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July 27, 2010

Blowout Sale

Gold suffered a panic sell today, but for those traders who find themselves with light precious metals exposure, the correct term is not "panic" but rather "opportunity." The decline of gold's price over the last five weeks represents a classic summer doldrums period for precious metals, and these periods usually end with a mini-panic followed by a quick rebound and a run higher during the cyclically strong period of autumn through early spring. The most pronounced example of this behavior is found in the 2007-08 cycle:

Gold rally

I remember that day very well because I capitalized handsomely while trading my book with Citi. Now, these blowout days are typically magnified in silver's action. Check out what happened back on August 16, 2007 to the white metal:

silver rally

Silver's drop today did, indeed, exceed that of gold, sporting a 2.75% loss versus the 1.85% drop in gold. However, this drop is rather tame on silver's part, not to mention its price divergence in near-term action:

silver price chart

If silver can outperform gold 78% to 55% after underperforming, what is it going to do after showing relative strength? The bigger question lies in whether precious metals are about to embark on one of their grand autumn-to-spring runs. I believe the answer is "yes," not just because I may wear gold-tinted chart-viewing glasses, but because of cycle analysis of gold and the dollar, as well as a bit of technical analysis.

The read on cycles pertains to the big picture view on the buck. The dollar is due for a 3-year cycle low (a major low) early next year. For reasons I won't detail here, I expect that low to form at a lower level than the 2008 low, meaning the DX is set to plunge another 12 points or more in the next 8-10 months. Furthermore, gold... the recent correction notwithstanding... has shown fabulous relative strength to major asset classes over the last several quarters.

We've already heard renewed whispers from the Fed that they will do "anything" to spur economic growth. Well, the Fed, despite all its fancy programs and related acronyms, really only has one tool in their shed: the printing press. I think gold has been sniffing out the next round of counterfeiting, and the recent correction is nothing more than a shake of weak hands before a serious run commences.


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