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July 1, 2008

Shining Through

Good morning, folks. The first glance at the screens this AM reveals a familiar reprise: oil up and stock futures down. It seems energy traders are unphased by oil's inability to hold a $3 gain yesterday and are trying it again. Precious metals are also edging higher, and as I have not delved into their technicals for a few days, they are the focus of this morning's post.

First, an updated gold chart:

gold chart

Gold traders have been whipsawed quite a bit in recent weeks, and I believe such action has made them gun shy. Also, if gold behaves similarly to the periods after the '04 and '06, it will continue to whipsaw traders, and this knowledge may be keeping a lot of bulls on the sidelines or with much reduced positions. I am not in their camp. I believe we have begun a rally that will take gold into the $1100 area and silver to the mid-$20s, and I backed this view by adding to my positions yesterday.

The financial world is a significantly different place than it was in '04 and '06, and the metals are reflecting the change. Price did not crash as hard as in those prior periods. Why? Because we are in a deepening recession, lead by the demise of large financial institutions, and the Fed is fighting it all the way. The entire premise of this bull market in metals is coming to fruition before our eyes.

What are the miners doing these days?

stock chart

Oh, nothing much. Just a 15% rally in 4 days on surging volume and in the face of rising energy costs. There is no doubt that the miners are confirming the recent moves in the metals.

And, of course, no analysis of precious metals would be complete without at least a glance at the greenback.

dollar chart

So the bottom line is that the U.S. dollar, and by extension precious metals, are pricing in the expected reaction by the Fed to a rapidly deteriorating financial environment: creation of fresh piles of dollars. We could be only hours or days away from round two of the banking crisis, and when those headlines hit the papers, we will see multi-percent up days for PMs.


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