Gold and Silver Market Updates
Having broken out upside from its 3-month long trading range, which was not expected in the last update, gold is now theoretically in position to continue to advance, and may end the current intermediate uptrend by staging a vertical blowoff move. However, the recent advance looks insipid when compared to silver - gold is still only about $15 above the high attained early in February, and in the event of a downturn it is unlikely to find much support in the January - March trading range, because it has not risen sufficiently far away from it. We can observe these points on the 6-month chart, on which we can see that the RSI and MACD indicators are not at overbought extremes, and thus there is room for further short-term gains. The gap with the moving averages remains large, however, and on the 5-year chart we can see that the rate of rise of these indicators is very steep, and thus continues to point to a correction.
On the 5-year chart we can further observe how gold has succeeded in breaking out upside from its long-term uptrend channel, an event that quite frequently leads to a vertical blowoff move, that is followed by an abrupt reversal, especially if, as is the case here, the price is already way above its long-term moving average, signalling that the intermediate uptrend is mature. Not only is the price way above the 200-day moving average, but this indicator is now rising at a very steep rate - a rate that is regarded as unsustainable.
In conclusion, although further short-term upside potential exists for gold, and the current uptrend from the fall of last year may end with a vertical spike, this uptrend is believed to be getting close to terminating. This fits with silver which is getting close to burnout and is likely to go into sudden reverse.
Silver has put in an excellent performance over the past few weeks, and the question naturally arises as to how much longer the current near-vertical uptrend can continue. Although cautious in the last update, it was stated that "Although the current intermediate uptrend is definitely getting "long in the tooth", there is scope for further upside before it has run its course, and it may end with a spectacular vertical blow off move that takes it to a short and intermediate-term overbought extreme." - and that is what we have seen/are seeing.
On the 6-month chart we can see the strong gains by silver over the past month, but it should be clear that although we might see a brief period of even steeper advance before this uptrend exhausts itself, silver is now extremely overbought as indicated by short-term oscillators and moving averages gaps. This is now an increasingly high-stakes game and is regarded as the province of the brave - or the foolish. In order to avoid sleepless nights two alternative strategies are suggesting for handling this situation. One is take the big profits on offer immediately, and although we obviously don't like to do this as we are not operating as a charitable institution, adopt the philosophy of "leaving a little for the next man (or woman)". The other is to automatically exit on a closing break of the 10-day moving average, which although it involves loss of some profits, avoids one getting caught in a potential serious downdraught that such a break might lead to.
The 5-year chart puts recent gains into a broader perspective, and on this chart silver's overbought extreme is even more obvious. Admittedly, "it might be different this time round", but we are happy to let others run the risk of finding out whether this is true. Given that markets tend to go down twice as fast as they go up, can you imagine the speed of the descent if this breaks down? - to get some idea try looking at April 2004.
Finally, I have had some Emails from people telling me that I'm "a great contrary indicator" with regard to the outlook for gold and silver. If you are one of those you might like to reflect on the fact that subscribers to www.clivemaund.com were buying Avino Silver & Gold last year at C$1.36, now C$3.73, Coeur d'Alene at $4.39 before it broke out in January, ECU Silver last year at C$0.25, now C$2.62 and Excellon Resources last year at C$0.19, now C$1.30.
We have a policy on my site known as "The Prime Directive", which is to buy low and sell high, and in accordance with The Prime Directive we have started rotating out of red-hot small silver stocks into other stocks that are just about to start major runs. When this ramp in silver burns itself out, we aren't the ones who are going to end up with big tyre marks on our faces.
is an English technical analyst, holding a diploma from the Society
of Technical Analysts, Cambridge, England. He lives in Chile.
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