RISING CHANNEL OFFERS YEAREND GOLD TARGET -- SILVER RECORDS MULTI-YEAR HIGH -- GOLD MINERS ETF SURGES ABOVE OCTOBER HIGHS -- JUNIOR GOLD MINERS ETF CONTINUE TO OUTPERFORM -- THE CURRENCY AFFECT ON FOREIGN INDEX ETFS
RISING CHANNEL OFFERS YEAREND GOLD TARGET... Link for todays video. Gold continued its recent surge by moving above $1400 on Monday. Silver and platinum also moved higher. Gold hit an all time high on the Comex, while silver traded at a 30 year high. Precious metals remain hot as an alternative to currencies. It does not matter which currency is under pressure. The Dollar has been the most recent casualty with a sharp decline the last five months. Dollar bears took a break on Monday as the Eye of Mordor turned to the Euro. Debt concerns with Ireland and Greece weighed on the Euro over the last two days. Chart 1 shows weekly candlesticks for the Gold SPDR (GLD). I used Gord Greers trick to add space to the top of the chart, which is needed to project the upper trendline of the rising price channel. GLD remains in a clear uptrend with the upper trendline extending above 1500 in January 2011. Barring some sort of dramatic reversal, this is the next target to watch.
(click to view a live version of this chart)
Chart 1
SILVER RECORDS MULTI-YEAR HIGH... Chart 2 shows the Silver iShares (SLV) breaking neckline resistance of an inverse head-and-shoulders pattern in August. This is a continuation head-and-shoulders pattern because it formed after an advance from November 2008 to November 2009. The ETF reached its head-and-shoulders target in early October and continued higher the last three weeks. Based on another rising price channel, the upper trendline extension marks the next target around $30 by yearend.
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Chart 2
GOLD MINERS ETF SURGES ABOVE OCTOBER HIGHS... Big moves in gold and silver proved contagious for precious metals stocks. There was some concern in late October because the Gold Miners ETF (GDX) was lagging gold. Chart 3 shows GDX firming around broken resistance (54) and then surging above 60. The move over the last three days has been exceptionally sharp with GDX up over 8%. The upper trendline of a rising price channel is coming into play just above 62, but the uptrend is more dominant than potential resistance. The indicator window shows the price relative, which reflects the performance of GDX relative to gold. After a dip in October, the price relative surged to a new high and GDX is leading gold now. This is bullish for gold overall.
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Chart 3
JUNIOR GOLD MINERS ETF CONTINUE TO OUTPERFORM... The Junior Gold Miners ETF (GDXJ) is outperforming the Gold Miners ETF (GDX). The former is made up of second and third tier miners, which are the most sensitive to changes in the price of gold. Chart 4 shows GDXJ surging around 20% the last eight days. This is clearly a show of strength, but it also creates a short-term overbought situation and smacks of rabid speculation. The indicator window shows the price relative comparing the Junior Gold Miners ETF to the Gold Miners ETF. The second and third tier miners have been outperforming the first tier miners since July. Gold bottomed in late July, a few weeks after the juniors started outperforming. Relative weakness in this group could be the first sign of a turn in gold.
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Chart 4
THE CURRENCY AFFECT ON FOREIGN INDEX ETFS ... After featuring the inverse head-and-shoulders in the Nikkei 225 ($NIKK) on Friday, a reader inquired about the difference between the Nikkei 225 and the Japan iShares (EWJ). The Nikkei provides us with a good view of Japanese equities relative to Japan and the Yen. In contrast, the Japan iShares (EWJ) provides the view of Japanese equities relative to US investors and the Dollar. Japanese investors buy and sell Japanese stocks with Yen. There is no currency conversion to consider. This is like an American investor looking at the performance of the S&P 500. The Japan iShares adds a currency dimension. Investors and traders in the Japan iShares, and similar ETFs, need to get two things right: the direction of the foreign index and the direction of the currency.
In order to fund the Japan iShares, a portfolio manager must convert Dollars into Yen and buy Japanese stocks with these Yen. To repatriate funds, this manager must sell the Japanese stocks and convert the proceeds back into Dollars. The currency risk can be hedged, but there is always some risk. A rise in the Yen and rise in the Nikkei 225 is a double positive for the portfolio manager. Conversely, a decline in the Yen and decline in the Nikkei is a double negative. Chart 5 lays this out with the Japan iShares, Yen ETF and Nikkei together.
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Chart 5
First, notice that the Japan iShares and Yen ETF advanced from early June to early November. However, the Nikkei 225 was flat from late May until early November (blue arrows). The Nikkei 225 did not push the Japan iShares higher. It was all Yen. The Yen ETF (FXY) gained over 13% from early May until early November. That is a big move for a currency. The bottom chart shows the Japan iShares relative to the Yen. In other words, this is the Japan iShares priced in Yen. Notice that this chart looks quite similar to the Nikkei 225 chart. Chart 6 shows the SPDR Euro Stoxx 50 ETF (FEZ) 50 ETF relative to the Euro and DJ Euro Stoxx 50 Index ($STOX5E) for reference.
