Przemyslaw Radomski's  Instablog

The Smart Money Is In The Precious Metals Market, But a Local Top Is Close

This essay is based on the Premium Update posted November 20th, 2009

At Sunshine Profits we’re holding gold and we find ourselves in very good company with some of the world’s biggest players. The smart money is definitely in.

Central banks are net buyers of gold for the first time in 22 years.

According to a report by precious-metals research firm GFMS, for the first time since 1987, central banks around the world bought more gold in the second quarter than they sold. India recently bought 200 tons of gold from the IMF and it won’t surprise anyone if China steps in to purchase the other 200 tons offered for sale.

Some of the world’s most successful traders are in gold. 

John Paulson’s hedge fund holds a massive gold position in the SPDR Gold Trust (GLD) and large positions in gold miners. 

Star hedge fund manager, David Einhorn, who predicted the fall of Lehman Brothers, used to stay away from gold for personal reasons. His grandfather was a gold bug who held on to his gold position for 30 years waiting for the U.S. greenback to collapse and for inflation to run amuck. Apparently Einhorn now thinks that grandpa may have been right all along but just had his timing wrong. He initiated positions in gold for his fund.

“Being a patient investor is one thing. Being 'wrong' for three decades is quite another,” wrote Einhorn in a letter to his investors.  “To everyone's dismay, we believe that some of Grandpa Ben's predictions are playing out.” 

The smart money is in, but it’s clear to me that the real fireworks will start when Main Street catches gold fever. The gold market is small. The market cap of all the gold stocks in the world is less than that of Microsoft or Walmart. So, when the public finally rushes into gold... Well, that’s when we’ll be very glad that we got in early.

Speaking of getting in and out of the market, there are times (during before local tops) when it makes sense to be in- and out of the market at the same time. I believe that a word of additional comment here would be useful, as I get the feeling that it might be perplexing to read that it might be useful to do one thing (enter the market) with a part of one’s capital and do the opposite (wait/sell) with the other part.

Generally, the action that one is supposed to take depends on their risk tolerance - and consequently their portfolio structure and attitude toward money management. Risk-averse Investors should have more capital invested in PMs also during corrections, while risk-loving Speculators might be inclined to monitor market closely on a daily basis to catch even the small moves in the price of gold and silver. Therefore, depending on your preferences, you will need to monitor prices of metals in different time frames, and you will define different moves as “small” or “big”.

From the long-term point of view even $50-$100 downswing is really small - think about a chart with gold's rise from $250 to $5000 - a $50 move is barely visible. On the other hand, the geo-political situation is tense and the risk of a meltdown in the financial markets is relatively high - meaning that a single event can cause gold's price to rise $100-$1000 or so - for instance if the Chinese officials decided to dump their dollar reserves on the market. This is not likely to take place in the near term, but given the enormous effect it would have on the price, I believe it is better not to be totally out of the PM market with a large part of one's capital (long-term holdings).

Conversely, if it is the short-term speculative capital that you want to focus on, please keep in mind that trading means using rather limited amount of capital for each trade. After all, there is a certain amount of capital that you should use at most, and if you use more than that, you can lose money on average (!) even if you are mostly correct in predicting moves of PMs - I wrote about this phenomenon in the past. Therefore, if you use a small amount of your short-term capital anyway, you don’t need to worry about a single big event that would drive gold’s price very high (you are covered, thanks to owning bullion, and using a part of your capital for long-term investments), and focus on what is probable in the short term. Here, a $50 move is very often a difference between a winning, and losing position, so focusing on such moves and exiting positions once a correction is looming, might be profitable.

Having said that, let's move to the analysis of the current events on the precious metals market. This week I will provide you with my thoughts on silver and PM stocks - charts courtesy of http://stockcharts.com.

Silver reached its long-term resistance line, which means that further gains might be postponed. On the other hand, should gold rally from here - and that is the likely outcome - silver's rise may be stopped by at its previous highs of $19.55 or $21.44.

Generally, much depends on the gold market, so once we get exit signals from it, it will mean that might be a good idea to close one's silver speculative (!) positions as well.

Silver often tops in the form of a double-top pattern, so it would not surprise me to see silver decline a bit, only to re-test its recent highs and decline afterward.

