At Last - A Bounce

Coming into today, gold had dropped $62.10 (9.7%) over the last 8 trading days, while silver had fallen $2.25 (17.3%). As a consequence, both gold and silver were oversold, so today's bounce is not too surprising. Gold climbed $9.80 (1.7%), and silver was up 42¢ (3.9%).

Given the severity and depth of the correction over the past several days, one could be excused for thinking that all of the problems adversely affecting the dollar have been solved. The reality is quite the opposite. For proof, take a look at last week's report of a record $68 billion monthly trade deficit.

Nothing has changed. The outlook for the dollar remains as bleak as ever. So it is not surprising that the precious metals remain in uptrends, as we can see from the following charts.

Both gold and silver have fallen below their 200-day moving averages, which is a sign of some technical weakening. That is of course a reason for caution until both metals climb back above their moving average. But note that both gold and silver held their uptrend lines. Support has held.

By the way, these are the same uptrend lines I have already been providing on these gold and silver charts. All I have done is change the short-term downtrend lines from green to red. I have done this purposefully because I want to highlight these hurdles. Once gold and silver climb above these red short-term downtrend lines, it is likely that the correction is behind us.

I include below a chart of the gold/silver ratio.

We can see that the ratio continues to decline. Though the descent is volatile, silver continues to outperform gold, which is to be expected in precious metal bull markets.

Given that gold and silver held support and did so from an extreme oversold condition, the possibility exists that we have made an important low. So do Friday's closing prices mark an important low?

No one knows the future, so no one has the answer to that question. In any case, it's the wrong question. We should be asking, has there been any news or new development over the past couple of weeks that has improved the outlook for the dollar? I'm not aware of anything.

Spending by the federal government remains out of control. Inflation hasn't disappeared, and in fact, it remains within the no-comfort zone by the government's own measures that understate the true rate of inflation. Though there has been a sigh of relief that crude oil is back in the low $60s, it is a price that not too long ago would have seemed outrageous. Crude oil and high commodity prices are still spreading inflationary shockwaves throughout the economy in the US and globally.

So in my view nothing has changed, except that gold and silver became better value. We can now accumulate them at prices considerably below those from a week or two ago.

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

This material is prepared for general circulation and may not have regard to the particular circumstances or needs of any specific person who reads it. The information contained in this report has been compiled from sources believed to be reliable, but no representations or warranty, express or implied, is made by GoldMoney, its affiliates, representatives or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report reflect the writer's judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. To the full extent permitted by law neither GoldMoney nor any of its affiliates, representatives, nor any other person, accepts any liability whatsoever for any direct, indirect or consequential loss arising from any use of this report or the information contained herein. This report may not be reproduced, distributed or published without the prior consent of GoldMoney.