Courtesy of John Nyaradi.
An epic struggle is underway between paper currencies like the U.S. Dollar and Euro dollar (fiats) and precious metals represented by gold and silver.
Many analysts this week have commented on Gold and Silver’s dips after near parabolic rises over the last few weeks. Investors seem stuck on the fence of indecision regarding whether Gold or Silver will continue their meteoric rises, or if indeed the gold and silver bubbles have popped.
A recent chart of the SPDR Gold Trust Shares ETF (GLD) displays a sharp decline after a steady upward swing. As one can see below, it will take a lot of sellers (a whole lot) to cross the 50 day moving average, and even more sellers to break its 200 moving day average, indicating that buyers are still in power over the metal. However, the MACD indicator has shown a strong downward trend in the last few days, so anything is possible when the Fed and European Central Bank are making promises they can apparently keep in regards to keeping Greece alive and defusing the crisis in Europe.
The iShares Silver Trust (SLV) has also shown a sharp decline in prices in recent days. While silver has broken its 50 Day Moving Average, it is still well above its 200 day moving average as indicated by the red line, and thus demand is still in control.
chart courtesy of www.stockcharts.ccom
So, long story short, after a crazy round of “Greek” looking problems and the horrible gridlock in Congress over several months, precious metals appear to be taking at least a pause in their recent run.
Regardless of what happens in the precious metals department, the more important question to ask is, “Are the Fiats Back?” or in other words, can we investors carefully look into investing into that thing called paper money, the once reliable form of exchange and commerce?
Looking at the technical indicators, there is significant volatility and even some new potential for the fiats once more.
The weekly view of the PowerShares DB US Dollar Index Bullish Fund (UUP) tells us that a baby bull market might be emerging for the greenbacks; the MACD indicator is starting to swing upwards, and the 50 day moving average might (I say might very carefully) start to move up and possibly cross with the 200 day moving average indicating a “Golden Cross” or BUY signal. One will have to wait and see, but perhaps paper will be in vogue once more:
chart courtesy of www.stockcharts.com
On the other side of the dollar trade, the weekly view of The Currency Shares Euro Trust ETF (FXE) tells us that the common currency has taken some recent losses but now is getting significant help from central banks around the world. While still in overall decline and below its 50 day and 200 day moving averages, that picture could change with enough help from the Fed and European Central Bank.
Are currencies back in style for the fall season? That could be, but one thing is certain. These markets will continue to be volatile as central banks inject liquidity and try to diffuse the powder keg of Greece and at the same time battle deficits, debt, rising inflation and the potential of Recession 2.0.
The bottom line is clear. Only one of these asset classes, precious metals or “fiats,” can emerge as winners of the current struggle.
If the dollar continues its recent moves higher, the bull run in precious metals could be temporarily over. However, if the European Central Bank can save Europe and the Euro, this would mean a weaker dollar and likely a corresponding rise in gold and silver.
These markets require extreme care these days because federal governments are actively at work in the currency world and, at the end of the day, “fiat” currencies are just that: currencies backed only by promises to pay.
Disclaimer: Wall Street Sector Selector actively trades a wide range of exchange traded funds (ETFs) and positions can change at any time.
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