In its latest Gold Demand Trends report, the World Gold Council reports that gold buying by the world's Central Banks hit a new record of 157.5 tons, more than double the level of Q2 2011 and accounting for 16% of overall global demand. Among them are the National Bank of Kazakhstan, and the central banks of the Philippines, Russia and Ukraine. If the Central Bank buying continues at the current pace this could be a record year for Central Bank buying.

That's the good news. The bad news is the WGC estimates that global gold demand in Q2 2012 was 990.0 tons, down 7% from the demand for the yellow metal in Q2 2011. The demand in Q2 last year was exceptionally high, they point out. The main reasons for the fall are the reductions in demand for gold in both India and China over the period. In India, investment and jewelry demand has fallen mostly due to the high gold price in rupees as well as worries over a weak start to the monsoon season.

Having discussed gold briefly, let's now turn to the technical part of our update with the analysis of silver. We will start with the long-term chart (charts courtesy by http://stockcharts.com.)

In the above chart a significant rally is seen, but it has been stopped by the medium-term resistance line and the 50-week moving average. Silver actually corrected about 38.2% of its 2012 decline (the cup portion of the inverted cup-and-handle pattern). This pattern is still in place.

Silver has shown to often be volatile and a sharp, quick move to the upside can be quickly followed by a period of disappointment. Such was the case nearly a year ago in the final months of 2011 and at the end of February 2012. Silver's price also moved very close to the 50-week moving average back then as well.

The point is that despite silver's recent strength and multiple reasons due to which it's likely to soar in the following years, it remains in a medium-term downtrend. It will remain the case until a breakout is seen.

Let's now switch perspective to the non-USD one, to further investigate the current situation in the white metal in a different way.

In the chart of silver from the non-USD perspective, prices are right at a resistance line and the RSI level suggests a medium-term overbought situation. The implications are therefore similar to what we discussed above - the medium-term case for silver may become bullish, but so far it hasn't.

Summing up, a lot has happened in the past several days in the white metal market but not very much has really changed from the medium-term perspective. So silver's show of strength seen in the above charts is not really a very bullish phenomenon. This is especially true when the overbought RSI levels are considered.

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, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. 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

Gold & Silver Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits' Premium Service gain access to Gold Charts, Gold Investment Tools and Analysis of Gold & Silver Prices Naturally, you may browse the sample version and easily sign-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.

Based on the August 24th, 2012 Premium Update. Visit our archives for more gold & silver analysis.

Fish are jumping and the cotton is high. Yes, it's summertime and the living is (quantitatively) easy. At least that's how it looks from the Federal Open Market Committee minutes for the July/August meeting that revealed support among some of the members for a new round of quantitative easing. With the release of the minutes Wednesday, gold went up and the U.S. dollar took a dive. The Fed members see three pitfalls for the economy-- the sovereign debt crisis in Europe, a global economic slowdown led by China and other BRICs, and the fiscal cliff, which could result in substantial fiscal contraction. (Fed Chairman Ben Bernanke has repeatedly asked Congress to solve the problem, but with a Presidential election coming in November it is difficult to see how Republicans and Democrats will reach an agreement.)

Gold investors combed through the text of the FOMC's latest minutes to find a nugget that will make the value of their nuggets go up. What they found was a single sentence towards the end of the meetings that went like this:

Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.

This sets the stage for further monetary easing possibly at the Fed's Jackson Hole, Wyoming meeting slated for the end of this month.

Waiting for other hints from the FED, let's now turn to the technical part of today's essay with the analysis of the mining stocks (charts courtesy by http://stockcharts.com.).

In the Toronto Stock Exchange Venture Index (which is a proxy for the junior miners as so many of them are included in it), we see a rally but it is quite small especially when compared to the recent several-week-long rally in the general stock market. It is likely just a correction after a breakdown below the recent huge head-and-shoulders pattern, so the implications are bearish for all precious metals mining stocks, not only for juniors.

Let's now move on to a very interesting chart that gauges the performance of mining stocks relative to gold. It can shed light on which group of assets (miners or the underlying metals) will perform better in the next couple of weeks.

In the miners to gold ratio chart (if you are reading this essay on sunshineprofits.com, you may click the above chart to enlarge), the medium-term trend is down and the recent rally here does not change the overall outlook. A short-term overbought status has actually been created, a situation not seen since previous local tops and the final top of 2011 which followed a big rally. The implications are bearish, the trend is likely to reverse, and the miners are likely to underperform the underlying metals in the coming weeks.

Summing up, the situation is less favorable for the precious metals mining stocks than it is for the underlying metals.

