance and reliability - virtually every time that it dropped to the level marked with the blue horizontal line, it meant a great buying opportunity. This level has just been touched, so the technical picture for gold becomes even more bullish.
Short-term chart will provide you with a more detailed view.
From the short-term point of view, the price of gold moved to the lower border of the rising trend channel, broke it very temporarily and moved rapidly higher. This fake breakdown is by itself a bullish sign.
There is only one thing that makes me concerned about the technical situation in gold, and that is the fact that volume on Thursday, when price rose, was lower than in the previous days, when it declined. The difference is not huge, so it is not that bearish sign, but it makes me take the double-bottom formation into account.
Generally, given the critical situation on the USD market, much depends on what will happen there - if USD rallies, gold's upswing may be delayed.
Please note that gold retraced about 50% of the mid-October - this Wednesday downswing, while the USD Index corrected about 33% of its analogous rally. This indicates strength of the gold market, as the yellow metal responds to positive factors more than it does to negative ones. This is another thing that makes me think that the breakout above $1,000 marked the beginning of a major rally. The question remains whether we will move higher immediately, or will we have another re-test of the previous high in gold, or perhaps the famous $1,000 barrier.
Silver
The situation on the silver market is shaped according to the seasonal tendencies described in the previous updates.
The reliability of the seasonal tendencies on the silver market is quite amazing - not only did the top materialize in the mid-September, almost exactly on the day it was predicted, but the price also rose on average up to the point where it was closer to the "bottom" part of the cycle. This pattern currently suggests that the next bottom will be put around the first days of November, which means that we are either behind one already, or are getting very close to it.
Please note that silver often tends to put some kind of double-bottom. Sometimes the second low is lower than the first one, just like it took place in April, but there are also times where the second bottom is barely visible and slightly higher than the first one, just like it happened a month ago.
Unfortunately, the seasonal pattern is not enough to provide us with target prices for the coming bottom, but the current value of the Stochastic indicator and the dashed support line near $16 suggest that the most of the downswing is already behind us. For now, it seems that we will either see silver bottom out in a similar way it did a month ago, or - given the negative influence from the general stock market - move lower, most likely not lower than the $14.8 level.
Speaking of the general stock market, please take a look at the following chart.
General Stock Market
The general stock market moved lower after reaching a strong resistance level created by the 50% Fibonacci retracement level for the whole 2008-2009 plunge and the upper border of the price gap in October 2008. The important fact here is that this downswing materialized on a rising volume, which is generally a form of confirmation the move.
However, being consistent in my approach, I will put the above fact into historical perspective before interpreting it. It was barely a month ago when we've seen a similar breakdown in the main stock indices, but still, a plunge did not follow. Conversely, we've seen a rally that also corresponded to a similar and very strong reaction in the gold market. Will the history repeat itself once again, or will the general stock market follow the breakdown lower?
It is a very tough call right now - betting on certain chart patterns is risky, but betting on the invalidation of these patterns is even riskier. Anyway, the situation remains neutral until we get the confirmation of the breakdown (by 3 consecutive closes below the recently broken support/resistance line), or if the general stock market moves rapidly higher, just as it was the case a month ago.
Silver is not the only market that is historically positively correlated to the general stock market - this phenomenon is even more visible in the precious metals stocks.
Precious Metals Stocks
The mining stocks sold of heavily in the past two weeks but have now reached a significant support levels and the technical situation is now favorable. The GDX ETF (proxy for PM stocks) has just reached the 50% Fibonacci retracement level and bounced with a vengeance, which by itself makes it probable that the bottom is already in. GDX closed at $43.80 on Thursday, right at one of the support/resistance lines.
Two of the popular indicators suggest that a bottom is close or already in. The RSI
Indicator has just bounced from the lowest levels since the October 2008 low. In other words, according to this tool, the precious metals stocks present a buying opportunity not seen since then.
Another indicator that has been useful in the past in timing bottoms in the PM stock sector is the Stochastic Indicator. It is clearly below the 20 level - at the blue horizontal line - which marked a great buying opportunities in the past.
Was that not enough of bullish signals, the more detailed analysis of the previous breakdowns provides us with one more confirmation. Please note that breaking below the previous support lines drawn from the October 2008 bottom (marked with dashed lines) meant that the decline is more or less 50% complete. It is the case also today, which suggests that even if we were to move lower from here, the second bottom of the double-bottom formation would not be much lower.
But wait - there are even more PM-stock-bullish signals. The following one comes from our own indicator that I designed to detect favorable buying opportunities.
According to the current value of the SP Gold Stock Bottom Indicator (relative to the dashed horizontal lines), we are right at or very close to a local bottom.
The historical performance of this indicator suggests that that this may mark a beginning of a bigger move. The following chart features the average performance of HUI (gold in case of SP Gold Bottom Indicator) after a buy signal is given during the whole bull market
As you may see, the rallies following signals from the SP Gold Stock Bottom Indicator were a very good entry points for short- and long-term trades. Please note that the value of the HUI Index increased on average (!) for at least 100 trading days.
While we're already at it - please note that for the first 15 days (and then for another 15 days) the performance of the HUI Index is stronger, if a signal is given by the SP Short Term Gold Stock Indicator, than it is the case with its non-short-term counterpart. This is precisely why I named it "Short Term".
Speaking of short term, let's take a look to the short-term chart of GDX ETF and see if it provides us with additional timing details.
