Thursday, May 5, 2011

What next for metals, markets and currencies?

It has been interesting to note an apparent correlation between the XJO (ASX200 Index) and the AUD/USD currency pair over 2009 and first half of 2010 with the XJO usually leading significant moves. From August 2010 we've seen the AUD disconnect somewhat and put in a stronger move to the upside, although some of the up and down swings continue to occur in tandem.

I believe there are two main causes for the recent disconnect. 

The first being that the USD has weakened significantly against many major currencies (especially over the last 4 months), so it's perhaps not so much AUD strength as it has been USD weakness.

The other reason being that the XJO is once again fighting up against strong overhead resistance at 5000 (so has effectively been capped).  As The Prince notes in his latest weekly wrap on Macro Business:
The S&P/ASX200 Index continues to baffle observers as being out performed by poorer and more debt-laden economies like the US, UK and Europe. The Chinese and commodity markets (but I repeat myself) are weighing on the local market and it appears the grand old correlation of AUS to US is slipping away.

The monthly and weekly charts support a continued bear market rally thesis, with increased volatility compared to an out and out bull market (or Ponzi market as it appears in the US at the moment).

Resistance at 5000 points and support at 4600 points create a probable channel where prices will gravitate for the time being. There maybe some short term price movements to be had, but on the whole, investors should stay away from the market – the old adage, “sell in May and stay away”, seems to be self-fulfilling. MB
Analysis from Deus Forex Machina suggests the AUD might be overvalued with a short term top in place:
On Monday I posted a technical piece saying the the Australian Dollar had hit resistance and so far it appears that the 1.1014 level has proved to be the ceiling that I thought it was going to be. It was tested on two distinctly seperate occasions on Monday Sydney time and then again in New York for 2 hours that night. So technically it looks fairly solid for now. MB
Another trader that I follow, Gary Savage at Smart Money Tracker is expecting only short term weakness in Gold and Silver before they blast off into a final (for this cycle) run away move that takes them significantly higher as the US Dollar collapses down into a 3 year cycle low.
The coming parabolic move will be significantly more powerful than what happened in `09 as this will be a final C-wave move. We should easily see a 300- 350 point move in gold and it's anyone's guess as to how far silver rallies during the final parabolic finish. $65 or even $70 isn't out of the question.

Now for the downside. The final dollar collapse is also going to drive the rest of the commodity markets wildly higher. That will include the energy markets. Oil is due for a brief move down into its cycle low this week too. Once that has run it's course we will see oil soar higher, possibly even reaching the `07 high of $150.

$150 oil collapsed the global economy in `07 and the economy was in much better shape with much lower unemployment than it is now. In an environment of already high unemployment $150 oil and soaring food prices are going to drive the global economy into a recession even worse than what we suffered in `08. Smart Money Tracker
With this scenario in mind, we could look to try and pick a bottom in Silver. If the bottom wasn't already put in last night (4th May US trade) at just under $39 then we might see support at either $38 or in my opinion worst case $36. Silver is also trading very close to the 50 day moving average which may also act as support around the higher of these two levels.

Another indication that we may have hit the bottom of this Silver and Gold correction (or if not be very close to it) is the miners last night did fall during overnight trade, but closed strongly with the Global Silver Miners ETF (SIL) closing only -.19% in the red, Gold Miners Index (HUI) closing slightly higher (+.07%) and Gold Miners ETF (GDX) closing +.21% in the green.
Based on all the above and some previous prediction I made around 2 months ago I am expecting that:
- The AUD is close to a top against the USD (if infact it isn't already in).
- US Dollar Index will fall short term, but bounce strongly into the latter half of the year as the Fed stops increasing the size of their monetary base with the end of QE2 (end of June).

- The ASX200 is unlikely to surpass the 5000 level. Either the financial sector (as the housing market continues to flail) or the resource sector (as the Fed eases the money printing and commodities fall), maybe a combination of both, will weigh heavily on the index so I'm expecting medium term weakness.

- The metals could still head higher short term. If Gold had gone parabolic in that recent Silver blow off then I might have suggested a short term top is in, but with Gold still looking like it could head higher and the miners now stabilising, we could be in for an interesting few weeks ahead.

As mentioned recently in previous posts, I will be looking to take profits on some miners into this rally, but will be looking to put some of this into AUD Gold. If Gold (in USD) does peak early this year, a correction in the AUD has the potential to offset this.

Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.

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