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, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. 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

Gold & Silver Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits' Premium Service gain access to Gold Charts, Gold Investment Tools and Analysis of Gold & Silver Prices Naturally, you may browse the sample version and easily sign-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.

Based on the August 17th, 2012 Premium Update. Visit our archives for more gold & silver analysis.

The summer dog days are upon us leaving investors cooling off in the shade waiting for a refreshing breeze of market-moving news. They are anticipating something important that will energize the gold price for an upward move, perhaps another round of quantitative easing by the U.S. Federal Reserve that could possibly be announced at the Fed's Jackson Hole, Wyoming annual gathering in late-August, or at the next meeting of the Fed's Federal Open Market Committee in September. Several U.S. economic reports released Wednesday failed to significantly impact the precious metals.

At least two heavyweight investors are not waiting on the sidelines to see what the Fed will do. Doing some bargain shopping, billionaire investors George Soros and John Paulson increased their holdings in the gold-backed exchange traded fund, SPDR Gold Trust. According to U.S. Securities and Exchange Commission filing for second-quarter, Soros Fund Management more than doubled its investment in the SPDR Gold Trust to 884,400 shares as of June 30, compared with three months earlier. Paulson & Co. increased its holdings by 26 percent to 21.8 million shares.

However, hedge funds have cut their net-long position by 66 percent from a record in August 2011. So who is the "smart money" in this case? We'll find out soon enough.

To see how precious metals are expected to fare in the August heat we now turn to the technical portion with the analysis of the Euro Index - after all the latter often moves similarly to gold. We will start with the long-term chart (charts courtesy by http://stockcharts.com.)

We begin this today's essay with a look at the long-term Euro Index chart. This week we've seen a move higher which appears to have resulted in a breakout above the declining short-term resistance line. "Appears" because the week is not over yet, but unless the Euro Index declines below the 122 level, the short-term breakout will be a fact. This is not a major bullish factor medium term, but we could see further strength here in the short run.

A major medium-term resistance line is close at hand and could very well stop the recent move to the upside. Both the black and red lines in our chart could serve as resistance (the neck of the previously completed head-and-shoulders pattern).

Now, let's see if there's been any reaction of the USD Index on the Euro Index behavior.

In the medium-term USD Index chart (if you are reading this essay on sunshineprofits.com, you may click the above chart to enlarge), we do not see any invalidation of the bullish trend at all. The breakout above the long-term resistance line continues to be verified, and the medium-term direction appears to be to the upside.

If the short-term rally in euro is indeed seen, then the dollar could move lower and retest one or both of its long-term support lines.

To see how precious metals would probably react, should a short-term rally in the Euro Index and a short-term decline in the USD Index occur, let's take a look at our own tool intended for measuring intermarket correlations.

The Correlation Matrix is a tool which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector. The traditional correlations are in place at this time, meaning that gold and precious metals are negatively correlated with the USD Index and positively correlated with the general stock market.

Consequently, the change in the short-term situation on the USD Index makes the short-term case for metals a bit more bullish than not. The influence remains negative in the medium term, though.

Summing up, the medium-term outlook for the dollar is unchanged and remains bullish. The short-term picture has become mixed and a bit bearish based on this week's Euro Index move. This could in turn translate into short-term improvement in gold and other precious metals. However, we advise caution, as the medium-term uptrend in the USD is still in place. More in-depth analysis of the currency market as well as the critical situation in the general stock market and their possible influence on precious metals are discussed in the full version of this article.

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, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. 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

Gold & Silver Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits' Premium Service gain access to Gold Charts, Gold Investment Tools and Analysis of Gold & Silver Prices Naturally, you may browse the sample version and easily sign-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.

People put too much store in central bankers and hang on their every word as if they are prophets with a direct line to the divine. It seems that no one does this more than gold investors. In the past gold has shown itself to be super sensitive to monetary policy announcements and investors hope that any indication of further easing would give gold a joy ride.

We have had enough evidence that central bankers are no super heroes able to leap tall buildings at a single bound and save the economy. There are plenty who contend that if the Fed had not stimulated the economy with zero percent interest rates, two rounds of quantitative easing and the so called "operation twist", the economic fiasco would have been much worse and the recession much deeper, perhaps even a depression. They go even further and say that the Fed has not done enough, and if only it had printed more money, we would be out of the woods by now.

The Austrian economists, on the other hand, counter that there is no free lunch and the tab will be paid later. The short-term pain of a deep recession would have been more salutary to the economy and would have eventually built a more robust sustainable recovery, they say. They argue that the Fed's actions simply delay, or numb the pain. So far, even with all the quantitative easing, we have not seen much of a recovery as the employment report released on Friday confirms. In the best case scenario the U.S. economy is stagnant. At the worst case scenario it is going down the hill. That the economy is a mess is the one thing that Barack Obama and his Republican challenger, Mitt Romney, agree on.

