Previous tests of the 50-week moving average have preceded significant rallies over the past year. Two consecutive weekly closes above the 5-week moving average constitute "confirmation" of a new upleg in the gold bull market... silver tends to exaggerate the trends in gold and... a tentative buying level is beginning to be described. ~ Precious Points: The Beauty of Bernanke's Machine, June 30, 2007

After bouncing decisively off the long-watched support at the 50-week moving average last Friday, the holiday-shortened week began with a move back above the 5-week moving average and ultimately closed there, a key level for the health of the current short term trend. Though it proved to be somewhat of a seesaw week, with gold retreating back to the 5-week average on Tuesday and breaking through on Thursday, the proprietary trend cycle charts gave us a buy reading Friday morning for a rally that took gold to a bullish weekly close. Recall that two weekly closes above the 5-week moving average is an extremely bullish trend signal.

Silver had been in somewhat more dire straits recently, its decline pushing through key support first at the 50-day moving average, eventually through the 50-week moving average as shown below. Notice the convergence of the 5- and 50-week averages in the silver chart, which has been characterized here as a warning sign for weeks, now points to strong resistance just under $13. Silver's advance rally Friday morning was further indication of a move back above the 50-week average in gold. Without another close above the 5-week average confirming a new up trend, gold faces a do-or-die convergence of its own.

For some, taking profits after Friday's rally will be enough, but for most, the positive week for metals begs the question whether this is a dead cat bounce after a breakdown, or a sustainable new trend. While stock markets await a new season of earnings and retail sales figures, the near term will probably continue to be dominated by the most recent hot topics.

Essentially, two, sometimes competing, forces are currently at work in the bond market that are also effecting the outlook for the precious metals. The first is the improving economic outlook, as illustrated most recently by Friday's employment data. This tends to raise yields positively for gold through the mechanism outlined last week whereby the Fed responds to increased demand for money by providing new funds to maintain its target (artificially low) rate. The decline of $2.25 billion in sloshing repo funds last week is negligible in light of the heavy maturation Thursday and Friday. Though the Fed's slightly less hawkish statement put a floor under the last bond selloff, the prospect of rising rates is alive again and is enough to extend, at least a little longer, the flurry of acquisitions and buyouts, and has probably prompted some home mortgage refinancing. Ultimately, these are all signs of an expanding money supply.

The Bank of England's hike last week emphasizes what's been stated in this update repeatedly and of which there's no longer any question: the global trend is towards higher interest rates. As seen over the past two weeks, this puts downward pressure on the dollar as it becomes increasingly less desirable for foreign investments. As if they needed any more reason to jump ship! Since the announcement of China's sovereign investment fund, the writing's been on the wall for the U.S. currency and financing of U.S. debt. After the last Treasury auction proved somewhat anemic, there's now concern the August refinancing could be notably weaker, likely sending bond yields higher still, but probably not without further pressure on the greenback.

So, at the expense of the dollar, Bernanke's steady target rate provides abundant new money to the strengthening domestic economy while foreign central banks exacerbate the situation by raising their rates, even if they are still woefully low themselves. Unless a monkey-wrench is thrown in at Congressional hearings next week, the turning gears of Bernanke's beautiful machine continue to sound like music to the ears of precious metals investors!

Of course, it's prudent to understand the downside to the rising interest rates around the world, which is that eventually Japan will raise its overnight rate and the world will flirt with the risk that, no matter how gradual and transparent the move may be, currency traders and other arbitrageurs will unravel enough of the yen carry trade to have a negative impact on valuations across asset classes. There's also an unknown level where rising domestic yields will have a similarly negative effect in the U.S. Though there are certain risks ahead that threaten a rather ugly ending, these major potential obstacles are manageable and still out on the horizon. Given the repeated testing and holding of the 50-week average in gold on Friday, this will remain the important level to watch for confirmation of the short term rally. The overhead resistance is well established.