More Dollar Weakness - More Strength in Gold

Dollar weakness continues to be the theme this week as it continues to work lower nearing a chart support level near the 80.00-79.50 zone. If it does breach that support, gold should respond higher. If it holds, look for pressure on gold to emerge in the form of profit taking.

There is no definitive trend yet in the Dollar as it continues to work back and forth in a broader range. The ADX reveals the sideways pattern but the bears are currently in control. Whether the support level will hold and bulls will be able to mount a counter-attack remains unclear at this point. Time will tell.

I have noted the 50 day moving average on the chart but quite frankly, in a market that is trendless, moving averages are generally useless. They are notorious for resulting in whipsaw trades during such times.

I did want to note that the gold shares, as evidenced by the HUI remain very strong and continue to lead the metal higher as they outperform it on the way up. They did the exact same thing as the market was headed lower so the relationship is quite intact.

Note that the index powered through the 200 day moving average which is a big deal in technical analysis circles. Also note that the ADX, on the daily chart, is showing a very strong uptrend in place with the bulls currently in control. The index however is now closing in on what should be considered a pretty good level of resistance on the charts. If it can clear that, 260 is the next test, Expect fierce resistance to surface at this level barring a sharp break in the US Dollar.

Incidentally, I do want to comment on something - while gold was moving lower, we here were noting the breakdown on the technical price charts and noting the bearish posture of the market. I lost count of the number of emails I received from the rabid gold bugs who went out of their way to mock or rail against the entire concept of Technical analysis when it comes to gold. Their view was that since the gold market is obviously manipulated all the time ( their view - not mine ) they stated the utterly uselessness of applying these concepts to the market since the "market was clearly manipulated". Now suddenly, LO! - It's a MIRACLE - we see a plethora of technical analysis "experts" in the same camp noting the bullish chart pattern as they breathlessly drool over the 200 day moving averages, this oscillator, that indicator, etc.

I can be kind and chalk this up to a sudden case of enlightenment but my more cynical nature tells me that this is what is a rampant case of hypocrisy on full display. Apparently technical analysis is only valid when it confirms that gold is moving higher!

I will leave the fair and open-minded reader to draw their own conclusions about this but I already have mine. One of these days I might just put up some of the emails I have received from these rabid dogs to show you just how hateful they can be towards those who dare to speak poorly of their yellow metal god.

As I have said before, I have had some dealings with those trapped in religious cults and I can tell you that the attitude of some of these gold bugs has convinced me even more deeply that in some parts of the honest money camp ( of which I consider myself a member) there is indeed a cultic mentality at work. It is quite scary to be honest. The one thing about being involved in a cult is that it clouds your mind and negates reason and sound judgment. It can be very difficult, if not downright impossible for many trapped in such things to ever come to their senses and realize just how deceived and misled they have become.

I honestly do not harbor any ill will towards them - I actually pity them. They have no earthly idea of how foolish they appear to clear thinking individuals.

I said all that to say this - it is one thing to have strong convictions about a market. It is another thing not to recognize the present reality, or perhaps deliberately close your eyes to the obvious. Any trader that wishes to be successful MUST, MUST, MUST avoid falling into this trap. Stay OBJECTIVE! Do not let your emotions control your reason and your mind. Learn to recognize when you are wrong about a particular market and either get out of its way or at the very least, cut back your exposure to it. This is the only way to survive in a business that has changed so dramatically over the years.

Computer algorithms are heartless automatons which do not care one whit about the size of your hard-earned trading dollars. They will rip it away from you faster than you can spit if you are not careful. The old adage " learn to run away and play another day" should be plastered all over the monitors at your trading desk until you get it!

One last look at the HUI weekly chart to get a better sense of the intermediate picture in the mining sector.

Notice that the ADX line is still moving lower, indicating the absence of a discernible trend at this time frame. The +DMI is now above the -DMI revealing that the bulls have control of the market for now. They have not yet managed to start a strong trend but they have halted the downtrend. I would like to see this index close above the resistance zone noted to be more comfortable with the possibility of a trending move. Such a thing, if it occurs on a weekly closing basis should turn the ADX higher but it will still take a push through the next resistance levels noted on the chart to suggest a powerful uptrend is underway.

Look at the big gap on this chart. If the miners manage to make it that far, they will have to have some sort of powerful tailwind to take them through this gap and up through the 300 level.

Here is a chart of the GSCI again. Note how the commodity sector is moving higher as it approaches a level of chart resistance that it has been unable to clear successfully since early October of last year. If the sector is going to come to life and convince more of the bears to go back into hibernation for a while, the index will need to clear this zone on a weekly basis. If it does, silver should stay firm.

Note by the way how silver is doing what we suggested it would do WHEN COMMODITY PRICES start rising. Silver will not perform well, ( I do not care one whit for all the BS about chronic silver shortages parroted by those who have a vested interest in higher metal prices ) during any such time when DEFLATION is in ascendancy. Silver must have an inflationary environment to propel it higher. The weakness in the US Dollar is therefore even more noteworthy than for gold as currency weakness has tended to attract hot money flows into the commodity sector in general. This is the reason that silver is currently outperforming gold. It will do so as long as the deflation fears are taking a back seat to Dollar weakness.

I will try to get something up a bit later detailing the COT stuff. Speculators are on the long side with commercial interests/swap dealers on the short side once again so all is pretty much back to normal. Short covering among the big specs has been the dominant feature of the silver market. Then again, so has it been among many individual commodity futures markets. Bears are getting pushed out across the entire sector. Gold has finally seen more fresh buying than short covering, an encouraging feature for the bulls as this is a bit more enduring in nature ( as long as chart support levels do not give way). More on that later...