We believe that interest rates cannot stay low forever. The Fed's interest rate was bought down from 5.25% in August 2007 to 0.25% in December 2008. When interest rates finally rise, the prophets of doom and gloom will have plenty to rant about.

Just what did QE do for gold? One could argue-plenty. On November 24th, 2008, which is the day that QE1 was announced, the price of gold was $819.50. It rose to $1,113.30 by March 31st 2010, which is when QE1 ended. This was a hefty increase of $293.80. The price of gold rose from $1,337.60 on November 3rd 2010, the day QE2 was announced, to $1,502.50 on June 30th 2011, which is when QE2 ended. This was a sizeable increase of $164.90, but smaller than in the first round. Does the smaller increase in the second round suggest that investors are becoming less sensitive to such measures by the Fed? Has gold lost its "safe haven" status and become a "risk on" asset?

Without any clear signs of the next round of QE, we will search the stock market for clues regarding gold and silver. We will start with the S&P 500 Index long-term chart (charts courtesy by stockcharts.com.)

In the chart (if you are reading this essay on sunshineprofits.com, you may click the above chart to enlarge), we see that stocks have rallied recently and approached but not yet moved above the level of the previous 2012 high. It seems that once the S&P moves above the $1,425 level and verifies this move, the picture will be bullish here once again. For now, we continue to view the outlook as mixed with a resistance line around 1.5% above Thursday's closing price level and RSI levels neither overbought nor oversold at this time.

Let us now move on to the financial sector.

In the Broker Dealer Index chart (a proxy for the financial sector), we saw a bit of a rally for the financials last week, but their underperformance over the past five months remains clearly evident. The small rally seen last week does little to atone for the declines seen in two-thirds of the weeks since the mid to late-March high. In short, there is really no good signal for the stock indices in general here.

To better see what possible effects could higher stock prices have on the precious metals market, should a rally in the S&P 500 emerge, let's take a look at our own tool intended for measuring intermarket correlations.

The Correlation Matrix is a tool which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector.

Both gold and silver are positively correlated with the S&P 500 Index in the short and early medium term. Hence the possible rally in the stock market could help these two metals reach higher prices in this time horizon.

Yet one cannot forget that the currency markets are strongly and negatively correlated with precious metals at this time. If the medium-term rally in the USD Index continues, the downward pressure on precious metals prices will remain in place as well. Note that the metals' reaction may be delayed by a day or a few of them in response to strong moves in the USD Index, because the nature of the relationship is medium-term, not a short-term one.

Summing up, the overall picture for stocks is best described as mixed or unclear at this time. A short-term rally has been seen recently but an important resistance line is in place and the strength of the rally will be determined when this previous 2012 high price level is tested. It simply seems best to wait and see before commenting further here. Should such a rally in the stock market emerge, gold and silver could benefit from it in the short and medium term, as suggested by the Correlation Matrix. For now, this bullish factor is not in place. One should still bear in mind that such a scenario would be thwarted by a strong rally in the USD, as the correlation between these two metals and the dollar is still strong.

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, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. 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

Gold & Silver Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits' Premium Service gain access to Gold Charts, Gold Investment Tools and Analysis of Gold & Silver Prices Naturally, you may browse the sample version and easily sign-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.

Based on the July 27th, 2012 Premium Update. Visit our archives for more gold & silver analysis.

Gold rose sharply Wednesday after a European Central Bank council member suggested the possibility that Europe's rescue fund could get a banking license, allowing it to tap cheap ECB funding. The rally was also supported by reports that the Federal Reserve is getting ready to implement another round of stimulus. The Wall Street Journal reported Wednesday that the Fed is growing uneasy over the sluggishness of the U.S. economy and the unemployment rate. Gold market showed some strength this week but is this really a beginning of a new rally?

Let's have a look at gold's chart right away and try to figure out whether these recent moves have much meaning for the upcoming weeks (charts courtesy by stockcharts.com.)

In the very long-term chart of the yellow metal (if you are reading this essay on sunshineprofits.com, you may click the above chart to enlarge), the situation is unchanged in spite of the rally this week. The trend still remains down from here and with RSI levels now close to 50, gold is no longer oversold.

When it comes to gold's short-term performance, we need to mention that the short-term resistance line has not yet been crossed and it is quite hard to tell whether this will happen based on gold price alone. Such an event would influence the short-term outlook significantly - a breakout would likely be followed by a significant rally, but since it was not yet seen, the implications are not bullish.