The precious metals stocks are also near their resistance level.

Gold stocks are very close to their old 2008 high, and given the strength of the current momentum it is possible that this level will be touched during this rally. I have used the word "touched" intentionally, as it seems the PM stocks would need to take a breather before they break into new highs.

Currently, the HUI Index is trading near a less significant high (marked with a thin vertical line on the chart), which may also stop this rally, if gold is to decline from here. However, based on the above analysis of gold charts, this is not a likely outcome so PM stocks may also move higher before topping. Based on information available today, I've marked the probable topping area with a red ellipse. Let's see if the short-term chart confirms the above analysis.

I've used the GDX ETF as a short-term proxy for PM stocks, as it allows me to analyze volume. The latter has been decreasing recently, which is an early sign that the rally is slowly running out of steam (buying power is drying up). The value of volume is not at a dramatically low level that would cause me to send out a Market Alert, but it certainly suggests that if mining equities are able to move to their previous highs, this is likely to mark a local top.

Naturally, the key question is "when?" As always, "now" is the most difficult time to invest, but once again the cyclical tendencies help us put the daily price swings into proper perspective. In the past, the red vertical lines were very close to local extremes (tops or bottoms), so it might be the case also here. This time, the next vertical line suggests top/bottom in early December, possibly in its second week. This may correspond to the top, at which the HUI Index reaches its 2008 high.

Summing up, apart from points raised in my previous essay, additional signals pointing to looming correction come from silver and PM stocks. The momentum is strong, so the correction may not materialize today or tomorrow, but based on what we see today, it seems that the temporary top will be reached within the next few weeks. The full version of this update is about 4x bigger than the free version and contains many additional charts and analysis with critical implications to you. Subscribe now, and find out why $7000 gold and $400 silver aren't really irrational!

To make sure that you are notified once the new features (like the newly introduced Free Charts section) are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski

Editor

www.SunshineProfits.com

* * * * *

Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

Sunshine Profits provides professional support for precious metals Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free weekly trial to see if the Premium Service meets your expectations.

All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


Disclosure: I own gold and silver.

Has Gold Just Broken Out of Its Trend Channel and What Does This Mean To You?

This essay is based on the Premium Update posted November 20th, 2009

Let me begin this week's essay by quoting a part of last week's update, in which I mentioned that the regular interpretation of the trend channel in gold might be misleading this time:

Still, there is a specific phenomenon in the technical analysis that I've noticed during my observations - when a pattern becomes "evident" so that everyone and their brother sees it and are able to act upon it, the price does exactly the opposite to what it is expected to do. There is a good reasoning for that to take place. Once everyone takes action on a particular signal (for instance they sell before a breakdown), there is nobody left to sell anymore, and as price fails to move decisively lower, investors buy back and fuel another rally. In most cases it is very difficult to estimate if a pattern is "commonly known" or not, but the current trend channel is rather evident, so its reliability is a little lower.

Consequently, gold has broken above the rising trend line on Monday and did not move back below it so far. Therefore, it doesn't surprise me to see many messages in my e-mail inbox from Investors, who are out of the market and they are afraid that gold will never look back from now on and that it will keep rising in the foreseeable future. However, this is a small clue that this is not the case yet, and that a correction is coming rather soon. The price of gold broken above its resistance, and the breakout was confirmed by a few consecutive closes above this level, but is this enough to suggest that another strong rally will begin even without a small breather? Let's turn to gold chart (charts courtesy of http://stockcharts.com) for details.

The short-term resistance level, created by multiplying the distance between two previous tops by 1.618, has been hit on Wednesday. Yet, the price did not reverse immediately. Instead, it moved to the previous resistance and verified it as a support by moving higher after touching it on an intra-day basis. Moreover, the volume has been rising during the past two weeks, which is a confirmation of the move - in other words, it suggests further gains in the short-term, not a plunge. Naturally, a sell-off might materialize even despite the lack of warning signs from volume, but this is not what is a likely outcome. Therefore, gold might move even higher (not necessarily today) before correcting in a more meaningful way.

