The Dollar Confirms a Possible Silver Pullback
By Przemyslaw Radomski, CFA Feb 10, 2012 1:45 pm
The medium- and long-term outlook for silver remains bullish, but the short term is now more bearish than not.
“It was the best of times, it was the worst of times, it was the age of wisdom (for those who invest in gold), it was the age of (central bank) foolishness, it was the epoch of belief (in Chinese growth), it was the epoch of incredulity (in fiat money), it was the season of Light, it was the season of Darkness, it was the (Arab) spring of hope, it was the winter of (Syrian) despair.”
With several of our own additions in parenthesis, these are the opening lines of the famous novel A Tale of Two Cities, by Charles Dickens whose 200th year birthday was celebrated around the world this week. His words seem just as true and relevant today as in the time in which they were written.
Greece played the Artful Dodger this week and missed another deadline to approve conditions for a second €130 billion bailout on Tuesday night because of last-minute haggling with international lenders over emergency spending cuts. Negotiations to save Greece from a disorderly default are now teetering on the edge.
The delay fueled anxieties that Athens may be forced into a messy default next month and triggered concern over whether Greece remains committed to fiscal reform after two years of failing to implement measures agreed in return for financial support. Greece has already missed two deadlines this week. Finally a deal was presented for approval at a meeting of eurozone finance ministers Wednesday only to be sent back to Greece as incomplete. They also warned of more intensive involvement in the Greek economy to improve tax collection and accelerate the sale of state-owned assets.
Earlier in the week the Great Expectations that a Greek rescue plan will be completed drove the dollar down sharply against the euro and boosted gold 1.5% on Tuesday.
Gold could face a short-term pullback if Greece strikes a deal, as it may hurt the appeal of safe-haven assets, but on the other hand it will be good for the euro (bearish for USD Index), which might be bullish for gold. In the long run, the lingering eurozone debt crisis is expected to support sentiment in gold.
Charles Dickens said: “Do all the good you can and make as little fuss about it as possible.” To see what good we can do for precious metals investors, let's begin the technical part with the analysis of the USD Index. We will start with the very long-term chart (charts courtesy of http://stockcharts.com.)
In the very long-term USD Index chart we see no significant changes. Thursday’s closing index level is slightly below that of a week ago, but the recent move back below the long-term resistance line has not yet been confirmed. The index level is now more or less right at this support-resistance line, and the medium/long-term situation is slightly more bearish than not.
In the short-term USD Index chart, we see that the index “somewhat bottomed” at the cyclical turning point. Instead of a rally, a pause has followed with some sideways trading and small moves to the downside although declining at a much slower pace than seen in previous weeks. It seems likely that the index could actually rally in the very short term but the outlook for the medium term is bearish.
The situation for the USD Index appears rather bearish for the medium term but bullish for the short term, which might be a bearish short-term indication for the precious metals sector. It is also consistent with our recent view on the mining stocks part of the precious metals sector published on February 3, 2012 in my article on the likely top in mining stocks (see Local Top in Mining Stocks Might Be Just Around the Corner):
(…) the medium- and long-term outlook for the gold and silver mining stocks is positive, however a correction is likely to be seen soon – perhaps it will start next week. Long-term investors should consider purchasing junior mining stocks, while short-term traders might want to trade the coming correction.
Since the dollar is negatively correlated with the precious metals market, the likelihood of a rally is bearish factor for the precious metals sector – also for silver.
A look at the very long-term chart reveals a rather uneventful week. Silver’s price has been in a sideways trading pattern during the past two weeks after a strong rally in which the red support-resistance line was pierced and volume levels were significant. With silver now above this line, it seems that a move back to it, a test of the breakout may in fact be seen. The 38.2% Fibonacci retracement level based on the 2002 to 2011 rally is also in play and will likely assist in stopping a decline as well.
Summing up, the medium and long-term outlook for silver remains bullish but – also based on the analysis of the USD Index – the short term is now more bearish than not.
For the full version of this essay and more, visit Sunshine Profits' website.
No positions in stocks mentioned.
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