Now, let's have a look at the white metal's chart as it also seems to have experienced a rally.

While the rally was seen if one monitors the precious metals market on a daily basis, the very long-term chart for silver (if you are reading this essay on sunshineprofits.com, you may click the above chart to enlarge) reveals that this week's rally is basically invisible. Silver saw a small move to the upside, which was stopped by the 50-day moving average. There was no breakout above this line.

And what about the short term? The inverted cup-and-handle pattern is still in place and still has bearish implications. This 50-day MA provided resistance during the pullback back in 2008 and may play an important role this time as well.

Finally, let's take a look if one of our own indicators suggests that a bigger rally is in the cards.

As you may see above, the indicator touched the lower dashed line, which is a buy signal. However, it was very close to this level just a few weeks ago and only a small rally followed. So, a small move to the upside was very much in the cards, but this is not enough to claim that a reversal in the trend will be seen.

Summing up, the recent moves in precious metals are more of a pullback than a real rally. They could turn into a rally if something (like a rally in oil or breakdown in the USD Index) pushes them higher and they break above their respective resistance levels, but this remains to be seen. We encourage you to join our subscribers, who have already read today's Premium Update that deals directly with factors that could impact the situation for silver, gold, and mining stocks (with emphasis on the USD Index).

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, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. 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

Gold & Silver Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits' Premium Service gain access to Gold Charts, Gold Investment Tools and Analysis of Gold & Silver Prices Naturally, you may browse the sample version and easily sign-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.

Based on the July 20th, 2012 Premium Update. Visit our archives for more gold & silver analysis.

Each week we reply to questions from our subscribers and include them in our Premium Updates. Today's essay is dedicated entirely to commenting on one of the letter that we received this week. It touches several interesting points and shows us that there are still some controversies and doubts regarding two most popular approaches to analyzing financial markets, i.e. technical and fundamental analysis, that need clarification. For clarity's sake we decided to put our comments alongside it, in addition to answering the reader's final question.

Q: I appreciate greatly your regular analysis, but cannot help but have doubts on one aspect of your technical analysis. It is significantly influenced by the USD index movement, in which when the euro falls, the Index rises and risk assets fall off, including gold (in an environment where inflation is for tomorrow and global growth is slowing).

A: Yes, our analysis is currently heavily influenced by the movement in the USD and euro, but the key word here is "currently". There will be a time (as you write below) when gold will move higher whether the dollar moves higher or not. In fact, this has already happened before. At times we have even analyzed currencies and used tops in USD as a signal for tops in gold. Just because USD is currently the key factor for precious metals investors and traders, doesn't mean that it will remain so going forward. That's why we constantly monitor correlations between various markets and see how they change, so that we know when to pay extra attention to the currency markets and when it's only optional.

Q: But hiding behind the USD and US Treasuries as an alternative safe haven is a short term game, as real returns on 10 year treasury paper is negative, and US debt is still too high with slowing growth. At some point market players will start to diversify from concentrating so much in the USD and start to simultaneously diversify into gold because of the headwinds visible in the US economy (fiscal cliff, etc.). No market player in this environment will put too many eggs in just the USD because it is also clearly perceived as only the least dirty shirt in town. When this diversification happens, gold and the USD Index could initially both rise. And this will be the first leg of a bigger move in gold when the USD shirt looks even dirtier.

A: Agreed.

Q: Traditional technical analysis cannot tell us when this will happen in this current environment where traditional technical correlations are more susceptible to macroeconomic/political developments.

A: Agreed. Technical analysis cannot currently tell when these fundamental factors will come into play. Again, the emphasis is on "currently". We could also add "directly" to that. Technical analysis will probably tell us that in the form of a bullish formation and the overall strength in the gold market, for instance relative to underlying factors like stocks, currencies and commodities. Support lines, cycles and Fibonacci retracements don't explain why a given move is likely to be seen. They just tell you that it is the case. So you will never know if a given formation is the result of one fundamental factor or another one.

The most important comment that we would like to make here is that it is not the point of using technical analysis to detect the timing of the market's recognition of certain factors months ahead. When you buy a sports car you don't complain about it not being a good vehicle for a transportation company - you enjoy the ride. Technical analysis is just one of the tools at our disposal. We put great emphasis on it in our weekly analysis because this is where the biggest changes can be observed. The fundamental picture is bullish for precious metals. And even though we discuss the latest news, our long-term views on gold and silver really don't change (we will make relevant comments on medium-term moves, though). So, we use the technical analysis to predict what can be predicted and we use fundamental analysis (including macroeconomic and political developments) to establish the main trend and position ourselves accordingly. Additionally, we hold some in physical form as insurance against serious financial turmoil. This way, the fact that not everything can be predicted using technical analysis becomes less important. Also, without it, one's forecasting abilities would be much more limited.

