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Fake Rally for Precious Metals or Start of Strong Move Up?


Several days of divergence between them and main stock indices will tell. For now, remain cautious.


Investing your money in a long-term position can be likened to navigating a ship to port. The compass (fundamental and technical analysis) points you in the right direction as you head out to sea. Even if your ship is sturdy (you've made the right call and are heading in the right direction) every once in a while a big, unexpected wave seems to push you off course.

And without question, since the beginning of the economic crisis, the seas have become especially turbulent.

One such wave was the announcement this Wednesday by the IMF that it would begin phased open-market sales of the remaining 191.3 tons of gold it plans to sell under a program launched last year to raise money for lending. The price of gold dropped 1 percent on the news.

To remind you, this comes nearly four months after India purchased 200 tons from the IMF, news that helped push the price of gold up. So what's the difference?

The IMF had announced last year that it would sell 403.3 tons of gold, about one-eighth of its total stock. Until now, the gold has been made available only to central banks on a first-come-first-serve basis. So far, India -- the world's biggest consumer of gold -- Mauritius and Sri Lanka have purchased a total of 212 tons of IMF gold. The average price for the three sales was a little over $1,050 an ounce, generating about $7.2 billion in proceeds.

In a carefully worded press release, the IMF said that "in accordance with the priority of avoiding disruption of the gold market, the on-market sales will be conducted in a phased manner over time."

The press release further noted that this doesn't preclude off-market sales directly to interested central banks.

It is well known that China is interested in increasing its gold reserves. China is sitting on top of a huge mountain of dollar reserves. In fact, a day before the IMF announcement, the US Treasury Department released data showing that Japan overtook China to become the world's biggest foreign holder of US Treasury debt, reclaiming the title for the first time in more than a year. China shed more than $34 billion in long-and-short-term Treasury debt in December, while Japan added $11.5 billion, according to the monthly Treasury International Capital report.

So, it wouldn't surprise anyone if China steps in and buys some of the IMF gold. Perhaps China is waiting for a better price.

I believe that the IMF announcement will have a negligible effect on the long-term price of gold. The IMF said it would stagger the sales. But even if it were to dump all the tons at once, it seems that they'd be almost immediately absorbed by China, Russia, Middle Eastern sovereign funds, and other central banks.

In this case, it seems that we don't need a confirmation that gold is still a very-long-term buy in the form of the news that George Soros charged into gold during the fourth quarter even despite the fact that gold prices had already run up substantially. He doubled the stake of his fund in the world's largest gold ETF, becoming the fourth-largest holder in the SPDR Gold Trust. As of December 31, gold is Soros's largest single investment.

Moving back to the analogy from the beginning of this update -- my firm has set our course and we'll keep a close eye on the charts to get us safely to port. This week, we prepared two charts for you -- one featuring gold, and the second one with one of our unique indicators. Let's begin with the gold market (charts courtesy of

In our previous essay, we wrote the following:

(…) we see that the similarity that was present during the latest decline is still present after gold bottomed. This time, however, it suggests that gold may soon need to consolidate for a week or so -- just like it took place in the past. Please take a look at the areas marked with red rectangles -- gold paused when it moved to the declining short-term resistance line (April 2009), or it broke above it and then verified it as support (October 2008, July 2009). Should history repeat once again, we can see a similar pattern also this time (…)

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