This essay is based on the Premium Update posted on October 15th, 2010

The Mid term elections are upon us and we thought to consider what impact, if any, they may have on the stock market and precious metals.

Whether you call it a recession, or depression, or deflation, or recovery, for tens of millions of Americans there's little difference. Americans point to the troubled economy as their most burning issue this year when deciding how to vote for 435 House seats and 37 out of 100 Senate seats, according to a nationwide CNN poll.

No big surprise.

There is good reason to believe that voters will push the new Congress to the conservative side of the pendulum. What would that mean?

Generally, it is believed that a more conservative government might lean towards self-control in spending (yeah, right), restraint in Keynesian stimulus policies, which means moderating the quantitative easing.

In the short term that could be good for the dollar and a near-term risk for gold. As the inflation worries could cease for some time, which would help the dollar and at the same time it could cause gold's gleam to fade temporarily as some people would believe that the inflationary period is over.

Last week we discussed the currency war and why it is good for the price of gold. We read an interesting article in the London Financial Times by Martin Wolf that explains why he believes America is going to "win" this particular war. We like his explanation, so here it is:

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world's surrender: the needed changes in nominal exchange rates and domestic policies around the world.

In short, what Wolf is saying is that US policymakers will do whatever necessary to avoid deflation. This will cause the prices of long-term assets to rise and encourage capital to flow into countries with less expansionary monetary policies, Switzerland for example, or higher returns such as the emerging economies. We believe it will also cause the price of gold to soar. We certainly agree here.

In the very long-term chart gold this week, (charts courtesy by http://stockcharts.com.) we see similar trends to what has been the norm since early August, nearly ten weeks ago.

In last week's Premium Update we stated that "we see that gold moved up to the upper border of the very long-term trading channel." Once again this week, this same trading channel has held and evidence continues to mount for a likely corrective phase to begin very soon. Gold appears unable to break out above the resistance line and although its price did rise significantly in the past few weeks, there does not appear to be enough strength left in this rally to delay the inevitable correction much longer.

This week, the RSI for GLD SPDR is still showing a level corresponding to an "extremely overbought" status (conversely, the USD Index' RSI is extremely oversold.) The current rally has brought gold's price to a level, which is indeed two times higher than the prior move below the June local top. This is an important development for setting short-term targets for gold and it further supports the theory that a consolidation is likely to begin very soon.

The volume levels that accompanied recent daily upswings were much higher than the volume we've seen when metals declined heavily last week. This is a pattern, which has been seen in the past and is often followed by a period of consolidation and price correction, so we might expect this situation to be repeated also this time.

At Sunshine Profits we are constantly researching and creating new tools to help investors maximize profits. This week, we have included a preview of our new charts. With options expiring on the 3rd Friday each month, Subscribers focused on daily trades can greatly benefit from these charts - they provide an approximate roadmap for trades around the stock options expiration days.

The chart for gold's performance prior to option expiration has been developed from averages from 2002 to 2010. It means that the line based on the 2009 - 2010 data (marked with red line) is reflecting the most current trends in this phenomenon (other colors are used to let you know how this tendency used to change over the years). The obvious pattern seems to be that gold's price tends to rise from Monday (day -4) to Tuesday (day -3) - Friday is marked with "0". This is generally followed by a decline and then a leveling out period with subsequent increases remaining below the levels seen prior to stock option expiration.

This appears to hold true even when the long-term trend is bullish. The options appear to have influences for the short-run driving prices higher before the expiration date. Perhaps stock options are, in part at least, the cause of such increases.

This tool is of even more significance-- we'd even go so far as to say, a whole lot more significant -- for shot term traders in mining stocks. Here is where this tool gives you bang for your buck, however we will leave that part to our Subscribers, along with many other tools exclusive to Sunshine Profits.

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!