Q: What most are saying is that to stop the US shirt from getting dirtier, the Fed will intervene again with QE3 and so push the USD Index down and gold/risk assets up. However we all know that this debt problem is structural and requires fiscal reform. More and more monetary easing will push the problem further back, make it worse, and in the meantime incorrectly convey the view that past correlations still hold as in better times.

A: If the correlation numbers are significant then the correlation will be in place and analyzing one market will help to analyze another. When the abovementioned factors kick in, the correlation numbers will start to reflect that and we will know not to pay attention to these other markets anymore.

Q: With (a) more QE by the Fed, the USD Index goes down and gold instantly up because of the USD/gold correlation.

A: Probably yes.

and with (b) no QE the USD Index stays strong for the foreseeable future as concern increases about the US economy and traders/investors simultaneously hedge their USD exposures with more gold.

A: The USD may not stay so strong for the foreseeable future. It could move higher and then decline again or move sideways. It would depend on what happens with other currencies. After all, currency exchange rates are just comparisons of speeds at which each currency sinks. If other currencies improve somewhat, it could be seen as weakness in the dollar. Also, traders and investors don't have to automatically hedge their USD exposures with more gold. This is likely to be seen at some point in the future, but we can't tell how soon.

Q: For me these macro considerations, (a) and (b), will drive the gold wheel going forward more than technical analysis.

A: Technical analysis is not the main factor behind the precious metals secular bull market. Macroeconomic problems in the world, massive money supply, artificially low interest rates, BRIC countries' growth and other fundamental factors are. Technical analysis is just a tool that helps to time the best entry and exit points within this major move up. As such it will not drive gold, just as it has not driven it in the past. However, will the short- and medium-term moves continue to be detectable by technical analysis? Most probably yes.

Q: Technical analysis is useful in indicating the support levels to watch out for while the USD Index rises. But it may be only that - an indication, because market participants know either way gold will win out. And precisely because of this gold may not fall below USD 1500 (…). I think these considerations need to be more openly discussed even if one argues that gold will eventually win out but may have a technical drop of another, say, 20% before we get there.

A: We will be happy to discuss technical factors pointing to higher or lower prices in gold in the short term. However, the above-mentioned factors neither support nor contradict gold's decline in the short run. It is simply something that will likely be seen "in some time," probably months or even years from now. (A detailed analysis of the situation in the gold market along with our price targets can be found in the full version of this article.)

Q: There are ways of staying in a gold position and hedging the downside risk, and even making money on the volatility in the short hedged position through playing (in/out) the intraweek volatility in the price ranges, even as they shift going forward. But I understand this may not be everyone's cup of tea! That's what I do currently building up a bigger positive spread between my long/short positions so that I have additional spread to play with when deciding when gold has reached a bottom and I start closing out my shorts. I hope to do this in 2013, if not sooner, and would be surprised if gold loses another 15%. (…). I know it is a tough call as you have customers, and need to position yourselves accordingly, but if you had to call it (based on your view about QE timing, and other economic/political interventions) , do you think that the next big move up in gold will be this year or next and what upside range would you foresee?

A: I think that the next big move might start close to the end of this year or in 2013. At this point we see this as a 60/30/9 probability: 60% for this year, 30% for next year and 9% for the following years. The remaining 1% is for the case that we are wrong about the secular bull market in precious metals and that the next big move up in gold doesn't arrive for at least 10 years.

To sum up and somehow answer the title question, we would like to stress that we don't choose just one of these methods and shun the other, as we believe that the key to successful market analysis is using them both. However, one still needs to remember that each serves different purposes - fundamental approach is essential in positioning oneself properly and to know what to expect in the long run, while technical analysis is indispensable in tracking day to day changes and short- and medium-term trends as they unfold.

Current situation in the precious metals market is probably the best confirmation of the above sentences: an investor using only the fundamental approach would have probably lost serious amounts of money during recent declines, telling themselves "hey, I know the fundamentals are good so I got to go long on gold" while the followers of only technical analysis might have already lost their faith in the precious metals sector, as the technical situation is not as promising now as it used to be. But combining both approaches lets one come up with a coherent strategy that is likely to pay off handsomely in the future. If you're interested in reading our replies to other questions or examining our latest Premium Update (with over 20 precious-metals-related charts), we invite you to join our subscribers.

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, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. 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

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