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Is Gold's Move Higher the Beginning of a Leg Up?

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Silver, on the other hand, is just beginning its decline.

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The decade that just ended was one in which the US endured two market crashes, one at each end of the decade, the terrorist attacks of 9/11, a war in Afghanistan, and a fiasco in Iraq that still drags on, Wall Street scandals highlighted by Enron, Hurricane Katrina, and the recent near economic meltdown.

Is it any wonder then that Time magazine couldn't quite decide how to call this decade? The magazine came up with a few names: Decade from Hell, or the Reckoning, or the Decade of Broken Dreams, or the Lost Decade:

Book ended by 9/11 at the start, and a financial wipeout at the end, the first 10 years of this century will very likely go down as the most dispiriting and disillusioning decade Americans have lived through in the post-World War II era…Call it whatever you want -- just give thanks that it is …over.


Noble Prize winning economist Paul Krugman had no problem at all coming up with a name for the decade. He called it The Big Zero.

In his New York Times column Krugman wrote: "It was a decade in which nothing good happened, and none of the optimistic things we were supposed to believe turned out to be true."

He has his reasons for calling the past decade The Big Zero. He says it was a decade of:

  • Zero job creation.

  • Zero economic gains for the typical family.

  • Zero gains for homeowners, even if they bought early. (Almost one-quarter of all mortgages in America, and 45% of mortgages in Florida, are underwater, with owners owing more than their houses are worth.)

  • Zero gains for stocks.

Krugman reminds readers of the excitement in 1999 when the Dow first topped 10,000. Summing up Krugman says:

"So there was a whole lot of nothing going on in measures of economic progress or success… So let's bid a not at all fond farewell to the Big Zero -- the decade in which we achieved nothing and learned nothing."

We're now poised at the beginning of a new year and a new decade. We can hope that the bad things that happened in the first decade were a coda to the previous century, and not an overture of what's to come. Today the US is cleaning up the mess from the largest financial collapse in history. There's no doubt, as we have written before, that the US will remain vulnerable to misgivings about its sovereign creditworthiness. This is especially so when you consider the high proportion of US debt held overseas.

What would we call this decade at Sunshine Profits? From our point of view it's nothing short of the "Golden Decade." It was surely gold's turn to shine. A $100 investment in gold when the market opened on January 3, 2000, was worth about $380 as of the end of the decade, for a total return of 280% and an annualized return of 14.3%. Gold stocks (as measured by the XAU Index) have also had a good decade, climbing 9.4% annually.

For this coming year and perhaps even for this coming decade, we're betting on silver and gold, also in the form of mining stocks.

Moving on to the technical part of the commentary, this week I'd like to provide you with analysis of gold and silver. Let's begin with the yellow metal:


Source: Stockcharts.com

The price of gold moved higher this week, but it was stopped by the resistance level created by the small December top. The history suggests that the gold market often corrects in the form of a zigzag, and the one that we've seen so far is, in my opinion, too small to say that "that was it".

Please compare the December 2009 downswing to the similar moves in the past, which I've marked with red rectangles. Each time, correction had two stages, and even the smallest one (June-July 2009) had the biggest upswing within it than what we've seen in the mid-December 2009. This alone suggests that the current move up is in fact an upswing within a move lower.

The current situation in the featured indicators: RSI and Stochastic, is also similar to the ones from the time frames marked with red rectangles, which serves as a confirmation of the above analysis.

Additional confirmation comes from the analysis of the white metal:


Source: Stockcharts.com

The situation on the silver market is also similar to the ones that already took place, also with similar implications to the ones mentioned earlier.

The tendency for the silver to correct in more than one stage is even stronger for the white metal than it is for the yellow one, especially after big upswings. This has a lot to do with the fact that silver is generally more volatile than gold, but I don't want to get into details of this mechanism in this particular essay. The point here is that what we've seen up to date is most likely just a first part of the decline. We doubt that the second part would take us much below the recent low, but it appears likely that it will take some time (a week or a few of them) before the final bottom for this decline is put.

Please take a look at the situation in the Stochastic indicator. During past corrections it formed some kind of double-bottom, after which it rallied to/above the 80 level only to correct soon after that. This is where we are today -- at the moment, the Stochastic indicator has just moved above the 80 level. Should the history repeat itself once again, silver may move lower soon.

Summing up, it may be the case that the bottom is behind us and the risk being left behind is too big for one's long-term holdings -- at least in our view. However, there are still several points that make this situation unclear in the short run.
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No positions in stocks mentioned.
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