Gold Breaking Out vs. Euro


"Relative strength chart shows trend change."

The trade deficit widened unexpectedly this month after the USD reached extremely oversold levels, which was quite surprising to Wall Street. Usually, a weaker USD should lead to an increase of exports of U.S. goods; however, the exact opposite occurred. This further signifies the global economic slowdown despite record government stimulus, a devalued USD and artificially induced low interest rates. The market and the employment situation are no better off now than they were previously.

Despite Washington's attempts to prevent a depression through spending, investors are beginning to lose hope in what the Fed and Congress are doing to prevent a market collapse into new lows. Wednesday, as predicted, the House created a $26-billion job bill that, supposedly, will prevent government layoffs and expand the job market for government workers. Washington is trying to alleviate high unemployment by creating more government jobs. That is not real job creation. Incidentally, the previous employment numbers were mildly inflated due to the recent influx of temporary census workers and did not accurately reflect the true number of unemployed Americans.

Investors believe that sustainable job creation is through small business growth. The markets, as well as the American people, are looking for leaders who will cut government spending and institute tax cuts for small business owners. Entrepreneurs attempting to innovate and meet consumers' demands in a struggling economy should be supported with meaningful tax breaks. This spurs authentic growth and innovation. I expect the market and the American people to vote in candidates who are committed to these principles. The people are losing their faith in the current leadership, as evidenced by President Obama's approval rating dropping to its lowest point in his entire tenure.

The Fed has committed to buying long-term Treasuries, which would artificially keep interest rates low. They are desperate to get capital flowing again, but it comes at a cost. Eventually, markets move back to their former equilibrium and long-term trends. If you push down a spring as far as it goes, it eventually snaps back harder than before and reverberates. We may not see it for a while, but eventually long-term Treasuries will crash. Right now, investors are flocking to Treasuries for security and safety. However, just as the market is losing faith in the Fed's handle on the economic situation, bondholders will ultimately lose faith in government bonds. We may see a drop in Treasury prices along with continued high interest rates over the next several years, and possibly even decades, as our children and grandchildren face the burden of credit downgrades.

It is my fear of a devalued currency and lack of confidence in Obama's handling of the economic situation that cause me to be bullish on specific mining exploration stocks that are converting strong cash positions into high-grade copper, silver and gold resources. I have been following this sector for over nine years; and I gather that, during the next 5–10 years, precious metals will see a lot of growth as investors seek hard money and hard assets.

Wednesday's major collapse in the equity market was significant. Last week, I mentioned that the USD was extremely oversold and that the euro and U.S. equities were about to correct considerably. Today, we are seeing the beginning of a new downward trend in global equities and a flight to safety. Investors are worried that efforts from Washington will do nothing to prevent a slowing economy and huge trade deficit.

Wednesday's weakness in gold was only relative to the USD and U.S. Treasuries. Compared with the euro, there are technical signs of a major move upward in the gold price. We could see a resumption of the market patterns that we saw in April and May, when gold and the USD rallied together as investors sought shelter from government defaults and sovereign debt crises. The relative strength trend of gold vs. the euro is an important indicator of the true price action of gold. Right now, it is showing signs of a bullish move higher after finding long-term support.

Although gold was down slightly against the USD, it gapped up today vs. the euro after reaching an important 38.2% Fibonacci retracement and long-term trend support. MACD supports that momentum has shifted. RSI crossed 50 today—also a bullish sign.


Jeb Handwerger

Disclosure: Long gold and silver mining stocks.

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