Gold Breakout Or Reversal?

In timing the gold and silver markets, people look to all sorts of charts and data to make a decision to buy or sell. They also look to the Federal Reserve and the various voting members along with Bernanke and see what their thinking is. In trying to put all of these various tools together in deciphering where gold and silver will go next, there are a few thoughts I have on what I’m seeing that still lead me to believe we have some troubled waters ahead for gold and silver. While some of the gold bugs say that gold and silver are about to break out since they have passed their 200 day moving average, there still could be another shake out ahead. Let’s look at the price movements of late first.

Gold and Silver’s Recent Run Up In Price 

If you have been reading my thoughts on gold and silver you know that I have stuck with one central theme in that gold and silver still, even today, react to what the U.S. dollar does. The last couple weeks we have seen a reversal in gold and silver because of a retreat in the dollar. One has to ask themselves, why is the dollar now weaker? The only legitimate answer, from a short term perspective, is because the Euro (see chart below) which makes up 57.4% of the dollar is stronger. Then one has to ask, why is the Euro stronger? The answer is, Mario Draghi, the President of the European Central Bank (ECB) got German Chancellor Angela Merkel to promise they (Germany) will do all they can to save the Euro.

And People believe that because of this, the underlying problems for the countries that make up the Euro will disappear? That we should now buy the Euro because a banker (Draghi) and chemist (Merkel) have spoken the words people want to hear (print money)? Really?

What’s important in the chart above is the July 2008 low for the Euro vs. the Dollar of $1.1978. This is the area that I have been telling readers to see if it holds above that price. So far it has, but barely as it touched 121.56 recently. What you can see from the chart above is a series of declining tops with various run ups in the Euro along the way. That is all we are experiencing now. The $1.26 to $1.27 range on the Euro will offer resistance for now and the dollar at that point should continue it’s climb higher. The Euro falling below that 119/118 level could signify the end of the Euro as we know it. I will be writing an article on the European banks in the near future that I hope clears up how bad things really are in Europe and for the Euro.

The Dollar Index charts below give the short term and big picture of where we are with the dollar. We are right up against resistance on the short term chart and I believe we are consolidating before the next move up in the longer term chart.

You can see from the above chart that the moving averages are all still pointing up.

What Do Treasuries Tell Us?

What’s really interesting to me is the fact that treasuries have now become stronger during this Euro run up and dollar decline. Why? Is it because smart money from Europe is trying to find safety or the perceived safety found in U.S. Treasuries? Possibly. The interest rate on the 10 year has fallen the last few days from a high of 1.836% to 1.67% today. This should be reflected soon in the dollar once the people in Europe finally discover the Emperor still has no clothes. As long as treasuries are strong and the rate falls, the Fed doesn’t need to do another round of QE just yet. Take a look at the recent price action in the 20 year Treasury Short ETF, symbol TBT as it shows a fall from the highs. When this ETF goes higher in price, it indicates weakness in Treasuries.

 

What Does the VIX Tell Us?

This is not to say, of course, that the U.S. financial system has its act together. It doesn’t. The positive data we see today is only temporarily showing some green shoots in housing and other areas. The banks still aren’t lending however and they are still not marking to market their assets, or anywhere close to doing so. The main reason that gold would break out, I believe, will stem from a banking issue in the future, not from any fear in the air. I have written much on this. Fear will come and it won’t be pretty when it does. It will also show up in the VIX which did show some fear today with the stock market losing over 100 points which has caused the VIX to reach a one week high. Is fear entering the picture? I don’t see any real major fear coming in until after the elections. Obama will do everything he can to get elected and I feel he will keep things status quo for the time being. The VIX is something to keep an eye on nonetheless because any Euro problems can spread quickly to the U.S. just as the U.S. problems spread quickly across the globe in 2008/2009.

Gold Breakout or Reversal?

So this brings us to gold and silver and whether we will climb higher from here or fall again.

Today gold and silver broke above their 200 day moving averages, causing some shorts to panic and cover, driving the prices even higher. this could continue a bit in Asia and Europe in the next 24 hours. This rise in prices occurred despite St. Louis Fed President Bullard saying this morning that as long as the economy is recovering, there won’t be any need for QE3. The gold and silver prices have since come down off their highs of $1,676.20 for gold and $30.95 for silver to settle at $1,670.40 and $30.54 respectively (at the time of this writing).

I make big assumptions with the Euro problems and that weighs heavy on what the dollar will do since the Euro alone makes up 57.4% of the Dollar Index. I put the odds of the Euro breaking the 2008 low of $1.1978 at about 75%. Why so high? Because I look at the economic data and see what it tells me. You must have people working to improve GDP and you must control your debt expenditures. Yes, the U.S. has its issues, and it will get worse here. But Europe has greater issues since the U.S. produces more than any other country and has a military that backs it. But the U.S., too, will run out of money to pay for things (neither Presidential candidate is offering real cuts). Europe will just implode first because Germany can’t bailout everyone else (Draghi and the ECB’s wishes) and that could affect gold and silver as a result of a stronger dollar in the short term, which very well could last until after the election as we move closer to the edge of the fiscal cliff.

Data from above table found here and here.

The unemployment rate is getting worse in every European country except Germany, but even that rate in Germany has ticked up. Naturally the U.S. unemployment rate is higher than what the government tells you as they no longer count those who have been unemployed over a certain amount of time, but we’ll use the government numbers for now since that’s what most of the unaware investing market looks at.

So basically what you have for Europe is 22 million out of work and 112 million working. Here in the U.S. we have 12.74 million out of work and 141 million working. Take Germany out of the equation for Europe and you have 19 million out of work and 90 million working, or about 21% unemployment. Germany can’t bailout everyone in Europe. Watch for Greece to fall first, then Spain. Something’s got to give and the U.S. dollar, being the lesser of two evils and with better data at present, should benefit from this, possibly putting some pressure on gold and silver prices. This, in addition to St. Louis Fed President Bullard coming out immediately this morning after the release of the Fed minutes yesterday, downplaying QE3, makes me say this. The Fed has to talk the talk of calming the markets. Until they can’t any longer that is.

Dollar cost averaging is still the way to go and one must keep in mind that gold should first be viewed as insurance against the coming banking problems of the world that I wrote about in Chapter 4 of my book Buy Gold and Silver Safely. As I said, my next article will be on the European banks. You know...the ones that CNBC said passed the stress test with flying colors in 2011.