May 15th Market Thoughts

Posted on 15th May 2012 by Trevor in Uncategorized

Sell first and ask questions later. That seems to be the global investment strategy this week. Whether it was JP Morgan’s $2 billion loss, Greece’s possible exit from the euro, or ‘Greece of America’ California’s $16 billion budget deficit, investors found plenty of reasons to sell everything. US dollar cash and US Treasuries rallied, go figure.

I see no reason for gold /silver to be getting hammered this badly, as fundamentally the debt keeps rising by about 100 billion a month in the USA alone. However due to operation Twist this is not showing up now on the Feds balance sheet. Op Twist is where the Fed buys long term bonds and keeps rates at zero for the banks to artificially create a no lose carry trade for themselves.  Banks can buy Short dated bonds and are guaranteed to make 20-30 Basis points with no risk as the Fed has told them rates will stay at zero till 2014  . . .

The only reason for gold to fall is the slight strength in the US$ index.  But the move does not / should not mean gold and silver should be getting this badly whacked! Especially given the multiple issues in Europe and Japan Debt load.

U.S. Dollar Index Daily Chart  





















  The recent price action in gold has been quite ugly and price is resting at key support stemming from an intermediate-term descending channel shown above. Should the lower bound break to the downside a sharp move lower could play out.

It is important to remember that gold is coming off a monster multi-year bull run and it only serves to make sense that a nasty pullback that shakes out the bulls would be forthcoming.

Gold and silver both are starting to become oversold on the daily time frame. While the gold bugs have been feeling pain the past few weeks, the gold miners have been taken out back to the woodshed for a good whipping. The miners have been absolutely crushed in 2012 .

Gold Bugs Index Weekly Chart 









 As can be seen above, the Gold Bugs Index (HUI) has been under considerable selling pressure since early September of 2011. However, note how low the True Strength Index is based on 5 years of price data. We are nearing the same level that we saw back in 2008 which marked a major bottom that ultimately resulted in a monster move to the upside for the gold miners.

I am of the opinion that this chart demonstrates quite clearly that a great buying opportunity for gold, silver, and the miners is likely going to present itself in the near future. I will be watching this price relationship over the next while waiting for a strong entry point for a longer-term purchase. After this pullback concludes, the potential returns that could occur in gold, silver, and the miners could be breathtaking. 

The start of this week has been ugly so we may very well be there this week and with the bottom in place !

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