The moment of truth for PM is coming

Let's see if gold stocks and silver will be able to confirm the gold rally. The high of 2008 is at about 57 :

For the silver we're close to the  2008 high too:

Is Ben really almighty as he may pretend and can change natural lows of deflation and inflation:

The coming  days are really important and will show the direction for the future market action not only in the PM sector.

Gold, it seems to be over, at least for a while

Is it a truncated 5th or there is one marginal high, say around 1280, in cards?

 

Fat fingers?

May be, may be not, after all it's not that important:

The Gold/Silver ratio is surging 3d day in a row:

And what's about US treasuries, they were already rallying for some weeks:

So, was it really because of a fat finger?

Precious metals: time to get out

Gold and silver were in the uptrend since the beginning of February. But it seems their run up was a mere  correction which is about to be done.
Gold has corrected 78% of its initial decline since December '09.

The move down will be confirmed after the breach of the low trend line (now at about 1130):

 As for the silver, the story is about the same, except that the correction was  a bit deeper.

 And as for the broad market, the  drop of PMs will be anything but bullish.

Precious metals looks like ready to plunge

During some days the strengthening dollar didn't do much on precious metals. That's true, the strength was mainly due to the euro weakness.  Yesteryear, high-yielders  like AUD have joined the party and we have finally  had a sell-off in gold and silver. But, in  the most important juncture we find the unhedged gold producers index HUI.

 The GSR (Gold to Silver ratio) seems to be on the point to rally in more impulsive fashion than it did until now.  And that, as we remember, is an obvious sign of mounting expectations of deflation.

In the "real economy", IBM has reported its earnings and put aside a "better than expected", we note the drop in the consulting business revenue, - the clients of this IBM's unit don't want to invest in new contracts and sometimes aren’t resuming the old ones.

The precious metals weakness

Precious metals are  weak  these times, breaking my preferred support levels of 108-109 on the ETF (GLD). Silver on Tuesday has confirmed the gold persistent weakness putting in a new low since this wave down has started. So, for now I'm considering highly probable the test of 100-102 range for the ETF GLD (1010-1030 for physical) and the down trend line (at 14.90) for the silver.

This impulse down bodes well with an expected continuation of the dollar strength. I don't see any meaningful correction before 81 is reached.

A view on the precious metals

In the precious metals complex, I'm watching closely 3 components : gold, silver and the gold bug index HUI. Until the recent sell-off, the three have advanced more or less synchronously. Moreover, the run in the precious metals that preceded  was  real not only in US dollars, meaning the investors are scared of  the  (hyper)inflation on the global scale.
As the dollar has started to gather some strength, these hedges have been thrown away. But, as far as we continue to stay in "corrective mood" in the broad market, the things are, in my opinion, not done, especially for gold. The yellow metal's sell-off is looking much as a correction and I would expect gold to reverse from 108-109 range to push higher at the beginning of New Year as high as 126-132 for the ETF (GLD) or 1270-1330 for cash. Indeed, I would expect gold to make new historical highs as we enter the initial phase of the new wave down for stock indexes,   it was already the case  in the 4Q  2007 and 1Q 2008.

For the gold miners and the silver, the things are much trickier. They are more sensitive to the prospects of the broad stock market. And, in my opinion, they are far from being bright at this point.The gold bug index has stopped its advance right before the top of 2008, rising the probability of the double top.

The silver has reversed right under its Jul 08 minor top, nearly my preferred level of March 08 gap (19.40). I must say, that the whole advance in silver and HUI looks to me as corrective, since I can't rule out that their declines from the March 08' was in impulsive way.

So, my conclusion: the gold is very certainly correcting and will take new highs in the beginning of the 10', pushed by the deflationary forces. We may have the situation where gold and dollar move in the same direction. As for the  gold stocks and silver, the situation is not easy, at least they will lag gold, creating the situation of non-confirmation.

The wind of change

So, the expected correction has finally started and, as for me, did the most of its job last week. In my opinion the trend change is  now  confirmed for semis, small caps, home builders and transports. For Nasdaq my scenario seems to be followed with an exception of starting point. The only broad group where the top is clearly not in are big caps with DOW Industrial and XMI as benchmark indexes.
For inflation related stuff  things are a bit trickier. On one side the GSR (Gold to Silver Ratio) indicates the bottom is in.

On another, gold price and USD index charts still looks uncompleted. The same story for emerging markets ETFs. They had such a strong momentum before the correction has begun, that I can't see them not to make new highs before we'll actually roll over.