Before moving on to the analysis of the USD Index, I would like to comment on the recent developments on the non-USD chart of gold (gold:UDN ratio). UDN is the symbol for PowerShares DB US Dollar Index Bearish Fund, which moves in the exact opposite direction to the USD Index. Since the USD Index is a weighted average of dollar's currency exchange rates with world's most important currencies, the gold: UDN ratio means the value of gold priced in "other currencies". It trades similarly to the USD/EUR currency exchange rate.

In the October 16-th Premium Update I wrote that gold didn't break above its previous high in the recent months, but that is not the same high that one looks at when viewing the price of gold in the U.S. Dollar. The March 2008 high that was the top that gold broke above in USD, but taking other currencies into account - it has already broken this level in January. Consequently, the non-USD gold chart differs from its USD counterpart but is just as bullish. After all, price broke higher almost a year earlier and has verified that breakout a few times over several months, which means that it is now set to rise higher, most likely above its 2009 high.

After breaking through three resistance levels, the non-USD price of gold finally managed to form a meaningful rally, which took it to its previous high. It may or may not move above it at this time, but that is not the most important implication here. The key observation here is that we can see a clearly visible, substantial, multi-month "cup" from the cup-and-handle formation. The exciting part is that the more U-shaped the cup is, the more bullish the formation gets, and the cup on the chart above is almost perfect. The value of the ratio may stop at its previous high, especially given the overbought RSI indicator, but once the consolidation is over (and the "handle" is formed), the non-USD price of gold is likely to soar.

While commenting on the metals market, it is always useful to feature the USD Index chart. After all - it is the currency metals are priced in. Let's begin with the long term chart.

There are no big changes in the long-term USD chart, since I've covered it deeply in the October 30th Premium Update (click to read it - it's now available as a sample version). The trend is still down. Dollar tried to ignite a rally in late October that was supposed to end the decline, but didn't manage to do anything more than just to create a fake-out bearish signal. The value of the USD Index is still trading sideways near the upper border of the trend channel, which makes a substantial plunge quite possible - a move to the lower border of the channel would mean a massive decline, much below the 70 level.

Let's zoom in for more detailed view.

The short-term chart reveals dollar's cyclical tendencies (black vertical lines) that mark moments close to local extremes (mostly tops, though). Should this pattern repeat once again (and it is likely, given how many times it worked in the past), we might see a local extreme in the USD Index early in December, and trading sideways until that time. It's too early to say if that would be a top or bottom, but I will get back to this topic once we move closer and have more information. For now, it seems that PMs might rise/decline rather regardless of the short-term action in the U.S. Dollar. Please take a look at the correlation table below.

Although the 10-day column is not statistically significant, and is just a very rough estimation, it provides us insight into what tendencies might change in the very near future. In this case, the low values of correlation coefficients for gold/USD (-0.18) and silver/USD (-0.01) suggest that these markets are now more or less moving "on their own", and a catalyst from the USD Index is not needed to ignite a rally, nor plunge.

Summing up, based on this week's price action, it seems that gold may need to move higher before correcting in a meaningful way. The key driving markets for precious metals, USD Index and the general stock market don't provide decisive signals, and the former has been recently trading rather independently from PMs, so it may not be needed to ignite a rally or a sell-off in the metals. Once the looming correction is complete, the following rally can be quite spectacular, as precious metals stocks are becoming less dependent on the main stock indices, and the non-USD gold price formed a massive cup from the very bullish cup-and-handle pattern. If the rally is to be profound even not taking U.S. Dollar's plunge into account, then the value of the yellow metal in USD can increase even more significantly from the "regular, USD perspective".

The full version of this update is about 4x bigger than the free version and contains many additional charts with critical analysis. Things covered in this week's Premium Update include the in-depth analysis of gold (long-, medium-, short-, and non-USD perspective), silver, USD and its cyclical tendencies, main world stock indices, long-, and short- term analysis of precious metals stocks along with their relative performance to other equities, and platinum. Additionally, I comment on the evidence that the smart money is in PMs right now, and explain how it can make sense to enter the market and exit it at the same time. Subscribe now, and find out why $7000 gold and $400 silver aren't really irrational!

To make sure that you are notified once the new features (like the newly introduced Free Charts section) are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski

Editor

www.SunshineProfits.com

* * * * *

Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

Sunshine Profits provides professional support for precious metals Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free weekly trial to see if the Premium Service meets your expectations.

