Gold, Silver, and the US Dollar: A Trend, Consolidation, and a Reversal

METALS MOMENTUM

Looking at the news and looking at price reaction, there sure seems to be a lot of head scratching when it comes to precious metals and the US dollar right now. Today in the fed minutes, it was released that a lot of the fed governors are open to further bond buying, but due to steadily recovering economic numbers, it doesn't seem like something they will need to do anytime soon. Non-farm payroll  increased 243,000 net jobs in January. That helped lower the unemployment rate for the fifth straight month, to 8.3%. Also, car sales are up, as is consumer borrowing. This is not at all surprising when the FOMC rate is at the lowest in history and in the last meeting it was announced that the fed won't raise rates until late 2014. Still, even with all this positive economic data, the dollar has failed to show any follow through strength, and precious metals continue to hold at current levels.

So what in the world is a trader to do? Time to go back to the charts...

The US Dollar is pretty self explanatory from a long-term trend standpoint. I asked my five year old daughter, "Which ways this one going sweetie, up or down?" Without even looking at the volume changes or bar formations she said, "Down Daddy!" Ah the market intuition of a 5 yr old! If you really want to  break it down, the US Dollar has been in a downtrend since the Nixon shock in August 1971. Recent bounces are not surprising, considering the market has lost about 34% since 2001 on the open market. The recent price movement is surprising when you try and analyze the fundamentals. With all the positive economic data coming out recently, why is the dollar making only a half-hearted bounce here? Who knows. What I do know is that this most recent bar on the monthly chart looks like a reversal bar. After making highs of almost 2.5% higher than the open, the market settled negative for the month. The push higher on the single bar as well as this most recent bounce have happened on steadily decreasing volume, which implies the crowd just isn't there to support the movement. I think if the US Dollar is really going to recover, there needs to be a high volume breakout to the upside and soon. If all this positive data is failing to help the Dollar recover, whats going to happen when there's negative data? (If you've been in a cave the past few years, see chart for details.)

This is my favorite chart of them all. I've always believed that whatever gold does, the rest of the complex is going to follow. Maybe not on a day by day basis and maybe not from a percentage or volatility standpoint, but certainly from an overall directional standpoint. As long as I've been a metals bug, silver has been my go-to for the swings, but gold is the anchor. It does not experience as much price or percentage volatility as the rest of the precious metals. Depending on your style of investing, volatility can be very important in trading. Silver may only be up $3 in the past year, but it's been as high as $49.50 and as low as $20...that's a great trading range! Gold, however, has been much less volatile. When I look at that gold chart, 1 word comes to mind: consistency.

The beautiful long-term uptrend (LTUT) has yet to be violated by anything other than a head fake. Even when gold drops in price, as it has off of previous highs in the past 6 months, this consistent trend has remained true. The STDT sounds like something bad from a weekend in Vegas, but it's the short-term downtrend. In addition to being broken this past month, right after the LTUT was getting tested, and unconvincingly broken, it looked like the market was forming a descending triangle. For a descending triangle to work, it usually needs to breakout about 3/4 of the way to its apex. The longer it goes after that, the less likely of a break, as demonstrated in gold and as we will see again shortly in silver. As long as gold continues to hold it's long-term uptrend intact, it looks like a great investment to me.

Silver's weekly chart is very similar to what we just saw on gold's. Not only did the price fail to break support at the appropriate time (3/4 to apex) on the triangle, but after breaking $30 support, it failed to really follow through and make a new trading range lower before coming back above $30 only 3 weeks later. There was a great short opportunity there if you were following that $30 break, but only for a very small amount with tight stops and the market only got as low as $27.15.

On the daily chart, we can see that silver is continuing to trade in a range, but a couple things stand out to me. First, the market is starting to develop strong resistance at $34 as opposed to the $35 high end we were seeing for the past few months. In addition, there has been a serious tightening in price volatility over the past 3 weeks. Remember, the tighter range and the longer time frame of consolidation, the bigger and more reliable the breakout is going to be.

Don't forget to manage your risk with stops. Always have a plan A and a plan B. Best of Luck!
-AJL

Adam Laigo

Semper Pacific Wealth Strategies

metalsmomentum@gmail.com

Twitter: @PrcsMtlsGuy