Terra of Uncertainty

Precious metals continue to disappoint, while USD continue to sink. Looking at charts of gold and silver, it seems that we didn't complete the movement and have to push a bit higher. At the same time gold to silver ratio remains in the area of uncertainty

Should we cross the blue line and it will send a warning that liquidity is dissipating and the risk assets will be put under pressure.
In the equity space, big caps continue to outperform small ones and techs have clearly lost their leadership. Investors are still bidding stocks, but becoming more defensive.

Mish on USD and Gold

An excellent post from Mish about the US dollar and Gold and where we're with it. Just wanted to correct his thoughts about the European banks:
1) European banks are arguably in as bad a shape as US banks because of loans to Latin America and the Baltic states.

We should add a higher level of leverage of European banks if compared with their American peers. The loans were given to the whole Eastern Europe, not only Baltic states. Much of them were spent on real estate speculations of all sorts and  the bear market in many countries has barely begun. The problems in continental Europe exist as well but we didn't even see the beginning of their resolution. I'm very bearish on the European bank system in the long run and hence on the Euro its self.
Will the single currency become the deception of 2010?

Complacency and Confidence

The words associated with Wednesday's session.
The broad indexes are approaching critical levels of resistance, Intel beats the Street and ends near the lowest level of the day, - to say this performance was largely anticipated. The volatility index (VIX) make new lows, showing there really isn't much fear in this market. AlphaTrader has initiated a long position in volatility via VXX with a goal to stabilize the whole portfolio in case, just in case, everything is not that good the market seems to believe.

Silver and Gold were quite disappointing, failing to advance in this risk and inflation friendly environment. Looking at my favorite chart of gold to silver ratio, I find it looks indecisive at the moment.

To complete the pattern, the ratio should go at least to 55, which would give us 20 bucks silver with, say,  1100 bucks gold.  In fact, the task is not impossible, given the current weakness in USD which, in my opinion, should shortly land around 74

Will precious metals anticipate the bottoming USD and decline in advance or will we have a spike provoked by the fear of the global inflation. Despite the appearance, this market becomes very tricky. The gold to silver ratio is the thing to watch very closely.

Is Gold the best hedge against the inflation?

My positive opinion on precious metals has materialized in the new historical highs for gold and cyclical for silver. The public attention has been largely attracted by the gold installing above 1000 dollars mark. As for me, I'm happy with just new cyclical highs in silver. Really, is the gold the best hedger against the inflation (or should we say reflation) where we are supposed to be ?
Looking at gold to silver ratio we see that gold is a strong outperformer in a deflationary environment, as the one we have experienced last fall. Since the reflation policy has started to work, the silver has started to outperform gold.

We can even try to judge the "quality" of the reflation policy regarding the eurozone on the chart with gold priced in euros: the recent top in dollar is far from confirmation.

Or to find  which country is the biggest bénéficier of the policy of global reflation, looking at gold priced in Australian dollars:

Even Dow  has managed to do better since the reflation attempt has begun:

So, my conclusion is that gold as well as cash is the best investment during the periods of credit stress which we have seen during second half of 2008 and 1Q of 2009.  But for the period of  "reflation" gold under performs other assets (except cash)  and will even further under perform silver should we enter a period of higher inflation.

No Top is in, yet

So, it seems, it's a bit frustrating to be a bear theese days.
Yelnick and a lot of other elliottists have reiterated recently "last chance to exit" calls, but no chance, we haven't entered the first wave down, yet, - it's only a zig zag correction. Indeed, it would be surprising to start a new leg down a priori without any notable non confirmation signs. Hopefully, during this new leg up, we will be satisfied.
I'm looking, at least, for a relative underperformance of technological and homebuilders stocks comparing to traditional big caps. On the other hand this wave should mark the highest point of price and optimism for inflation related stuff, like EM stocks/bonds and for precious metals sector as well: "Hey guys, we're facing a hyper(re)inflation, no?"

Is volatility turning up?

So, yesterday's start of 4Q has given some clarification about where we go.
First of all, the VIX (implied volatility) has closed above 100 DMA, first time  since the beginning of this rally.

Homebuilders index has closed bellow the previous lows of August and September.

On the other side, Gold and Silver still looks good, showing the potential of new highs in the nearest future.

So, I'm sticking to my current opinion from the previous post about the NASDAQ and most markets in general. We should have some more upside movements, however some non confirmations will show up.