Based on the October 5th, 2012 Premium Update. Visit our archives for more gold & silver analysis.
It would behoove those who still cling to a misguided faith in fiat currencies to pay close attention to what is happening in Iran. The rial swooned in a free fall as much as 18% on Monday to a record low against the US dollar. The collapse was so steep that Iranian currency websites blanked out the rate. The currency has reportedly lost 80% of its value since the end of 2011. It is literally getting to a point that it will not be worth the paper on which it is printed.
The economic sanctions imposed on Iran over its disputed nuclear program are hitting Iran where it hurts. Inflation is raging at an annual rate of 24 per cent, Iran has been all but frozen out of the global banking system, and its oil exports have been slashed. Britain, France and Germany are pushing for EU sanctions on Iran to be tightened further later this month, to close some of the larger loopholes. Iran's weak currency makes imports to the country more expensive and although a weak currency can theoretically make exports more attractive, Iran is in a bind since most countries don't want to trade with it.
And in a classic scenario, the Iranian government has tried to step in to make things better and bring the currency under control but has only made them worse. Last week it launched an exchange center aimed at stabilizing the rates, but the rial's fall has since increased. Previous attempts also include a sharp rise in interest rates in February and an order for an imposed exchange rate to be used both in banks and on the open market. At the time, the police were sent to change bureaus to implement the order but change bureau owners simply shut down and refused to comply.
Many Iranians have lost faith in the rial and are contributing to its instability by rushing to convert their assets and properties to foreign currency and gold. Turkish gold sales to Iran have soared as Iranians turn to the precious metal to protect savings.
Wait a sec. Isn't it for times like these, when the you-know-what hits the fan, that one needs to have physical gold put aside?
Gold has proven itself to be good money time and time again throughout history. It possesses all the properties to make it so: divisible, portable, recognizable and, most importantly, scarce - making it a stable store of value.
Investor and newsletter publisher Dennis Gartman told CNBC Tuesday that "Gold is just another currency. It is doing well in other currency terms... I am not a gold bug. I don't think the world is coming to an end, but I think everyone needs to own some gold."
We bet there are plenty of Iranians who wish now that they would have thought of buying gold earlier.
Let's now move on to today's technical part with the analysis of the general stock market. We will start with the very long-term chart (charts courtesy by http://stockcharts.com.)
In the long-term S&P 500 Index chart, we see very much what was described in Tuesday's Market Alert that we sent our subscribers this week.
The S&P 500 didn't really decline below 2008 lows last week and it holds up quite well also this week. At this time the move above the 2008 high appears to be verified. Additionally, the DIA ETF touched the neck level of the previously-completed reverse head-and-shoulders pattern, which is a bullish development as it further verifies the breakout.
The Transportation Average and financials don't confirm the above bullish developments, but their impact is not short-, but medium-term. So, it seems that a rally in stocks is in the cards. The situation is now more bullish than not.
Stocks verified the move above their 2008 top and the picture here is now bullish.
Let us now have a look at the intermarket correlations to see what this bullish picture in the general stock market could mean for the precious metals.
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. Generally, the short-term 30-day coefficients are still in the classic mode this week. The USD Index is negatively correlated with gold, and the general stock market is positively correlated with the precious metals.
Here we can see that the general stock market has bullish implications in the short and medium term. As we can see, the correlations between the USD Index and the precious metals in general are quite strong and it would be advisable to take this currency into account as well, when making your investment and speculative decisions.
However, the most important implication for the following part of the essay is that the general stock market is strongly and positively correlated with the junior sector (note high values of correlation coefficients in the row that is 3rd from the bottom). This means that the positive situation (technically speaking) in stocks is positive also for juniors.
Speaking of juniors, let's have a look at their long-term chart.
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 confirmed move back above the recent bearish head-and-shoulders pattern. This long-term pattern was clearly visible and confirmed - and yet, it was invalidated, which proves that strength of the sector. The situation is now bullish, and the long-term picture for the precious metals juniors looks very favorable at this time.
Speaking of juniors and their timing, please take a look below at our SP Junior Indicator:
As you can see, the indicator moves somewhat in tune with juniors, with the main difference being that it moves horizontally. Thanks to this and overbought / oversold levels (dashed lines), we can see if juniors are currently overvalued relative to senior mining stocks or vice-versa. When the indicator is overbought and starts to decline, it's time to limit one exposure to the junior sector, and when its oversold and starts to move higher, it's time to increase one's juniors' holdings. As you can see this approach was useful not only in 2008 but also in the most recent years. The key point here is that the SP Junior Indicator is moving higher after being oversold for several weeks - which makes it a very good time for one to think of increasing their exposure to the junior miners.
Please keep in mind that both above charts are of long-term nature, which means that they don't tell us anything about the short-term price moves - a correction may or may not be seen based on them, all they tell is that no matter if a correction is seen or not, juniors will likely thrive in the following months.
Summing up, the picture for the general stock market appears bullish at this time, and since it's positively correlated with gold, silver and precious metals mining stocks, it bodes well for these assets. The situation on the USD Index and the fact that the precious metals sector is overbought on a short-term basis, however, suggests that a correction is quite likely to be seen soon.
Still, no matter if a correction is seen soon or not, the case for the junior mining stocks seems really favorable, as the move back above the recent bearish head-and-shoulders pattern appears to have been verified. Additionally, the SP Junior Long-term indicator suggests that juniors are likely to outperform senior miners in the weeks to come.
Meanwhile, if you are considering purchasing gold (or you've been looking for a good place to direct your friends to when they ask you how to do it) we suggest that you look at our newly-released how to buy gold section, in which we awarded each method from 1 to 5 stars according to their usefulness to investors and traders.
Thank you for reading. Have a great weekend and profitable week!
