The turning gears of Bernanke's beautiful machine continue to sound like music to the ears of precious metals investors! 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. ~ Precious Points: The All's Well That Ends Well, July 14, 2007

Stocks exploded to record highs on Thursday and Friday, but metals were mostly left behind. The suggestion is that the move in stocks was less related to fundamentals and more to sentiment, with a short squeeze in equities driving a rally that overlooked gold and silver. But now with gold confirming two weekly closes above the 5-week moving average, the metals could be heating up for their own run at new records.

The chart above shows two successful weekly closes above the 5-week moving average, suggesting the start of a strong new upsurge in metals. Seasonality is currently working against the metals and there is strong overhead resistance in gold, first at $680 and again just below $700, but over the past year every consecutive weekly close above the 5-week moving average has signaled a move to a new high.

Silver, as we've observed has been struggling lately, as illustrated by the convergence of the 5-day and 50-day moving averages. Despite violently breaking that support two weeks ago, silver has now successfully moved above both. Another weekly close above the 5-day moving average in silver would suggest this move has some staying power, but as in gold, significant resistance lies overhead near $13.40 and again just below $14. If we really start rolling, the possible target for this move is near $14.50.

The recovering technical picture with strong resistance remaining requires a look to fundamentals for further guidance. Last week's update suggested that declines in the dollar would extend and contribute to strength in the metals, but that a rate hike in Japan could introduce serious risk. The dollar did continue its decline early and Tokyo left rates unchanged, which sunk the yen and also contributed to the recovery in stocks and metals. Concern over a rate hike in August will probably stir some recovery in the yen, with negative effect for the dollar.

As described in recent updates, economic recovery should boost metals by working to expand money supply and increase inflation. Better than expected retail and consumer confidence encouraged continued buying in stocks that did not carry over into metals. One possible reason could be that total sloshing Fed repo funds actually declined slightly this week due to another heavy round of maturation. Furthermore, the overall data was not particularly strong, however, and so far the earnings picture has been mixed. Continued good news could help gold and silver creep above their resistance levels, but a really powerful move would be based on significant economic recovery.

And then there was the speech last week from Bernanke specifically about the question of inflation. Overall, the speech rang a bit more dovish than usual and suggested that while the Fed will continue its commitment to fighting inflation rhetorically and through spurious data, it stands ready to pump in new money as needed. As expected, Bernanke's policy, even as reflected in a purely academic speech, again was a boon for gold, which managed to close quietly higher that day, in contrast to stocks.

The chairman's need to talk down inflation in the face of rising long term rates and rising commodities, leaning on the credulity of the public and the credibility of the institution, may all very well be the preparation for a cut. Remember that if credit markets lock up and demand for new money drops off, then the fed's rate targeting pump loses its prime, or worse, switches into reverse and becomes a vacuum sucking money out of the economy. But this is not likely a fate to which Bernanke would leave us.

In the Q&A portion of his presentation Bernanke was explicitly asked about the relationship between money supply and inflation, and his answer was incomplete, if not outright evasive. What he concealed behind the smokescreen of academic terms was that the lag time between a massive injection of new money and a rise in prices throughout the economy can be extended and perpetuated, and more clandestine inflation perpetrated, if people believe hard enough that inflation pressures in food and energy are temporary and insignificant. Couched in an appeal for better information in how to steer public consciousness towards that end, the speech was another shameless attempt to understate inflation. But this always means two things: one, there is and always will be inflation, and two, it should just be ignored by the public. The bottom line is that Bernanke's speech was exactly the sort of rhetoric you'd expect from a man prepared to undertake a massive devaluation to try and stave off a credit crisis.

While monetary policy continues to bode well for the metals' longterm outlook, it's important to realize this will not necessarily occur immediately to benefit gold or silver. The near term outlook for metals continues to be volatile, but for now remains in an uptrend. A stronger fundamental outlook is developing, but there is still the risk that a retest of the lows is still ahead of new highs. But, if you're holding from the last test of the 50-week moving average in gold, you certainly have the room to see it through.