Gold & Silver: Market Update
We have been bullish on the broad stockmarket at clivemaund.com, but short to medium-term bearish on gold and silver in the recent past and by extension gold and silver stocks, due principally to the distribution patterns that have formed in the metals and their increasingly bearish COT structure, especially gold. However, there is an inconsistency here that is becoming increasingly obvious and has led to a re-evaluation over the past couple of days. The inconsistency arises because a breakout to new highs and strong advance in the broad stockmarket, which looks very probable for reasons we will look at shortly, will almost certainly be accompanied by further heavy losses in the dollar. What this implies is that although already oversold, the current orderly decline in the dollar will likely turn into a rout and it could plunge into a selling climax. This must mean that although the gold COT structure is now bearish, it is going to get even more so in the event that the dollar plunges and gold spikes. There was a hefty reaction in gold last Tuesday, which we sidestepped, although it made up most of the lost ground late in the week.
We will start by reviewing the outlook for the broad stockmarket with reference to a long-term chart for the S&P500 index. Here we see that the index is at an important psychological juncture, for it is on the point of breaking out to clear new highs, and on the basis of this chart it is expected to do so. A big reason is that volume indicators are exceptionally bullish - the Accumulation-Distribution and On-balance Volume indicators shown at the top and bottom of the chart continue to make new highs, and by a wide margin. Two important points need to be made here; one is that we do not, of course, overlook the fact that in real terms, this index is nowhere near making new highs, as can be readily seen by plotting it in Euros or Swiss Francs. The other is that a breakout to new highs is actually nothing more than a compensatory move for the collapse in the currency, made possible by continued ramping of the money supply. However, this won't take the shine off the huge profits that are to be made in Call options, hence the broad market article of a couple of weeks ago on www.clivemaund.com in which we focused on Call options in a selection of big mainly DJIA stocks, which are so far doing well.
Of course, if the broad market breaks out to new highs, then it implies that despite already being oversold, the orderly decline in the dollar thus far is going to accelerate - one very possible scenario being that it nosedives into a selling climax that is followed by a dramatic snapback rally. On the long-term chart for the dollar index going back to the mid 1980's we can readily see why this could occur. Over the past few months the dollar has been eroding a band of crucial long-term support in the 78 - 81 zone and is now right on the point of breaking below it. In attempting to decide whether the dollar decline will now accelerate there is an important fundamental factor to consider - and this is the fallout from the August credit crunch debacle. Overseas banks and financial institutions are still smarting from having been defrauded to the tune of trillions of dollars by US banks and financial institutions over sub-prime mortgage paper. US banks and financial institutions colluded with rating agencies to repackage and misrepresent these dodgy loans as being much more sound than they actually were, and then succeeded in farming them off to unsuspecting foreigners in what amounts to the greatest swindle of all time. While diplomatic niceties and their own corrupt and compromised natures prevent the heads of these foreign banks and institutions from standing up and telling the unvarnished truth about how they were played for suckers, privately they are seething and out for revenge - and one way they can get it is to dump the dollar. Like US generals, they will probably find the courage to speak their minds - once they have retired.
The stockmarket breaking out to new highs implies a falling dollar, as already mentioned, and with the dollar now breaking down below major long-term support it is clearly vulnerable to going into freefall, particularly given the fundamental considerations set out above. In this situation it is hard to see gold and silver doing anything but going up, despite the current bearish COT structure in gold. If this scenario comes to pass what we can therefore expect to see are upside breakouts by both gold and silver - gold above its Distribution Dome and silver above resistance approaching and at its highs of last year. Both would be expected to spike, with Large Spec long positions and Commercial short positions ballooning to levels way above anything seen over the past year, before the inevitable dramatic reversal occurs. Oil, which is currently constrained beneath the confines of a dome similar to that in gold, would also be expected to break out upside, also to compensate for dollar losses.
In conclusion, there are 3 breakout moves to watch out for that will signal the start of new uplegs in the broad stockmarket and in gold, silver and oil and resource stocks generally. One is a clear breakout by the S&P500 index to new highs, which we are very close to, the second is breakouts by gold and oil above their Distribution Domes. All of these likely are likely to occur synchronously, and although the situation is silver is not so clear, the breakout by gold can used as a signal for silver. In the event that this happens, the gold stocks indices, which have stalled near their highs in a narrow range, will break strongly to the upside from what will later be seen to be Flag consolidation patterns.
We succeeded in sidestepping a hefty reaction in silver early last week, but while gold has already made good most of its losses of early last week, silver has not - yet, and long positions can therefore be reinstated at a better price, although some traders may prefer to wait for the "triple breakout" referred to in the Gold Market update before going long.
Much of what is written in the Gold Market update applies equally to silver, to which readers are referred. On this occasion gold may be used as a breakout indicator for silver. This is because the gold price is still trapped beneath the confines of a Distribution Dome, however, should it break out upside from the dome, as now expected due to the prospects of the dollar going into freefall, it will likely enter a period of near vertical ascent, and silver, which does not have the same clear shorter-term dome pattern, can be expected to follow suit. Therefore, silver investors and traders should watch out for a breakout by gold from its dome, and should this occur, will be entitled to expect silver to break rapidly above the resistance at last year's highs and enter into a period of rapid appreciation. Despite the substantial increase in the Commercials' short positions in silver, cited as a source of concern in last week's update, it is still nowhere near as high as that in gold. There is therefore plenty of scope for a big rise in the price of silver before the Large Spec long positions and Commercial short positions become prohibitively big.
is an English technical analyst, holding a diploma from the Society
of Technical Analysts, Cambridge, England. He lives in Chile.
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