Mixed Signals

The precious metals are giving mixed signals. Both metals remain in the correction that began in May, but the similarities end there. Silver is trying to move higher, but gold is not yet ready.

Normally, silver leads in precious metal bull markets, so the present circumstances are not unusual or surprising. But it begs the question. Can silver pull gold higher so that both metals resume their long-term uptrends?

We can see that gold remains within the 'pennant' formation that has been forming since May. In a 'pennant' the gains from the previous advance are consolidated, so pennants are bullish patterns. Once the consolidation is complete, typically the uptrend resumes with new highs reached soon after the breakout from the pennant. But compare the above chart to the one of silver below.

Silver closed Friday at a new 3-month high, but gold is lagging. In other words, silver closed at its highest level since May 30th, while gold closed Friday more than $25 below the $650 level reached at the beginning of August.

Silver's relative outperformance is clear from the following chart of the gold/silver ratio which is now at the lowest level since early May.

So what's next for the metals? No one of course knows - the future is impossible to predict. But we can make some basic conclusions from the above charts.

Both precious metals are within bull markets. They are in powerful uptrends, with their current price above both their 200-day moving average and long-term uptrend lines. But both precious metals remain below their May peaks, so their correction continues. In this regard, the relative outperformance of silver is noteworthy. Given that silver normally leads, its strength may be signaling that the correction is nearing its end and that both silver and gold will soon be moving higher.

That conclusion is logical. The factors that have been driving the precious metals higher for five years have not disappeared. Foremost among these are three key problems with the dollar.

1. The federal debt is growing, not shrinking, meaning more dollars will have to be created out of thin air to finance this debt.
2. The economy is weakening, and the Federal Reserve has stopped raising interest rates in order to avoid a recession, which it now deems more important than fighting inflation.
3. Sensing the growing weaknesses in the dollar, central banks - with the Bank of Italy being the most recent example - continue to diversify out of the dollar, the world's reserve currency.

The logical way to diversify out of the dollar is to buy gold and silver. It's no wonder that the precious metals are doing so well - gold is up 41% over the past year while silver has jumped an eye-popping 85%.

Published by GoldMoney
Copyright © 2006. All rights reserved.
Edited by James Turk, alert@goldmoney.com

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