Gold Hits 7-Month High, Dow Revisits 4-Month Low

February 18, 2009

Today, the price of gold moved closer to $1,000 when it hit 7-month highs between $970 and $983. This should serve as a wake-up call to all who have not bought into the precious metals bull market that is in full force. It's worth mentioning that both Gold and RBY are following upwards trends that we had forecast and laid out in two commentaries from December 20th and the 26th.

As gold hit new highs, we observed a new pattern that began in late December: a divergence between the Major Stock Market Indices/industrial metals and Precious Metals/Mining Stocks Sectors/US Dollar. The following chart shows the new direct relationship between GLD (gold ETF) and UUP (US Dollar ETF):

For one, investors have shown that they're just too pessimistic about the major companies trading in the world equities markets and future economic development. This helps to explain the low demand for industrial commodities like copper and oil as well as the dejavu back to November 2008 lows. As money has been converted to hard assets and cash, the US Dollar Index hit new 3-month highs above 87 on yesterday.

The divergence is telling us that fear is high and that investors are either holding cash or rushing to the safe havens--gold, silver, and quality mining stocks. Although we expected this scenario to have occurred sooner, it's happening now because gold and silver recently passed through key resistance levels (discussed in Jan 12th commentary, ). In short, precious metals and mining stocks now have the necessary investor support needed to continue the long term upwards trend.

Remember that gold still hasn't reached all-time highs in US Dollar terms. It's easy to see this when we consider that the world's largest buyers of gold, Indian consumers are refusing to buy gold at such high prices. Presently, the price of gold is at all-time highs in Indian Rupees. As it and other developing-world currencies begin strengthening against the dollar, the price of gold will be more attractive in India. We expect this rise in demand to start in late spring 2009 and continue through the early part of the summer.

Is the divergence pattern we're observing creating a win-win situation for gold, silver, and mining stocks? Well, think about. Now that gold and the dollar are trading directly, gold is being used as a safe haven. When we revert back to the inverse relationship, then not only will we see the increase in demand from India, we'll see gold reach new highs in dollar terms as well--which in our opinion, means you can't go wrong with gold.

Commentaries by Category: Mining Stocks and Metals Analysis The Economy Bank Crisis Analyst Opinions/Research

Commentaries by Category:

Mining Stocks and Metals Analysis
The Economy
Bank Crisis
Analyst Opinions/Research