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May 11, 2010

Shock and Awe

Until I met my wife last year, I had joyously existed without a television set for nearly 7 years (we all have to make sacrifices, right?). But since the damnable device is now in my living room, I often cannot resist the temptation to waste a little time in front of it (which was the reason I punted the habit 7 years ago). Today's curiosity concerned the public reaction to a new high for gold. I had not had CNBC tuned for a quarter hour before hearing no less than three recommendations from fund managers stating that everyone should have gold in their portfolio. It was hard not to grin since the same talking heads were labeling gold a bursting bubble less than 4 months ago. Public participation will certainly help drive this stage of the bull market higher, and excessive public participation will mark its end. However, I hardly think we're close to the excessive point, and all technical indications are for higher near-term prices.

gold daily chart

At some point gold will either back-test this breakout or break slightly below in order to shake off some riders. However, the move to a new high strongly supports the notion I've consistently held that our parabolic run is still in play.

silver consolidation pattern

The $2 surge in silver over 4 days is breathtaking. If anyone is still seeking the "shock and awe" effect of Europe's stimulus package, look no further than the chart above. One would have to expect silver to soon follow gold's breakout, although a few days to consolidate the surge would not be out of the question. Resolution of silver's consolidation projects price to $24.

Precious metals mining shares, as measure by GDX and the $XAU, are also on the verge of all-time highs. Many leading issues such as Silver Wheaton, Novagold, and Allied Nevada have already surged into uncharted territory (pun intended). The performance of these shares are solid indicators of further gains to come. The decoupling of precious metals from the typical inverse relationship to the dollar is also a strong indication that the effects of global monetary inflation are taking hold. Central banks have trapped themselves. By trying to stimulate economies with free money they have done nothing but cripple any possible expansion with higher input prices. When they eventually learn that wealth cannot be created by printing money, we will get the necessary cleansing process to create the foundation for real growth. Unfortunately, the markets may be about to enforce such discipline before the bankers are enlightened... definitely a more painful path.

The next few weeks should prove quite rewarding for those who have exercised the patience and holding power to await a parabolic run in precious metals. I expect the ride to be quite bumpy, and traders will face numerous temptations to get shaken off the ride too early. It is now more pertinent than ever to have a tool such as cycle analysis which helps filter out the noise of everyday volatility. Along those lines, I will unabashedly plug my member newsletter. The Charter Member offer will expire May 28.


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