Week Ending 2/12/10
The following excerpt is from the latest full-length market wrap report, available only at the Honest Money Gold & Silver Report website. All major markets are covered: stocks, bonds, currencies, and commodities, with the emphasis on the precious metals. There is a lot of information on gold and silver, not only from an investment point of view, but also from its position as being the mandated monetary system of our Constitution - Silver and Gold Coin, as in Honest Weights and Measures.
The world's attention is focused on Greece's sovereign debt problems - a budget deficit that is 12.7% of gross domestic product. Consequently, Greece needs to sell 53 billion euros of debt this year, the equivalent of about 20% of its gross domestic product.
This has caused the yield on Greek bonds to rise to 7.16%, which in turn lowers bond prices. For 2009, Greek bonds had a negative return of 0.76%. The spread between Greek bonds and German bunds is about 300 basis points, although down from a high of nearly 400 bps.
Greece's bond problems have heightened risk aversion, sparking a sell-off in the euro, and a subsequent flight to safety into the U.S. dollar. Liquidity now trumps all other concerns. Investors are focused on the return of their money, as opposed to the return on their money.
Since the beginning of the year, the euro has declined 5% versus the dollar and almost 8% against the yen. And Greece is not the only concern on the horizon: Spain, Portugal, Ireland, and other countries have similar debt problems, not to mention the U.S., which is why interest rates are rising in the U.S.
As if the above wasn't enough bad news for the markets to overcome, China announced it was raising reserve requirements on bank deposits, as they did in mid-January. The People's Bank of China (PBOC) is trying to reign in a loose monetary policy that is fueling a crack up boom. Real estate prices are rising, increasing fears of a speculative asset bubble - sound familiar?
With all this uncertainty it is easy to see why investors have become more risk averse. The EU's announcement to stand behind Greece had a short term calming effect, but the markets want to see something more than just talk.
Early next week, the EU ministers are supposed to address Greece's debt problems. If the market likes what it hears, a relief rally will occur. If not, the euro could sell off further. All eyes are on Europe.
Gold was up $27.10 to close at $1099.30 for a weekly gain of 2.54%. This was a good performance considering that the dollar was up for the week as well. It seems that gold is sensing or expecting the dollar to decline (correct).
In last week's report on gold, I stated that: Downside momentum is waning and RSI and the histograms are showing slight positive divergences. Friday's candlestick was a hammer, which suggests that downside momentum is turning and that a short term reversal may be at hand. The open gap above looks inviting.
While gold did rally up $27, the gap has yet to be filled. The daily chart below shows positive divergences in both RSI & MACD, and MACD has made a positive crossover.
The histograms have turned positive as well. The weight of the technical evidence points to higher prices, but the dollar and Greece's debt problems will play heavily in the mix.
Also, if a rally does occur, it may not be anything more than a short term affair. There may yet be another downside move that tests the $1000 breakout area. I have discussed this for weeks and it still remains a viable scenario, although not the only one.
If a short term rally unfolds, it should be taken one day at a time. Constant reassessment of the landscape will be needed, and adjustments made accordingly. Email alerts will keep subscribers posted.
The weekly chart shows that the 50% Fib retracement level has held as support thus far. Highlighted in tan is the long term support band around $1000.00. This is the breakout area and neckline of the inverse head and shoulders formation discussed back in May, before the right shoulder had formed.
At that time I projected a possible upside target of $1300. Gold reached $1226.40. Subsequent to the breakout to an all-time high, the probability of a pull-back to the breakout area has been discussed on a weekly basis. It still remains on the table, although its likelihood is slowly lessening.
Up next is another daily gold chart, which shows a falling wedge pattern that is usually indicative of a reversal, but not always. A breakout above the upper trend line is needed on expanding volume.
Of some concern is Friday's hanging man candlestick that can mean that upside momentum is waning; however, it needs to be confirmed. We will know soon enough. I lean towards a positive resolution, which is why both physical gold holdings and pm stock holdings were increased in the model portfolio.
Last week's report discussed some of these new positions: IAG, GOLD, & NEM. Two new positions were added this week, which are accessible to paid subscribers only.
The gold stocks had a good week, gaining +3.61%. As with the other markets, the pm stocks are basically on hold waiting for word from the EU on Greece and the dollar's subsequent reaction thereto.
On Friday the gold stocks were hit pretty hard in the morning, but they came back to recoup most of their losses. Some actually closed up on the day, two of which I purchased. Considering the amount of bad news, I thought the action was encouraging, hinting at a short term rally.
In last week's report I stated:
After all the dust settled, the gold stocks, as represented by the GDX index, gained 4% for the week, with their big +5% reversal day on Friday. Last week's report stated that we were closer to the end then the beginning of the correction; however, this does not mean that the exact end is definitively here. Friday's huge candlestick suggests a reversal, which now must be confirmed by follow through action.
Even if a snap back rally unfolds, it is still possible for the GDX to correct further down and make new lows, so we must be patient and take one step at a time. Let's see if we get a snap back rally; and if we do, reassess the new landscape that comes with it. Then we go from there.
We've gotten a bit of a rally, but the burden of proof is on this coming week's reaction to whatever news comes out of the EU. If the market likes what it hears, the dollar should correct, and gold will advance - if being the operative word.
Last week's action was promising, but it still needs follow-through confirmation. Entering on recent weakness has provided a cushion or margin of error in case the rally doesn't develop further.
The daily chart shows support at 40 holding, with resistance above around 45-46. MACD has made a positive crossover, and the histograms have turned positive as well. CCI has moved from oversold to positive territory, suggesting further upside is likely.
The weekly chart shows that support marked by the 38% Fib level has held so far. Overhead resistance is indicated. As I have mentioned for weeks, the gold stock's fate rests not only with the price of physical gold, and hence the direction of the dollar, but perhaps more importantly, with the direction of the overall stock market.
In today's turbulent times of financial crisis gold and silver are more important than ever. Some analysts are saying that the precious metal and commodity bull markets are over. Is this true? Might neither be over? What other possibilities are there? Where are the best opportunities?
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Good Luck. Good Trading. Good Health. And that's a Wrap.