As I mentioned above, the current downswing has just touched the 50% Fibonacci retracement level, and that the value of the GDX ETF dropped below the long-term support line more or less by the same about that it declined before reaching it. The top was at $49.8, and the price broke the support line at $45, so in fact the move will be symmetrical (relative to the support/resistance line) if GDX moves lower to about $40-40.5. This would correspond to the 61.8% Fibonacci retracement level - clearly strong enough to hold given the rapidness of the decline (the more rapid a move is, the more "emotional" it is, and consequently more prone to be correctly predicted using the technical analysis).
Does it have to move lower because of this symmetry? Of course not. Similar events took place in the past and history often rhymes, but again, the symmetry was not very precise back then, so I would expect it to work on a "more or less" basis also here. This implies that it is quite possible that we would move to the $40 level, but it is not very probable.
There is one more chart that I would like to feature before summarizing this week's update - the Gold Miners Bullish Percent Index.
I featured this interesting tool back in June (which marked the bottom marked on the chart above), and since the situation (as far as the above chart is concerned) is very similar to the present one, I will quote what I wrote in the June 20th update and edit it to make it correspond to today's situation, and at the same to send this update to you as soon as possible.
The Gold Miners Bullish Percent Index is a market breadth/momentum indicator and is calculated by dividing two numbers: the amount of gold stocks on the buy signal (according to the point and figure chart, which emphasizes strong moves while ignoring small ones) and the amount of all gold stocks in the sector. If every gold stock is rising, then the value of the index will be at 100%, which raises a red flag as everyone interested in the market is already in, and the top will soon emerge. If we're looking at sentiment, substantial momentum usually corresponds to investors eager to jump in at quickly rising prices because they believe prices will continue much higher and are afraid of being left behind. If we said that at 100% the indicator shows overbought conditions, then you can see on the above chart that at the current 61% level the indicator is not extremely overbought, nor is it oversold. The Gold Miners Bullish Percent Index is no longer signaling that lower prices are to be expected, which was the case several weeks ago. Since the value of the index does not need to be at the oversold levels for a local bottom to form (still it is helpful in timing the major bottoms), we might need to look for additional tools to help us.
If you look closely you will notice two such additional tools in the above chart. The RSI (Relative Strength Index) is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions.
The RSI also ranges from 0 to 100 with an asset deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and likely to become undervalued. If you look at the RSI indicator in the above chart, you can clearly see that it in fact just moved below the 30 mark.
Another indicator on this chart is the Williams %R, also a momentum indicator that is especially popular for measuring overbought and oversold levels during horizontal trends. Bullish percent indexes take values from 0% to 100% and obviously cannot rise above that level, so it can be viewed as a horizontal trend. Named for its developer, Larry Williams, the scale ranges from 0 to -100 with readings from 0 to -20 considered overbought, and readings from -80 to -100 considered oversold. What I find particularly interesting here, is that the %R indicator has signaled a "temporary oversold" territory only three times in 2009 - and that corresponded to the long-term buying points, and powerful rallies. The last time the %R indicator for Gold miners Bullish Percent index hit the -100 level was during the September bottom - a sizable rally followed. The same signal has just appeared in the recent days, which suggests that we will see PMs higher in the not too distant future.
Currently both: RSI and William's %R indicators suggest that a bottom is in or very close.
Summary
The fundamental situation is still favorable for the precious metals market, and the main trends remains up. The medium- and short-term technical situation is very favorable for gold, silver, and precious metals stocks. The problem is that in today's globalized economy and even more globalized financial markets, no asset class or market exists without connection to other markets. In case of the precious metals market, it is the general stock market, and - most of all - the USD Index that need to be taken into account while estimating future price swings.
The situation on the general stock market is neutral, as we've seen a breakdown but it has not been confirmed, and moreover it is similar to the one that took place a month ago, after which stocks rallied along with PMs. The USD Index has modestly moved above its declining resistance line, and unless we move below it, a rally might form.
Summing up, although the situation on the precious metals market is itself very bullish, the situation on the key driving markets is may pose a serious threat to PMs, because of their historical correlations. Therefore, I suggest being partly in the market right now (33% - 67% of what you would have invested in PMs if a buy signal was given - more risk-averse and long-term oriented investors may want to hold bigger positions at this point, as the true risk in a bull market is being out of it waiting for the perfect buying point), and taking action once we get a confirmation of a move in either direction in the general stock market and the U.S. Dollar.
Other Information
As you already know, this week I've added the new section to the website. In case you missed the e-mail from me (please make sure that [email protected] is in your address book, and if anything from us comes to your spam folder, please mark it as "non-spam"), the newly introduced Free Charts section is a very-widely developed supplement of the Leverage Calculators from the Tools section. Charts (276 of them, featuring individual gold and silver stocks) allow you to see my view on each gold/silver stock's exposure and leverage, along with an easy-to-use interpretation of the statistical coefficients. Additionally, you will be able to see details of each stocks performance relative to gold/silver, how much under- or overvalued it is, and much more. Naturally, all of the above is updated on a daily basis (including the interpretation). Since this work has been completed, the question arises - is that it? Absolutely not. There are many ideas that are on my to-do list that I believe might prove useful to you, but there are two big ones that I would particularly like to focus on next, and I would like to ask you, which you would prefer me to work first.
