Portrait of a Precious Metals Bull Market

02/17/2011 11:34 am EST


Michael Murphy

Former Editor, New World Investor

The greenback’s weakness could add further fuel to equities, especially precious metals stocks, writes Michael Murphy, editor of New World Investor.

The weak dollar rally probably won’t last more than a few more days. It is amazing that the chaos in Egypt and the impending chaos in the European Union have not caused more dollar strength than they have.

We have to respect the judgment of the markets, and it appears people are getting out of the dollar before it really declines. It’s possible it will give a quick kiss goodbye to the 50-day moving average. [The Dollar Index closed just below its 50-day Wednesday—Editor.]

Once this temporary bounce rolls over, we should really start to see fireworks in the precious-metal sector.

The last reasonable week for market weakness has come and gone. Extremely bullish sentiment hasn’t been able to turn the market down. The poor seasonality in January, especially when the market enters earnings season at 52-week highs, wasn’t able to turn the market down. The weak employment report and rising dollar were nothing more than a bump in the road.

The Standard & Poor’s 500 has moved up 300 points from the retracement bottom last July at 1010, and after another week of hanging around 1320, it looks like it wants to stretch on up to the next big attractor level at 1440.

It’s hard to believe it will be that easy, but the Fed’s ocean of liquidity is overwhelming every normal corrective tendency. This will not end well, but for now a weakening dollar can drive stocks and precious metals higher than anyone is thinking. We are just now starting to see money flows diverge on the weekly charts, and it usually takes many weeks of this to cause real problems

Precious metals have already bottomed. Now we have gold going up, the gold miners outperforming the metal, the junior miners outperforming the big miners, silver outperforming gold, and silver miners outperforming the metal. That is the profile of a precious metals bull market. If “rush to safety” now means gold and silver instead of the dollar, Federal Reserve Chairman Ben Bernanke’s strategy is failing earlier than I expected it to.

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