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Dollar Tops As Precious Metals Bottom

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There's more to seasonality than summer doldrums.

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This has surely been an exciting week for gold and silver investors. The post-Halloween rally, which I mentioned in a previous Premium Update, took metals and corresponding stocks substantially higher and gold itself reached new highs -- at least in nominal terms.

The mainstream media are now reporting gold-related stories on a big scale -- recently, "gold prices" was the second-most searched phrase on Yahoo's finance page.

The contrarians among us might be concerned about this fact, as we all know what happens when everyone gets on the same side of the boat. However, gold did recently break above $1,000, and also verified it, so the excitement now is quite natural. In other words, there's no divergence that would indicate that a top is in.

On the other hand, I'm still receiving e-mails from readers who suggest that gold doesn't have to go up, that it's too high, etc. This is encouraging because it means a certain amount of investors are still out of the market, and can get in, thus fueling further gains.

The divergence that I'm referring to would take place if we were getting close to serious resistance levels after a huge rally without any breather whatsoever, and still everyone and their brother would be bullish on gold. This is what I prefer to see, as a confirmation, when timing tops. That was the case before the February 2009 top.

If you've been reading the news and following my essays, you know that the International Monetary Fund (IMF) announced in September that it would sell 403 tons to finance loans to developing nations. It was a foregone conclusion that the IMF would sell the entire amount to central banks rather than flood the open market.

Central banks themselves are no longer selling gold. Rather, they're holding on to their gold reserves as the value of fiat currencies decline. In some cases they're increasing their holdings as countries like China, with large holdings of US dollar assets, are worried about the declining value of the US dollar.

Therefore, we have another signal that the fundamental situation remains favorable. Still, it's not fundamental factors that drive markets in the short- and medium-term -- emotions do. This is why we need to turn to charts and their analysis for more details as to what the next several weeks and months may bring us.

Let's begin with the US dollar.


Source: stockcharts.com

The medium-term chart confirms that the "breakout" has been barely visible, and that it isn't a significant development -- at least not yet.
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No positions in stocks mentioned.
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