Both the S&P 500 and gold price have consolidated over the past few months and are now looking to overcome key technical resistance at 1,150. If this level can be breached, it will be a very bullish development that is likely to signal the next major upleg in both stocks and precious metals.
The market’s 65% advance from March until November of 2009 was one of the strongest in history. But this sharp ascent has since flattened out and the S&P 500 is now bouncing between 1,050 and 1,150. A breakout in one direction or another is likely to take place in the coming weeks and I believe this move will set the direction heading into the Spring/Summer trading season.
The number 1,150 is not only important to the S&P 500, but the exact level that gold is also looking to take out before moving higher. $1,150 acted as previous resistance to gold’s advance and represents the 2010 high thus far. If successful at closing above this level for at least two days, I believe we will see the beginning of the next major upleg for precious metals.
While technical analysis can give us an idea of what might happen in the short term, I remain convinced that we are heading into a double-dip recession at some point within the next year. Unemployment remains high and consumers have curtailed spending, the main engine that drives the economy. On top of this, banks are still not lending and a whole new round of mortgage rate resets are schedule to come due this year and next, after a relative lull in 2009. Throw in the bursting of the commercial real estate bubble and it is hard to fathom how any true economic recovery could manifest.
Continued government stimulus may be able to prop up the markets a while longer, but this is inevitably going to lead to inflation down the road. I have been using the current dip to pick up quality junior gold and silver miners at bargain prices, but would like to see the $1,150 hurdle cleared before jumping in with both feet. Precious metals stand to do well if the markets continue higher or as a safe-haven if investors get nervous and bail on stocks. They have performed strongly during extreme periods of both inflation and deflation. Either way, the best investment class of the past decade is likely to remain so during the next decade as well.
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