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Gold and Silver Sitting on the Fence and Raring to Go |
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“Precious metals traders had fingers burned on the profit-taking stove by selling stock index markets. Recent selling in stock indexes caused traders to sell good metals trades with profits because they needed the money to cover mediocre and poor trades in mainstream stocks. Further, there was disruption in the Yen carry trade. A rising Yen weakened stocks so gold stocks and other precious metal trades were sold to cover. Silver followed gold but refused to sell very much.” –Traderrog
One drawback-advantage in gold is the availability to exit and settle a trade in 48 hours making it so handy and liquid enabling a quick clean-up after other market messes that didn’t work out so hot. This is why we saw the tumble in gold price recently. When the Shanghai Composite Index fell -9% in one trading day, spill-over into other global markets gave everybody a haircut with few exceptions. Those that were hurt and had to cover, did so by selling fast, liquid positions in gold. Silver followed as it trends with gold. We found it quite interesting silver didn’t sell much holding fast in these strong headwinds. This to me is a primary indicator that silver, in the silver and gold rally race this spring, will be the percentage winner by a substantial margin. Gold is no slouch either as we just saw a private report using proprietary information that a certain gold index should rally 40% for 2007. I have never seen that ratio before and its proven success rate is so powerful I cannot conclude anything else but that a +40% 2007 rally must be a reality. The proven value of this formula was 96% correct. I am convinced.
We know there is large amount of stock trading using margin. Typically, traders are leveraging at a margin of 50% and the hedgies are pushing it 10-1 and in some cases, we have heard of 100-1. You cannot play in that ballpark unless you have massive cash reserves and exceptionally strong credit. Hedge Funds and the largest broker-dealers do this every day but those trading departments are so well funded and back-stopped, that on a bad day they could lose $50,000,000 and not even blink. They know they can make it back in a few days and then some, so why worry.
Our gold and silver markets are tiny by comparison and when the big hitter’s short them for profits it’s immediately reflected in our metals prices. Some metals traders have complained ETF’s have stolen trades from the junior and senior metals stocks. This is partially true, but on the other hand, they have provided a newer, firm stability to these sectors as their fund ownership of physical metals erased much volatility. Our favorite senior silver stock is steadier than most as they have $millions in silver bars in their possession fully paid. Further, they have a huge cash pile and are busy using it for new reserves and to open a very promising silver mine in Mexico.
We think the two lessons learned here are: (1) Gold and silver bullion is real money; not fiat money. When traders get cornered with bad paper, precious metals show their true worth by providing something even better than cash for bail-out tools. (2) Our second point is precious metals are regarded as THE top ranking asset that is not somebody’s else’s counter-party liability who’s owner may or not be able to pay.
Gold ETF (GLD) Two Year Chart With
Continuation Rectangle Break-out February, 2007
Gold ETF has shown us a continuation rectangle from June, 2006 to its break-out point on February 1, 2007. Those patterns, the longer they stretch sideways in time, can produce explosive moves either long or short once price finds new direction. Today, we are back in our rectangle after a failed, late February, 2007 break-out rally. Sometimes it takes 3-4 tries to escape the rectangle pattern. The first try failed but notice price clinging to the bottom of $65. Look what happened in April-May of last year. Based upon several factors we see this break-out coming again.
Silver ETF shows positive nearly perfect channel rally since it opened.
Yen versus Euro Chart Shows Carry Trade Moves
Here we see reaction to the Japanese interest rate hike to ½% from ¼% and
news the Japanese central bank would be slowing down the Yen-Carry Trade.
Traders were buying Yen for ¼% and getting over 14% in Iceland and lower but still very attractive rates in the New Zealand Dollar and the Australian Dollar. When the Yen shot up on this reversal news and trading action, we think lots of central bankers were burning the phone wires to calm this swift change as it was obviously roiling currency markets over the globe. After several soothing statements and some currency market adjustments by others, price dropped back near the 50 day average and the Yen-Carry Trade has resumed as before.
On the next page we see the GDM precious metals stocks index which has also painted a long rectangle. This index has been operating only a few months but when it was first offered, the numbers were correlated backwards to the markets. This enabled a longer look at what the GDM would look like if it had been on the market in those past months. The GDM is our preferred index as we like the composition of the stocks over those shown in the XAU and HUI.
By comparing all three of these indexes an experienced analyst can see some hidden price points, trends and trading patterns. Yesterday for our Trader Tracks readers we issued a special 7 page market alert to review and explain where markets are today and where we think they are headed.
For now they are straddling the spring trading fence deciding whether to sell down more or finally get moving in the normal gold and silver rallies.
We need to caution traders that major stock markets were quite disturbed and this threw many other sectors temporarily out of whack. The healing time can extend further than we wish but the outcome in our view is inevitable.
AMEX Gold Miners (GDM) Daily Precious Metals Stocks Index
This index has a long rectangle pattern with higher lows and the February 2007 breakout.
Its difficult to see but there is also an inverse head and shoulders pattern (mild) when the
last three bottoms were touched near 1,000 and previously at 900. GDM index has more stocks included than others and includes more of those we prefer to see within the index.
Summary
Watch carefully for breakouts in the precious metals and their stocks. Often, they do not move at exactly the same time but do trend together most of the time. This week’s rally in copper was terrific and is also a signal the metals are ready to move up once again. Copper’s new and powerful rally could be round one of the next ten round rally in gold and silver.
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Roger Wiegand, Editor, Trader TracksNewsletter, recommends trades
for gold, silver and energy and writes about market trends and activities.
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