Divergence

Since the broad correction across all assets began in mid-May, precious metals and equities have been moving in unison. Despite the traditional negative correlation between PM and equities, uncertainty of the Fed's interest rate decisions and fear of liquidity drainage affected both assets equally. As PM investors, we have been looking for indications that signal a break from this trend. The first indication came when PM stocks led the rally in response to the Fed's dovish meeting in 6/29. As Wall Street begins talking about the Fed game being over, we expect PM to stop being dragged by broad selling and buying in equities. Of course, we don't expect there to be perfect negative correlation between PM and equities. But today marked the first day since May when PM rallied against a poor performance in equities. Indeed, today's PM rally was supported by the missile launching of North Korea and a rally in crude oil past $75. But the importance of today's divergence lies in our expectation that the froth in PM has been cleared, setting the stage for a new uptrend.

As for technicals, gold is near a resistance level at $640, so a break above that level this week would be a strong buy signal. As for silver, we see a resistance at $11.5-$11.75 and we expect silver to rally quickly from it's current $11.4 and test its resistance level. If both metals fail to break their resistance, we could see a pull back to $580 and $11 respectively. As for equities, we continue to see whether the Nasdaq will break above the resistance level of 2200-2225. We expect economic data to begin showing clearer signs of stagflation in the economy (high energy costs, lagging wages, weak (and yes, even strong) employment, debt, housing meltdown...), so even though equities may break its immediate resistance levels, we don't expect them to make a new high past April's high. Again, we will keep our eyes on how PM and equities each react to future data. As for tomorrow, we expect a mild bounce in equities (as investors perhaps realize the empty threat of the "Type-Of-Dung" missile), and a continued rally in PM.