The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, September 3rd, 2009.
You Don't Mess With The Zohan is the title of a funny flick starring Adam Sandler from which I will borrow a sentiment that should apply to the breakouts in precious metals yesterday. And that is normally you don't mess with breakouts like this, however in knowing gold and silver continue to be in play via our self-serving bureaucracy / price managers, paranoid as this may sound, I wouldn't be surprised for a minute if these characters attempt to scuttle the rallies in coming weeks. After all, the dollar ($) is very oversold and susceptible to a correction higher, which is the primary source of concern here. So if it was my job to fix precious metals prices, in knowing they must be let loose at times to build up paper market related speculative excesses, what I would do is allow this to happen at a time just like this, one where it's thought prices will be held back by the natural drag of seasonal weakness in the stock market.
Of course things do not always go as planned, even for our price managing bureaucracy, witness the stock market last year, and potentially gold and silver right now. What do I mean? Well, what if stocks don't crumble in coming months? Then, with seasonal strength in precious metals on deck, it's quite possible the same speculators price managers use to boost stock markets jump on the bandwagon in knowing this, unexpectedly propelling prices higher. What's more, it should be noted that the situation pertaining to the oversold nature of the $ could fuel a 'wall of worry effect' in that many are being held back from buying gold and silver because of this, where these people will be forced to think 'something is different this time' if the rallies in precious metals prove lasting. And as some are saying then, this could be your last chance to buy gold under a $1,000, so you had better hurry.
On a more serious note, and from a fundamental perspective, with both traditional institutions and governments increasingly returning to the fold, not to mention the Fed might be forced to come clean with respect to its gold capping activities, on the surface there appears to be good reason to be bullish about prospects for precious metals, however the volatility could be spine tingling. This is because official efforts to suppress precious metals will not go away both at home and abroad, not to mention that once credit contraction in the economy gets rolling for real, which will be marked by a turn in real estate related loans, then things could get very interesting. Then, it will be instructive to see if those fleeing faltering fiat currency regimes will be enough to counter the deleveraging, not that such concerns will matter in real terms and the long run.
Be that as it may, the breakout in gold needs to run further before even the most rudimentary technical measures would signal an official 'buy signal', however it does look good in this regard, and it would look better with a two-day close outside of the triangle, which would be registered today. Of course a three-day event would be even better, especially if this involved a close over $1,000. Again, from a technical perspective, in looking at the indicator diamonds defining the trade in the chart below, with breakouts abounding apparently, one cannot deny the potential power behind this move. So four-figure resistance at $1,000 should in fact fall this time around, which will bring in a great deal of technical buying. This is why precious metals shares were up so strongly yesterday, in anticipation of this occurring. (See Figure 1)
As with the gold chart above, the most important observation that can be made with respect to the breakouts across the precious metals sector that occurred yesterday comes in the realization volatility, as measured by the Bollinger Band (BB) Width Indicator, is just getting rolling, and that if its to expand during a rally sequence, a profound move would unfold. Here, as you can see both above and below, breakouts in this regard (BB Indicators) have not even occurred yet, meaning the best is still on the way. We do need to see precious metals shares continuing to outperform in order to signal positive possibilities in this regard however, so watch the gold stock to gold ratios today, with the Amex Gold Bugs Index (HUI) / Gold Ratio the popular choice by most. Of course if you want intra-day action, one needs to watch the GDX / GLD Ratio. (See Figure 2)
As suspected in my last communication, because last year saw such dramatic moves in equities during September, the seasonal inversion that began earlier this year could extend into the extremes period this year, which could run all the way to November. This means that because of the mature state of our markets, which translated infers our markets have become gambling casinos to the nth degree, speculators will buy enough negative bets on stocks (see Figure 3 below) to provide a floor under prices until the normal seasonal weakness window has passed, leaving a great deal of liquidity in need of a home over the next few months. It's important to understand it's that dynamic operating here, which on one hand is a positive over the next two months, but on the other will also define volatility moving forward as well. It's the gamblers you see, some betting on a market crash in season, and others betting on the seasonality of precious metals not letting them down this year. (See Figure 3)
Source: Schaeffer Research
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