All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


Disclosure: I own gold and silver.

Silver Cycles, Silver-to-Gold Ratio, and the USD Index Analysis

This essay is based on the Premium Update posted November 13th, 2009

In the last several days I received many letters in which Readers commentend on my analysis of the seasonality on the silver market (thank you), so I decided to provide you with more detailed analysis of silver in the following essay.

I will begin with a reply to the letter from a Subscriber, who mentions that „the 30 year seasonal charts for silver show Nov to be a higher drop, but the 15 year seasonal chart shows the trend to have changed“. The question is which seasonal tendencies one should rely on. As always, it is useful to put things into proper context before making any calls.

In my opinion, the 15-year cycles are long enough to eliminate the "noise", so I think this signal is more important than the 30-year one. Why did this tendency change? Because fundamentals for silver have changed. There is much less silver now than it was 15 years ago, and the demand side of the market is changing - the use in photography declines but the increase in demand for industrial applications increases. Consequently, the amount of silver scrap entering the market is smaller (very large part of it comes from the use in photography), and so on. Therefore, very long-term cycles for silver could be misleading.

When speaking of silver and gold in the same essay, it is very useful to provide a chart with the ratio that sayh how much silver is worth in terms of gold or vice-versa. (charts courtesy of http://stockcharts.com).

The silver-to-gold ratio has been declining in the past few weeks, which confirms that this is not a final stage of this rally, and that it has much more to go. Naturally, this does not mean that there will not be any corrections along the way, but from the long-term point of view, this rally is still in its early stage. Let's take a look at the short-term silver chart for more details.

Silver appeared to be forming a bearish head-and-shoulders formation, but the action in volume did not confirm this, and the formation was finally invalidated yesterday, when silver moved higher on strong volume. I've discussed this matter last week when I commented on the situation in the PM stocks:

In the "head" part of the pattern the price fails to go much above the previous top, and in the final, third attempt to move to new highs, it doesn't even go above the previous (head) one. Since there is not enough buying power, the volume is lower with each upswing preceding a top (shoulder/head/shoulder). Without the confirmation in form of declining volume the whole logic behind this formation is flawed. That is precisely the case with the precious metals stocks, as this week's rally took place on a huge volume - definitely higher than the one on which the "head" was formed. Therefore, I don't think that the head-and-shoulders pattern should concern you at this point.

The same can be said about silver this week. Moreover, the indicators (RSI, Stochastic) that mostly corresponded to the topping areas in the silver market are now relatively far from their overbought levels. Therefore, taking into account the fact that silver rose on a high volume yesterday, and that it is still several cents below its resistance level, it seems that it may move a little higher before topping temporarily.

There is one more chart that I would like to feature this week, before summarizing – the USD Index.

The USD Index moved higher recently causing a mini-pullback in the precious metals, but should this make you concerned? Not really. The trend remains down, and a single-day or two-day rallies are quite common even during particular downswings, so yesterdays action doesn't really change anything as far as the bearish/bullish implications are concerned. Again – the trend remains down, which is positive for PMs.

Moreover, please compare yesterday's performance of the USD Index to the performance of gold and silver – although the daily rally was rather big, the reaction in metals was limited, which is another sign of the strength in this market.

Summing up, despite its recent weakness relative to gold, silver by itself doesn't seem to be topped yet. We may get a day or two of lower prices, but it may need to reach the resicance level marked on the above chart before correcting significantly. Still, since it is highly correlated with gold, the yellow metal might ignite a decline in silver if it corrects itself. On the other hand, if we get a confirmation that the rally in gold is becoming a parabolic one, silver may also rally very high in a relatively short time-frame. I've sent a Market Alert to my Subscribers on that matter yesterday - you might want to check it out and also read the latest Premium Update with the indepth analysis of the long-term silver chart (analysis of this chart alone is 2 times bigger than this whole essay) – it has implications reaching much beyond the silver market.

To make sure that you are notified once the new features (like the newly introduced Free Charts section) are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski

Editor

www.SunshineProfits.com

* * * * *

Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

Sunshine Profits provides professional support for precious metals Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free weekly trial to see if the Premium Service meets your expectations.

