Gold/Silver Market Updates
While gold has made progress since the last update, it has not not broken out to new highs against the dollar as expected, because the dollar has held up. Nevertheless it has made satisfactory progress and has made new highs against many other currencies.
On the 1-year chart for gold in dollars we can see that after being capped by the final fanline shown and the resistance at the September - October highs for several weeks, gold broke out above these restraining factors just last week, putting it in position to make a run at the highs of last March soon. However, should it do so in the short-term it is then likely to consolidate/react for quite some time, due to the overbought condition that will then exist, for an immediate advance to the area of the highs will result in it being very close to the upper boundary of the steep uptrend channel shown, and will take various oscillators to oversold extremes, including the slow stochastic shown on this chart, and we should note that this indicator is already at an overbought extreme, suggesting that gold could enter a reactive phase anytime now, which is certainly made more likely by the bearish Rising Wedge that has shown up on the Precious Metals stocks index charts, a factor that led us to ditch many gold and silver stocks last week in expectation of a reaction, after riding them up from the November - December lows. Another factor pointing to a reaction soon is the big increase in the Commercials' short positions in recent weeks.
Even if gold does go into reverse soon, either from its current position or after a run at the highs, we should keep in mind that the technical picture and the outlook for gold is very positive indeed, and it would be very odd if it wasn't. With many countries around the world expanding their money supply and dropping interest rates to zero in a desperate attempt to stave off deflationary implosion and maintain competitive advantage, it is the perfect environment for both gold and silver to maintain robust bullmarkets. In addition, with the bankrupt United States heading rapidly in the direction of anarchy and disintegration, the longer-term outlook for both the dollar and US Treasuries is very bleak indeed. Should a run on these commence, as looks inevitable and which will trigger a funding emergency in the US , then gold and silver will go parabolic.
Looking again at the 1-year chart for gold in dollars we can see that the break last week above the September - October highs has broken the run of descending highs and lows of last year and that the trend therefore is swinging from down to up. In addition the the 50-day moving average is now rising up through the 200-day, which should soon turn up, a technical development known as the "Golden Cross" because it frequently marks the start of a major uptrend. Should we see a significant reaction in the short-term, either immediately, or after a run at the highs, it will be viewed as an excellent buying opportunity.
The long-term chart for gold in Euros shows that it is doing just fine, although clearly it is getting overbought here, calling for consolidation/reaction soon. While it could run at the upper channel boundary eventually, its current overbought status suggests that it will soon react back into the lower more moderate channel.
Since a bearish "gravestone doji" appeared on the dollar index chart last month it has broken down from its intermediate uptrend by moving sideways, and it has failed to get above the doji day intraday high. These developments retain bearish implications despite the dollar index having held up, especially as it has failed to get close to the highs of last November. However, a big reason for the dollar index having held up is thought to be the worsening problems in the European Union, that are bringing about a resurgence of nationalism that could conceivably result in the EU being torn apart which would probably finish the Euro as a currency. Since the dollar index has a heavy Euro weighting this would explain its relative buoyancy. It is the severe problems in the EU and their negative impact on the Euro that could result in the dollar index chart breaking out to the upside, something that would otherwise be hard to comprehend given the dollar's terrible fundamentals.
The decidedly bearish looking charts for the precious metals stocks indices such as the HUI and XAU indices are difficult to reconcile with the generally positive charts for gold and silver. One possible explanation for this is that the broad stockmarket is about to tank again. The prevailing wisdom is that the broad market has bottomed, which is given credence by the fact that it has somehow managed to hold up despite a continuing avalanche of bad news. This is especially the view of the mainstream media which of course makes it all the more likely that it will break lower again. Should the broad US stockmarkets break to new lows it is expected to trigger a tidal wave of selling by the disillusioned bottom fishers who bought recently, that can be expected to lead to heavy collateral damage to Precious Metals stocks, as the "baby is thrown out with the bath water" in time-honored fashion. Should this happen gold and silver would probably escape relatively unscathed.
Silver has advanced in a satisfactory manner to the first target given in the last update at the resistance in the $14 area and is now at a critical juncture, for there are several factors pointing to its breaking down into a reaction shortly. However, it could instead break above the resistance in the $14 area which would be expected to lead to a steep and rapid run at the strong resistance level in the $16 where exhaustion would set in.
The reason for this "it's probably going to break down, but it could instead rise steeply" interpretation, is readily apparent on the 1-year silver chart. For on this chart we can see 3 major factors that point to imminent reversal - it has arrived at an important resistance level around but mainly below the $14 level, and also at its falling 200-day moving average, which is a restraining influence, and its slow stochastic, shown at the bottom of the chart, is hovering at an extremely overbought level. On the other side of the coin it is still above the support of a parabolic bowl, which is rising more and more steeply and could "slingshot" silver at the strong resistance level in the $16 area, where it would arrive in an extremely overbought state and would be expected to rapidly burn out and react. We are going are going to have an answer to this one very soon now, for silver is being forced into a corner between the rising parabola and the upper return line of the uptrend channel - it must break one way or the other very soon. The major stock indices, as we have already observed, are looking set to break heavily lower, and if forced to take sides, we would have to go for silver breaking lower soon.
The long-term outlook for both gold and silver remains excellent, with global currency debasement being highly fashionable, and near zero interest rates thrown in for good measure - no wonder investors are buying physical gold and silver hand-over-fist. This being so, if silver breaks down from the parabola shown soon as expected, it is likely to react back across the uptrend channel towards its lower support line, where it is expected to stabilize and turn up again. It will therefore be a buy again on an approach to this support line. If instead it breaks above $14 and races towards $16, traders can reduce positions there in expectation of a reaction, and get back in again once the reaction has run its course.
is an English technical analyst, holding a diploma from the Society
of Technical Analysts, Cambridge, England. He lives in Chile.
Copyright ©2003-2011 CliveMaund. All Rights Reserved.
Charts courtesy of StockCharts.com.