Wednesday, September 15, 2010

Are Gold and Silver Breaking Out?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Gold hit an all-time high yesterday. Silver is trying to challenge its high from March 2008. Both are inflation indicators and new highs indicate paper money is losing its value.

Spot gold came within a whisker of $1275 an ounce yesterday and was up 2% at its high. Spot silver traded around $20.54 at its peak and has so far been a bit higher today. Unlike the U.S. stock indices, both gold and silver are in secular (long-term) and cyclical (short-term) bull markets. Their recent rise was based on reports that the Federal Reserve would likely engage in more quantitative easing. The trade-weighted dollar (ETF: DXY) dropped significantly on the news and fell below its 200-day simple moving average. The dollar has been in a secular bear market for many years and usually moves in the opposite direction of the precious metals.

The technical indicators for gold (ETF: GLD) are somewhat overbought and look like they are losing strength. Silver (ETF: SLV), is more clearly overbought than gold, but the technicals look better overall. In strong bull markets, rallies can continue on weakening technicals however. News, as is always the case, can override all other considerations - although it will have to be news about liquidity and central bank money pumping and money printing.

As I have stated many times, there is already a lot of liquidity flowing into U.S. stocks and other investment markets in the last few months. Prices for almost all assets are rising because of this. Stocks continually went up on bad economic news during the summer and while some incorrectly interpret this to mean that the market is forecasting a better economy, this is wishful thinking. Look inside a number of economic reports and you will notice that rising prices are an important reason they don't look worse. The mainstream media does not report this however because the Federal Reserve keeps telling them that 'there is no inflation'. Apparently though, the Fed forgot to inform the gold and silver markets. Perhaps they should get a memo out right away and put 'rush delivery' on it.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

1 comment:

Hal (GT) said...

Don't you think gold's got a ways to go yet? It was a nominal high but not an inflation adjusted high.