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Gold Miners Index May Be Warning Us
The past couple weeks I have been keeping a close eye the price of gold and the gold miners index. I check to see if its pointing to higher or lower prices in the near future using inter-market analysis, price and volume, along with technical analysis. At this time the charts are still pointing to lower prices in the coming days or weeks.
Taking a look at the daily chart of Gold
As you can see it has formed a bear flag with declining volume and the price has drifted up into a resistance level. This combination typically leads to lower prices. With international fears floating around and the fact that inflation has started does make me a little weary of shorting gold but one thing I have learned over the years is that trading on fundamentals and news clips seen on TV is not a reason to pass on a setup if one forms in the coming days. The only thing that pays in the stock market is when the price action goes in your favor. This is why I focus on price, volume and momentum while avoiding what others are saying elsewhere. Trading is a numbers game and I put my money on the table when the odds are clearly favoring one direction. Unfortunately I am trading trades against what the masses think and feel is the right thing to do.
Its Super Gold Sunday!
While Ben Bernanke says we are not seeing any inflation, I think most of us know that is a load of BS as other countries like Egypt see food prices surging. Over the past couple years everyone has been talking about how inflation will soon start and that has been one of the main driving forces for higher precious metals prices.
As we all know the market does the opposite as to what the majority of investors are doing. And while everyone has been buying metals in anticipation of inflation, I find it amusing how inflation for the first time is clearly presented on TV (Egypt issues) and we see gold and silver trading lower than they were a month ago. Seems like the buy the rumor sell the news lives is playing out. But the question everyone is starting to ask is how far will the metals correct?
Do I See Lipstick On A Pig? Or Is The Stock Market and Gold Still Going Up?
As most sophisticated investors and traders are aware, the U.S. Federal government has run up significant deficits and the long term debt burden is becoming a drain on Gross Domestic Product. That being said, most economists are discussing the possibility of a major decline in the value of the U.S. Dollar going forward as inflationary monetary policy begins to strangle growth. While that view point may prove right over the long haul, in the short run most traders are not likely expecting the U.S. Dollar to rally.
The U.S. Dollar is expected to reach a multi-year cycle low in the near future. From the cyclical low, I expect the U.S. Dollar to regain a strong footing and work higher against the crowd. This is not to say that the U.S. Dollar will not eventually decline, but financial markets do not work that easily. Shorting the U.S. Dollar is a crowded trade and Mr. Market punishes crowded trades quite often by pushing prices the opposite of what the heard is expecting. Should the U.S. Dollar find a strong underlying bid, precious metals and domestic equities would feel the brunt force of such a move. While it remains to be seen if the U.S. Dollar rallies, if it does it will catch many traders and economists by surprise and the unwinding of the short dollar trade could unleash a wave of buying that we have not seen for quite some time.