All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 
Disclosure: I own gold and silver.

Is The Local Top in the Precious Metals Stocks Already Behind Us?

This essay is based on the Premium Update posted November 13th, 2009

“Inside the Global Gold Frenzy” is the title of an article that appeared last week in The New York Times.  It seems the mainstream media has finally caught on to what we’ve known for a long time - we are in the midst of an honest-to-goodness gold rush. The article pointed out some interesting facts.

Starting out in a part of Switzerland that is the place where about one-third of the world’s gold is refined into bars and ingots, the reporter tells us that every day truckloads of gold jewelry arrive from all over the world to be melted down.

 “Business is booming,” he reports. Demand for bars weighing 100 ounces or less for individual investors is up 80 percent, according to a Geneva company that owns the Swiss gold refining company.

Europe and the United States are the new emerging markets for inflows of old gold jewelry and individual investor sales, whereas in the past, hoarding gold as an investment was much more popular in the Middle East and Asia.

Moving on to London, the reporter tells that Harrods, the 160-year-old London department store, last month began selling gold coins and gold bullion ranging from tiny 1-gram ingots to the hefty, 12.5-kilogram, 400-Troy-ounce bricks, the kind that are stocked in the Fort Knox vaults.  The public’s response has been “astounding,” with bars being more popular than coins.

This is a good indication of just how slow the mainstream media can be. India’s huge gold purchase did not catch us by surprise, if you read last week’s Premium Update. Does all this “gold frenzy” suggest a bubble? It will at some point, but were far from it. Please remember that gold is only above it’s 1980 high in nominal terms. Adjusting it for the inflation gives us price of gold much above $2,000, and that is by applying the official inflation statistics, which are generally not reliable in my view, as the way inflation is measured has been changing over years. In other words – It is likely that inflation is underreported.

There are few more things that I would like to cover before moving on to the technical part of this essay. I’ve been recently often asked about the correlation between the general stock market and PM stocks – can it ever be broken and what may cause this to take place, so I would like to take this opportunity to comment on that matter.

Generally, I expect the correlation with the general stock market and PMs to weaken significantly in the future (months, but how many remains unknown - 1 - 24). I expect investors to gradually wake up to the fact that PMs have MUCH more favorable fundamentals than the whole economy (thus the general stock market), and will not close their positions (yes, also hedge funds) as eagerly as they did before (during the 2008 plunge), should the main stock indices tank again. The question is, when will the people with the most cash on hand (biggest hedge funds dealing in PMs) start thinking this way. Gold above $1,000 is a big factor from this trade-o-psychological point of view. In the third - speculative-mania phase of the bull market in the precious metals, I expect "the rally to feed on itself" meaning that rising prices will attract even more buyers and so on - even without the significant influence from the dollar or the general stock market. In this way, the correlation with both of these markets would weaken.

Moving on to the technical side of the market, this free essay will precios metals stocks, it seems that this sector may provide us with a shorting opportunity, but only under specific circumstances.

The value of the GDX ETF (proxy for the precious metals stocks) is very close the thin black resistance line, which makes probable that this rally will either take a breather at it, or correct. The analogous resistance line on the HUI Index has been touched this Wednesday, so there is a chance that the top has been put. Still, the „sell“ signals are not coming from that many sources to make me send a sell alert – I will get back to this matter in the following part of this update. For now, the signals coming from the GDX ETF confirm points and signals made in the gold section. Should the PM stocks move to the black resistance line on a very high volume and we get additional bearish signals from other markets, I will consider betting on lower prices in the short term.

From the long-term point of view, it would be useful to take a look at the relative performance of the PM stocks to other equities into account.

I have covered this ratio previously, when I wrote the following:

What we see above is a long consolidation after huge rally. This is really encouraging from the long-term point of view, as the rally that follows such a consolidation is often similar in size to the move that preceded it. If PM stocks manage to break out soon, we could see some real fireworks in the sector, for instance the GDX would equal the value of the SPY ETF. I realize that unless general stock market plunges, this means HUI above 800, but this is what the above chart suggests, and what I expect to take place sooner or later.

