Charts Point to Rise in Precious Metals

09/04/2012 8:30 am EST

Focus: MARKETS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

There has been a nice bump in the prices of precious metals, and the technicals indicate that we should expect more upside before a pullback, observes Jack Adamo of Insiders Plus.

Most of our recent outperformance in the Main Portfolio came from precious metals. The same factors that are killing the hedges are boosting gold and silver—that is, the Fed and other Central Banks promising to do something.

What that something is remains unsaid and unknown, but the promises seem to be having less and less effect on the overall market. It did stop the five-session slide in the Dow, but the index still finished the week nearly 1% lower.

In fact, the market seems to be getting a little cranky. The reaction to the Initial Unemployment Claims last week knocked stocks down a notch before the Fed piped up again, but claims weren't that bad. They only rose 4,000 from last week's upwardly revised 368,000. Moreover, the revision was only 2,000, which is lower than the 2,700 average upward revision over the last ten weeks. So it looks like the market is getting uneasy.

There are several important meetings coming up in the next few week, both here and in Europe. Maybe traders are becoming doubtful that anything substantive will be accomplished. The options available look pretty weak.

I'm not sure the strength in precious metals will hold up, but the Commodities Research Bureau Index seems to suggest it may. The index had been steadily declining since April 2011, due to a strengthening dollar. But as the chart below shows, the CRB (the black high-low line) looks like it bottomed in June, and the US dollar (the purple dotted line) topped in late July.

chart
Click to Enlarge

If that's the case, then we are returning, as we eventually must, to the Rorschach-like pattern from 2002 through 2008, where the rise in commodity prices (and stocks) simply reflected a steadily weakening dollar.

It's too early to be sure of that. Lately, the market is pricing in a stronger euro, but I think the euro will disappoint in the next few months. At that point, maybe the dollar will again get the heavy inflows that have boosted it since the problems in Europe started bubbling to the surface.

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