Tuesday, August 03, 2010

The Gold Price Needs to Break Through $1,190 and Silver Through 1860c Before it Will Run

Gold Price Close Today : 1185.20
Change : 1.80 or 0.2%

Silver Price Close Today : 18.407
Change : 0.004 cents or 0.0%

Platinum Price Close Today : 1580.10
Change : -21.30 or -1.3%

Palladium Price Close Today : 503.25
Change : -13.85 or -2.7%

Gold Silver Ratio Today : 64.39
Change : 0.084 or 0.1%

Dow Industrial : 10,674.38
Change : 208.44 or 2.0%

US Dollar Index : 80.58
Change : -0.36 or -0.4%

I checked out the point and figure gold chart and must have misunderstood my friend's email because there was no breakout yesterday, but a reversal might have begun.

Gold has now twice bumped into the $1,190 ceiling, and must now pierce that ceiling or fall back. Today gold rose $1.80 to $1,185.20. That's nice, commendable, welcome, but doesn't say much. Silver followed a like pattern, bumping twice against 1850-1860c (today's high was 1859c), but closed on Comex up only 4/10 of a cent at 1840.7c.

SILVER'S MACD indicator has turned up, but it has risen very quickly and clearly faces stout opposition at 1860. GOLD'S MACD has pointed up as well. That implies this is not a fake rally, but has genuine strength propelling it. Gold needs to break through $1,190 and silver through 1860c before it will run. That might happen tomorrow.

The longer corrections live, the more nervous observers become. Forgetting to lift up their eyes to the long horizon, they doubt every positive sign and expect the worst. Precisely this change in morale is what drives markets up at turns: nobody but a very few expect it to rise. That's what you're watching now in silver and gold.

The US DOLLAR INDEX is trading now at 80.583, down 35.5 bps from yesterday and right at its 200 day moving average (80.60). Since markets often return to their 200 day moving averages, that implies that the dollar is now positioned to turn around. Relative strength index (RSI) has become very oversold, but MACD has not quite turned up. Soon, soon.

STOCKS have been rising on sinking volume, never a good sign. Today the Dow remained under water all day long, falling as low as 10,600.95, down 74 points, but it closed at 10,636.38, down only 38 points. S&P dropped 5.4 points to 1,120.46. You are watching the last throes of this advance. Stay away from stocks, stay away.

Readers often ask me about investing in gold or silver mining companies, and whether, when I write "Stay out of stocks" that includes gold and silver stocks. It doesn't include gold and silver stocks, but I'm not terribly enthusiastic about them, either.

For reasons not altogether clear, but probably related to the arrival of the precious metals ETFs as competitors to PM stocks, Looking back three years, in the stock market panic of Fall 2008 mining stocks dropped right along with other stocks and gold bullion vastly outperformed them. PM stocks then recovered against gold bullion, but have also traded sideways for two years. Go to www.stockcharts.com and make up a chart using the symbol "$GLD:$HUI" to see a chart of Gold vs. the HUI gold index. Remember that as the graph rises, gold is outperforming gold stocks. As the graph falls, gold stocks are outperforming gold bullion.

Personally, I prefer the metals themselves, physical in my hand. I saw a study a few years ago that showed that two Canadian gold stock indices did NOT outperform bullion in the last bull market. What is the point of taking all that extra risk with a stock -- mine floods, management absconds, mine is nationalized -- if the indices don't outperform bullion? Now, that's the indices and not individual stocks, and indices are averages. Maybe you can pick the really great stocks that can outperfom the indices, but I can't, so I stick with bullion.

Will the PM stocks diverge from stocks in general? Usually they get dragged down along with everything else in a decline, but then they quickly recover. They are viewed, after all, as a proxy for gold that offers leverage to the gold price. So I am not saying, "Do not invest in gold or silver stocks" only that it increases risk and complicates life, and I am a seeker of simplicity.

Mark Twain once said that a gold mine is a hole in the ground with a liar at the mouth. That hasn't changed a lot, so you have to be very careful to avoid scams and promoters, many of whom have a patina of great respectability.

Picking the right PM stocks is key to profits. In the past I have referred customers to Sam Parks and the ladies who worked with him in Seattle, and they did very well. Sam is retired now, but still confers with Jane Bearny and Val Fitzsimmonds who still sell gold stocks. I'm not guaranteeing their performance, but I have confidence in their integrity, and in the gold stock business that's key. I get no kickback or commission for mentioning their names. They require a minimum $20,000 account, and you can call them at (866) 990-9948 for Jane Bearny or Valerie Fitzsimmonds (800) 465-4402. Remember, precious metals stocks are a speculative investment, so if you can't stand risk and volatility, stay away! And always buy bullion first!

Argentum et aurum comparenda sunt -- -- Gold and silver must be bought.

- Franklin Sanders, The Moneychanger

© 2010, The Moneychanger. May not be republished in any form, including electronically, without our express permission.

To avoid confusion, please remember that the comments above have a very short time horizon. Always invest with the primary trend. Gold's primary trend is up, targeting at least $3,130.00; silver's primary is up targeting 16:1 gold/silver ratio or $195.66; stocks' primary trend is down, targeting Dow under 2,900 and worth only one ounce of gold; US$ or US$-denominated assets, primary trend down; real estate in a bubble, primary trend way down. Whenever I write "Stay out of stocks" readers inevitably ask, "Do you mean precious metals mining stocks, too?" No, I don't.