Today, the situation is similar, but currently the PM stocks are even more likely to break out of the 2009 consolidation pattern. Once they do break out, they may contitue to rally strongly even despite weakness in the general stock market. This is not happening right now, but the ratio is trading very close to the resistance line, and since it is already it’s fifth attempt to break it, it may finally succeed. 

As I mentioned a few paragraphs earlier, the „sell signals“ are not coming from many sources. One of them is the Gold Miners Bullish Percent Index (the relative amount of the gold stocks on the buy signal according to point and figure charts to all gold stocks taken into account).

The high-probability sell signal is given if this index moves higher, and both indicators (RSI and William’s %R) used on the above chart become, and then stay overvalued for some time. The initial overbought signal is marked with the vertical dashed black lines, and the top signal is marked with red lines. None of this was the case recently, so the probability that the top is in, becomes lower.

Of course the signal from this index is not „a must“ for a top in the PM stocks to emerge – for instance the previous local top was not signalled in this way – this non-confirmation simply lowers the odds of an immediate downswing in the mining equities.

There is one more thing that I would like to cover this week before summarizing, and that is a signal generated by one of our unique indicators. The SP Gold Stock Bottom Indicator, which also suggests that PM stocks may peak, but most likely after an additional small rally.

Please take a moment to study HUI’s performance after this indicator moved above it’s upper dashed line. Each time it happened, it meant that a top is near, but it makes sense to bet on higher prices in the immediate-term. This is another non-confirmation of the bearish signals from the GDX ETF chart analysis that makes me wait for additional signals before sending an alert with a „sell PM stocks“ message.

Summing up, the short-term situation is rather mixed in case of the precious metals. There are early signs that the top is very close, so you may want to take some money off the table if you prefer to exit your positions rather early. On the other hand, the topping signals from the gold and GDX charts are not being confirmed by other methods of analysis, so if you prefer to stay in the market until it is very likely that this action is unprofitable, then I would currently suggest to hold your positions. I will keep you updated.

To make sure that you are notified once the new features (like the newly introduced Free Charts section) are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski

Editor

www.SunshineProfits.com

PS. This week’s Premium Update is the biggest one that I've created so far and it includes the long-term silver chart and its detailed analysis, with the implications reaching much beyond the silver market itself. Additionally, I comment on the Nov 23rd options expiration, the change in the long-term silver cycles, and the likelihood/timing of a disconnection between PM stocks and the general stock market. Be sure to check it out.

* * * * *

Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

Sunshine Profits provides professional support for precious metals Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free weekly trial to see if the Premium Service meets your expectations.

All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.



Disclosure: I own gold and silver.

Will Silver Outperform Immediately or Will We Need to Wait a Little Longer?

This essay is based on the Premium Update posted November 6th, 2009

The recent huge purchase of gold by the Indian central bank triggered a substantial rally that took gold to new (nominal - !) highs gathered a lot of attention and generated a substantial rally. I’ve touched this subject in my previous essay, but since this topic is so popular, I would like to put additional comments this time, but from a different point of view. In the following essay I would like to comment on the negative impact that the future government sales may have on the price of gold. After all, that is a wide-known argument against investing in the precious metals. It is said that gold is not a good investment, because governments and central banks around the world will at some point flood the market with their gold reserves and thus cause a massive plunge in the price of gold and silver (correlated with gold).

Think about it – governments are institutions, so they cannot be “emotional”, but it is ultimately an (emotional) individual (or a group of them), who make decisions regarding selling and buying precious metals. Sounds evident, but the implications are not that obvious. The more price of an investment asset goes up, the more attractive it becomes to buyers, as they project the same pace of growth in the future (by the way, this is the psychological mechanism that causes speculative bubbles). Consequently, when gold rises high (and silver even higher on a relative basis), it would not surprise me to see governments / central banks decide to purchase even more metals. The key implication here is that often repeated bearish argument - that monetary authorities will dump their gold on the market thus causing massive plunge in the metals – should not make you overly concerned.

Moving on to the technical situation on the precious metals market, this time I will provide you with my comments on the silver market (courtesy of http://stockcharts.com).

It was a week ago when I wrote the following:

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.

