The Philadelphia Gold/Silver Sector Index Poised To Advance

By Jim Donnelly, Olson Global Markets

Although a continuation of the rally in the U.S. dollar index (DXY) over the past few months had been expected to keep a lid on precious metal prices, the Philadelphia Gold/Silver Sector Index (XAU) has defied that theory. Clearly, there is an inverse relationship between precious metals and paper currencies of all types. However, after staging a solid correction from the December 2009 peak, the bid for gold and silver has remained relatively firm as both the Euro and British pound have sunk. By contrast, the DXY has gained strength versus each of those currencies during this period.

Still, global buyers as well as speculators taking a longer-term view of the prospect of mounting sovereign debt obligations have not apparently lost their appetite for gold and/or silver. Neither have saver nations like China and India.

Evidence of this situation can be seen by looking at a chart of the XAU on the weekly time frame. With weekly stochastic studies now rising bullish, the XAU appears poised to break, possibly, above key “mid-channel” resistance at 173.50. If it does, such a “break” would have very bullish implications for precious metals in general, and gold and silver in particular. A failure to do so, on the other hand, would be reason to reevaluate.

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