HECLA MINING IS ANOTHER SILVER PLAY -- METAL STOCKS LEAD MATERIALS SPDR HIGHER -- STRONGER YEN BOOSTS JAPANESE ISHARES -- WHY TIGHTER JAPANESE POLICY COULD HURT THE DOLLAR AND BOOST GOLD

HECLA MINING RALLIES WITH SILVER... Over the last month I've shown two silver stocks that are benefiting from silver's move to a new twenty-two year high. The two stocks are Coeur D Alene Mines (CDE) and Pan American Silver (PAAS). Hecla Mining (HL) is another one. In fact, Hecla Mining is the lowest cost primary silver producer in North America. And judging from its recent uptrend, it's clearly benefiting from strong silver buying. The daily bars in Chart 1 show the stock hitting a new 52-week high. Upside volume has been impressive. The (blue) 50 day average has crossed over the 200-day (red) line which is a bullish sign. Its relative strength ratio also bottomed last November and has been rising since then. The monthly bars in Chart 2 show the stock having broken a two-year down trendline and headed toward its late-2004 peak at 7.50. Its relative strength ratio has also broken a two-year resistance line. If you look at the price of silver in Chart 3, you can see why. Silver broke out of a two-year "ascending triangle" during the fourth quarter and is still climbing. So are the stocks tied to silver. Stocks tied to aluminum, copper, and gold are also among today's strongest stocks.

Chart 1

Chart 2

Chart 3

BASIC MATERIAL STOCKS SHOW LEADERSHIP ... Last week I wrote about new buying in energy and precious metal stocks. While those two groups are rising again today, stocks tied to industrial metals like aluminum and copper are also helping make basic materials Monday's strongest sector. [Silver is an industrial and precious metal]. The next chart shows the Materials Sector SPDR (XLB) moving close to another record high today. The XLB recently climbed above its early 2005 peak to reach a new record. The relative strength ratio beneath the chart broke its 2005 down trendline during November and has been rising since (see arrow). Three of today's XLB leaders are Alcoa (AA), Phelps Dodge (PD), and Freeport McMoran Copper & Gold (FCX).

Chart 4

INDUSTRIAL STOCKS RALLY ... Last Friday I showed Freeport McMoran Copper & Gold having bounced off its 200-day line. Today it's breaking through its 50-day line. [FCX is tied to copper and gold]. Phelps Dodge (copper) is trading at a two-month high and showing better relative strength (Chart 6). Alcoa (aluminum) is rising above its 50-day line (Chart 7). Its RS line is also turning up. Gold stocks are up another 3% today with gold climbing $6. Energy stocks are also in the plus column.

Chart 5

Chart 6

Chart 7

YEN BOUNCES AGAINST THE DOLLAR ... The dollar recently lost ground against the Euro. Today it's losing ground against the Japanese yen. The next chart shows the yen gapping over its 50-day average. The stronger yen is helping to boost Japanese iShares, which benefit from stronger Japanese stocks and a stronger currency. [The EWJ is quoted in dollars and strengthens along with the yen]. Given its recent correlation to the price of gold, the EWJ may also be benefiting from new buying in the yellow metal. Chart 9 shows the EWJ having broken the upper resistance line in a "triangular" consolidation pattern. That's a bullish sign. For the first time in eight years, Japan appears to be moving out of the deflation that kept Japanese rates near zero. That partially explains the link between rising Japanese stocks and gold. But there's more to it than that and it has a lot to do with hints of a stronger yen and a tighter Japanese monetary policy.

Chart 8

Chart 9

END OF THE YEN CARRY TRADE... For the past several years, Japanese rates have been kept near zero in an attempt to end Japanese deflation. That has also kept the yen on the weak side. That created the so-called "yen carry trade" where global traders borrowed money at low Japanese rates and invested in higher yielding currencies around the world. Some of the high-yielding currencies that come to mind are the Australian and Canadian Dollars. Over the past month, both currencies have started to fall (as have formerly strong currencies like the Mexican peso and the New Zealand kiwi). Chart 10 shows the inverse relationship between the rising Canadian Dollar (green line) and the falling yen (orange line) over the last year. The recent rebound in the yen may be tied to the drop in the CDW. In other words, prospects for a tighter Japanese policy may be starting to boost the yen and weaken some of the world's stronger currencies that have fed off the carry trade. That may also have a negative impact on the U.S. Dollar. That would be especially true if the Japanese start raising short-term rates after the Fed has stopped raising U.S. rates. Dollar weakness usually translates into higher commodity prices and stocks tied to those commodities. That's another reason why I happen to believe that a stronger Japanese stock market, and a stronger yen, are bullish for gold and most other commodities.

Chart 10