Wednesday, September 16, 2009

Precious Metals Becoming More Precious

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Gold had another all-time closing high yesterday in New York, the second in three days. It is trying to rally to an all-time intraday high and complete its long awaited breakout. Gold traded as high as $1020 in the overnight markets. The all-time intraday high, also hit in the overnight markets, is $1033. There is gold's third time trading in the over $1000 area (and there were two more times close to $1000) in the last 18 months. Unlike the first two times, which were sharp spikes up, this time gold has stayed in the $1000 area for several days. The other two times were also in February and March, times when gold tends to peak for the year. This time gold is hitting $1000 at the beginning of its seasonally strong period. The gold charts are extremely bullish looking and gold has put in an 18-month base. Conditions for a strong , powerful breakout look good.

Gold leads the precious metals. The other precious metals are not even near their all-time highs, although silver is much closer than platinum or palladium. All three have industrial uses. Silver is the only one of the three with a history of monetary use. Silver already became overbought on the daily charts in early September and has continued to go up since then. It was as high as $17.33 overnight. Gold has not yet become overbought on the dailies. In strong rallies a stock or commodity will get overbought and stay overbought for months.

While the precious metals are rallying, the U.S. trade-weighted dollar is slowly crumbling. As of this writing, it is trading at 76.38, but has been as low as 76.19. The yearly low is 75.89 and this was hit 11 months and 3 weeks ago. A new yearly low could be hit at any time from today onward. There are a lot of traders that automatically short yearly lows and this is seen as technical weakness. The U.S. dollar has already hit multiple yearly lows against the euro in the last several days.

Buying into a gold rally is a lot better deal than buying into the current stock rally. The gold charts are technically very strong, while the stock index charts have shown a great deal of weakness, yet the rally somehow continues. The premise behind the stock rally, the reviving economy, is also false. The premise behind the gold rally, rising inflation, is quite solid however. Both rallies are fueled by the money printing quantitative easing that the U.S. Fed is engaging in. This has always caused inflation in the past and gold is telling us this is happening again.

A correction to yesterday's blog: the ticker symbol for the natural gas ETF mentioned is HZBBF.

NEXT: The Inflation Trade

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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