It seems that the bottom materialized a few days before the exact date marked with red horizontal line – thus it was indeed “close to the bottom”. The action in the volume is just as positive as it is the case on the gold market, and both: RSI and Stochastic Indicator are not in the topping area. Several silver stocks are lagging their underlying metal but it seems that this is a temporary reaction to the weakness in the general stock market. Therefore, we will need to wait for a decisive action in either direction in the general stocks market, before making final calls here. For now, it seems that a sell-off in the main stock indices would cause the rally in silver and silver stocks to be weaker. Speaking of the main stock indices, please take a look at the chart below.

The SPY ETF (proxy for the general stock market, which allows me to analyze the volume) has failed to move above any of the rising trend lines. Moreover, the volume has been visibly high during the late-October decline, and relatively low during yesterday’s rally. The Relative Strenght Index appears to have formed a bottom, but that is the only thing that is bullish on the above chart – too little to make me state that a decent rally from here is the most probable outcome.

Additionally, several other main stock indices do not confirm this week’s upswing in the U.S. stocks. As you may see on the above chart, I’ve marked the performance of other stock indices (Nikkei, DAX, FTSE, TSX, HSI) using the semi-transparent lines. Clearly, the action in these indices does not confirm the rally in the SPY ETF.

Don’t get me wrong, I’m not suggesting that we are not going higher – it is possible, especially since the general stock market has been rallying so far this week (not visible on the chart). What I’m saying is that unless we move at least above the thin resistance line, lower values of the general stock market are likely.

Summing up, the fact that governments and central banks are buying precious metals is bullish, not the other way around. The short-term situation on the metals market is also favorable, although much – especially in case of silver and PM stocks - depends on the general stock market and the USD Index. The former had been rallying recently, but it finally topped and moved once again lower as indicated earlier - once it moves below its long-term support level, it’s likely to plunge. The situation on the general stock market remains mixed. Consequently, we will need to wait for additional signals to estimate if silver is likely to outperform gold in the near future, or will we need to wait a little longer.

To make sure that you are notified once the new features (like the newly introduced Free Charts section) are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski

Editor

www.SunshineProfits.com

PS. I received a substantial amount of positive feedback after providing my Subscribers with long-term price/time targets for this rally in gold, so in the next Premium Update (posted Fridays, at least a few hours before the markets close) I’m going to conduct a similar analysis for silver. Be sure to check it out.

* * * * *

Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

Sunshine Profits provides professional support for precious metals Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free weekly trial to see if the Premium Service meets your expectations.

All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Disclosure: I own gold and silver.

Dollar Tops, while PM Stocks Bottom: There’s More to Seasonality Than Summer Doldrums

This essay is based on the Premium Update posted November 6th, 2009

This has surely been an exciting week for gold and silver investors. The post-Halloween rally that I mentioned in the previous Premium Update, took metals and corresponding stocks substantially higher, and gold itself reached new highs – at least in nominal terms. The mainstream media are now reporting gold-related stories on a big scale and „gold prices“ is the second most often searched for phrase on http://finance.yahoo.com. The contrarians among us might be concerned about this fact, as we all know what happens, when everyone gets on the same side of the boat. However, gold DID break above $1,000 recently, and also verified it, so the excitement now is quite natural. In other words – there is no divergence that would indicate that a top is in. On the other hand, I’m still receiving e-mails, in which Readers suggest that gold does not have to go up, that its too high, etc. This is encouraging, because it meanst that a certain amount of investors is still out of the market, and can get in, thus fueling further gains. 

The divergence that I’m referring to would take place if we were getting close to serious resistance levels after a huge rally without any breather whatsover, and still everyone and their brother would be bullish on gold. This is what I prefer to see, as a confirmation, when timing tops. I don’t know if you recall this, but that was the case before the February 2009 top.  

If you’ve been reading the news and following our essays you know that the IMF announced in September that it would sell 403 tons to finance loans to developing nations. It was a foregone conclusion that the IMF would sell the entire amount to central banks rather than flood the open market. Central banks themselves are no longer selling gold. Rather they are holding on to their gold reserves as the value of fiat currencies decline. In some cases they are increasing their holdings as countries like China, with large holdings of U.S. dollar assets, are worried about the declining value of the U.S. dollar. 

