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Winds of Change Blow for Precious Metals Mining Stocks

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At this point, it seems that higher precious metals prices will be seen this fall and winter.

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Yesterday gold was little changed before the key Federal Reserve policy decision, a day after a German court ruling in favor of a eurozone rescue fund. The decision centered on challenges to Germany's participation in the 500 billion euro ($639.3 billion) European Stability Mechanism, or ESM. Critics charged that the treaty behind the ESM robs Germany's parliament of its constitutional authority over the country's budget and had asked for an injunction to prevent the country's president from signing it into law. In other words, the court ruled that it is constitutionally permissible for Germany to finance the debt of other nations.

The decision means the eurozone finally has two robust financial defenses against the debt crisis. The bailout fund will take its place alongside plans by the European Central Bank to buy unlimited amounts of short-term government bonds issued by troubled countries. The ESM can support countries by loaning them money, while the ECB bond purchases could lower the painfully high borrowing costs that are threatening Italy and Spain. Additionally, the ESM is also expected to join in purchasing bonds to support the ECB effort. Yet both the ESM and the ECB bond purchases are only stopgap measures. They can give governments time to reduce their deficits and cut debt long-term by reforming their economies so they can grow faster. One wonders if the countries will bite the bullet or delay once the pressure is off, as they have during previous lulls in the crisis.

The news of the German court decision Wednesday sent bullion to its highest level since the end of February. Also investors were hoping that the Fed will announce another round of quantitative easing (QE3) at the conclusion yesterday of a two-day policy meeting. Such news would be considered positive for gold, as injections of liquidity into the market tend to benefit the yellow metal.

What investors got from the Fed was something much bigger than QE3. What we got was an open-ended QE. $40 billion will be pumped into the US economy each month until further notice. Just as if the endless QE wasn't enough, the Federal Reserve has maintained its funds rate at 0.0%-0.25% at least until mid-2015.

The above is important because it is something that exceeded market's expectations. Consequently, we didn't see the buy the rumor, sell the fact type of reaction – what happened was bigger than the rumor, so markets got another positive impact.

This is a major bullish fact for the precious metals market. As Europe and the US continue their inflationary race, precious metals rally – and they should rally much higher – endless QE means that they virtually have to.

At this point, it seems that higher precious metals prices will be seen this fall and winter.

We've seen some bullish developments in the precious metals sector this week and last week. Let's now turn to mining stocks' technical picture to see whether they're in a similarly bullish situation as the metals themselves. We'll start with short-term HUI Index chart (charts courtesy of http://stockcharts.com.)



In the chart, we have a bit (!) of a bearish situation. With the index reaching the psychologically important 500 level this week, a level which has often provided support in the past, we could very well see it serve as resistance this time.

A moderately strong resistance line is also in place, one which is based on two local tops that were quite close together. The situation would be more bearish if the previous tops were father apart as this would make the resistance line a bit stronger.

At the moment of writing this essay, the HUI Index is at 516. However, the breakout is not confirmed and RSI is so extremely overbought that a correction or consolidation is now quite likely.
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No positions in stocks mentioned.
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