Gold and Silver Market Updates
Jul 28, 2006
There are a lot of conflicting opinions being bandied about regarding
the outlook for Precious Metals prices, as many readers will
no doubt be aware, and when this occurs, it is usually a symptom
of a trading range situation.
At a time like this we need
to stand back and look at the big picture. We will therefore
start by considering the very long-term gold chart that goes
way back to the early 1970's, and thus includes two bull markets,
the great 70's bull market and the current one.
On this weekly chart it is
clear that if we classify the vertical ascent of the late 70's
as a "Spike", then the recent runup, which looks tame
by comparison, can fairly be described as a "Spikelet",
and when you factor in inflation in the intervening years it
is certainly "nothing to write home home about". In
fact gold only really broke out when it crossed the $500 line
- where there was substantial resistance arising from the 1983
and 1987 highs. This former resistance is now, of course, a zone
of support. The relatively modest nature of the spikelet is emphasized
by the MACD indicator, which shows that although an overbought
situation developed, it was nowhere near as extreme as that in
1979. Gold has nevertheless stopped for a breather following
the peak at about $720, and the big question now is whether what
we are seeing now is a healthy consolidation/reaction, or whether
it's all over bar the counting.
The answer to this question
is implicit in what was written above about gold still only being
$120 or so above the breakout line of a 23-year line of resistance.
It seems highly unlikely that, given the significance of this
breakout, gold will rise a mere $220 or so before the advance
peters out and it goes into reverse, especially factoring in
inflation. In addition, the breakout was the product of a giant
Cup and Handle base pattern that took 9 years to develop, and
it would be unusual for such a large base area to generate such
a short-lived advance. However, the situation is complicated
rather by the odd behaviour of gold stocks, which have marked
out a potential "Head-and-Shoulders" top, which we
would probably not take too seriously were it not for the fact
that many gold stocks exhibited decidedly bearish volume patterns
on the recent severe drop.
We therefore conclude, pending
additional evidence one way or the other, that gold is currently
in a trading range situation. The effective boundaries of this
range are the strong support in the $560 - $580 area and resistance
approaching $680, shown on the 6-month chart, and it should be
noted that there is significant support at $600. While gold remains
within these parameters, it will be considered to be range bound.
Traders can reverse position at these levels with a close stop
to restrict losses in the event of the price crashing them.
The arguments pertaining to gold apply to a large extent to silver
too, where this year's sharp runup towards $15 certainly only
ranks as a "Spikelet" in comparison to the monstrous
"Hunt Brothers" superspike of 1979, which had opportunists
everywhere rushing to the furnace with Aunt Maud's treasured
silver heirlooms to take advantage of the price rocketing towards
$40, which, inflation adjusted, was vastly in excess of the recent
Our long-term chart only goes
back to 1994, but keeping the 1979 - 1980 peak in mind, we can
readily see that, inflation adjusted, the recent spikelet was
a comparatively modest affair. After the peak, a heavy reaction
set in, and now, like gold, a trading range appears to be developing.
Silver exhibits a fine example of a Pan & Handle base, that
formed between late 2000 and about August of last year. These
formations are very bullish and good examples of the ballistic
advances that frequently follow the completion of such patterns
are provided by the charts of ECU Silver ECU.V, Pioneer Drilling
PDC and Tanzanian Royalty TRE (the former Tan Range). This is
a weekly chart and we can see that, on an intermediate basis,
the overbought condition has neutralised, as shown by the MACD
indicator at the bottom of the chart. Silver truly broke out
from a long, dull multi-year period of sideways trading only
late last year, when it broke clear above the $8 level, which
level is now a strong and important support level. Thus, the
spikelet is "small potatoes" compared to what could
eventuate in the future.
On the 6-month chart we can
see that the price is being pincered between its rising 200-day
moving average, and its now steeply falling 50-day moving average.
This is a situation that is expected to generate a sharp move
soon. It could break either way, but consideration of the charts
of large silver stocks suggests that the break will probably
be to the upside. Note, however, that although we may see a sharp
move soon, this is unlikely to signal an end to the trading range,
which is defined by support towards $9.50 and resistance towards
Jul 27, 2006
is an English technical analyst, holding a diploma from the Society
of Technical Analysts, Cambridge, England. He lives in Chile.
Visit his subscription website at clivemaund.com. [You can subscribe
No responsibility can be accepted for losses that may result as
a consequence of trading on the basis of this analysis.
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