Therefore, we have another signal that the fundamental situation remains favorable. Still, it is not fundamental factors that drive markets in the short- and medium-term – emotions do. This is why we need to turn to charts (courtesy of http://stockcharts.com) and their analysis for more details as to what the next several weeks and months may bring us. Let’s begin with the U.S. Dollar.

The medium-term chart confirms that the „breakout“ has been barely visible, and that it is not a significant development – at least not yet. The previous breakdown below the September 2008 low has been verified by trading for a few weeks within the red-ellipse area, after which it moved once again above this price level. Yet, this rally did not take the USD Index very far – after an intraday spike on Tuesday, dollar moved much lower. The action in the RSI indicator suggest that a local top is behind us.

If we get a move below the 75.5 level – which I consider likely – it would serve as a non-confirmaton of the breakout, and that is a very strong bearish signal. Naturally, it would be a very strong bullish signal for gold. Given the recent strength of the yellow metal it seems that even if we would see USD rally from here, the only thing it would cause gold to do is to consolidate by trading sideways for some time. Going back to the USD Index itself, please take a look at the short-term chart below.

The short term chart reveals that the Tuesday top materialized almost exactly on the day that was indicated by the seasonal pattern (marked with the black vertical line) and it took place just after touching the short-term resistance level. This means that the counter-trend „rally“ phase is already behind us, and that lower prices are to be expected in the next several days (and probably also weeks).

Please note that the „near top“ vertical lines have also marked favorable buying opportunities in gold and silver. These were not necessarily the exact bottoms in the precious metals, but they were close enough for one to be glad that they purchased PMs at that time. Since it was only a few days ago, it serves us as another factor pointing to the necessity of being already in the precious metals market at least (!) with one’s long-term holdings.

However, the sitaution in the precious metals stocks is a little more complicated. Let’s turn to the chart of the GDX ETF (proxy for the sector) for details.

The precious metals stocks moved higher along with the rest of the precious metals market, but the shape of the rallies in the past two months may make you concerned that PM stocks are forming the head-and-shoulders top formation. I agree that the price pattern itself is visible, but I don’t thing that there is much too worry about. The head-and-shoulders pattern is formed when there is simply not enough buying power to push price to higher levels.

In the „head“ part of the pattern the price fails to go much above the previous top, and in the final, third attempt to move to new highs, it doesn’t even go above the previous (head) one. Since there is not enough buying power, the volume is lower with each upswing predecing a top (shoulder/head/shoulder). Without the confirmation in form of declining volume the whole logic behind this formation is flawed. That is precisely the case with the precious metals stocks, as this weeks rally took place on a huge volume – definitely higher than the one on which the „head“ was formed. Therefore, I don’t think that the head-and-shoulders pattern should concern you at this point.

On the other hand, the RSI is not overbought, so further gains are possible and likely. It seems that the bottom has been put exactly in tune with the seasonal tendency (red vertical lines on the chart), and higher prices are to be expected. The volume has been low yesterday, which is a natural during a small consolidation after a quick move. Several precious metals stocks have been lagging the GDX ETF lately, but I wouldn’t worry about this situation, as it is normal, especially near local bottoms.

Summing up, the popularity of gold as an investment has grown in the past several weeks, but this fact by itself is not enought to turn the long-term outlook for PMs bearish. The price of gold is moving higher and central banks begin to accumulate it instead of dumping it on the market, thus invalidating one of the key arguments against holding the yellow metal. The situation in the PM stocks is more cloudy, as this market is more likely to be influenced by a sell-off in the general stock market, but at this point the technical of the GDX ETF don’t point to lower prices in the near term.

In other news, the results of the recent survey for my Subscribers indicate that the „seasonal patterns” (used also in this week’s analysis) are very popular, and therefore I’m beginning to develop additional unique charts/tools based on them. To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski
Editor
www.SunshineProfits.com

PS. Apart from much more in-depth analysis of many other markets/charts, this week’s Premium Update includes the detailed answer to the how high could gold go question, and updated version of the gold/silver top juniors ranking. Make sure you check it out!

* * * * *

 Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

Sunshine Profits provides professional support for precious metals Investors and Traders. 

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free weekly trial to see if the Premium Service meets your expectations.

All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 
Disclosure: I own gold and silver.