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April 2, 2010

Breakouts or April Fool's?

Thursday's session provided some very encouraging action for us gold bugs. Both gold and silver broke higher out of consolidation patterns along with the loss of a significant pivot on the dollar index. Mining shares confirmed the breakouts with a 4% rally of their own. Seeing some follow-thru next week is going to be key to proving that these breakouts aren't just an April Fool's joke by the market gods.

Gold chart breakout

Silver Chart Breakout

XAU chart breakout

I noted on these pages how the arrival of our big run in precious metals, accompanied by a blow-off top in the stock rally, could see mining shares 70% higher. This potential is exemplified by the fact miners have rallied 9% in a mere 5 sessions. Once the big moves in gold and silver get rolling, I expect to see the XAU gain 9% or more in a single session, perhaps multiple times.

These moves will be dependent on the recent dollar weakness gaining traction.

US Dollar decline

weekly US dollar chart

Now, in order not to step on the toes of paid subscription services, I am not going to get into a lot of detail about my views on cycles here. However, I can say that I believe the intermediate dollar cycle out of December ended two weeks ago (blue arrow in the chart). If price were to form a weekly swing high next week... on Week 3 of a new cycle... we would be facing 3 months of decline in the DX into the next cycle low. Unlike other cycle analysts, I believe a yearly cycle low lies just ahead of us, not just behind. If I am right, the coming decline should be particularly violent and should fuel both the anticipated gold move as well as the blow-off top in stocks.

Speaking of stocks, the S&P 500 just won't let go despite a multitude of indications it is ready to correct. As we all know, a stock market that rolls through overbought conditions is likely to go vertical at some point, but parabolic moves are often interrupted by brief, yet violent, corrections. Whether stocks see such violence immediately or two weeks from now is anybody's guess. However, based on the big picture view, I do not want to be caught without my precious metals positions. Once stocks eventually correct... and they will... I will judge at that time whether I want to augment positions for a final move or simply ride it out with what I have.


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