Gold & Silver: Market Update
Gold's situation now bears a striking resemblance to the period from September through November 2005, which was followed by an almost uninterrupted advance that resulted in near 60% gains. At that time gold had just broken out from a 7-month triangular consolidation to become overbought. A consolidation pattern then formed which involved it correcting back to the vicinity of its 50-day moving average, after which it took off. Using the spot gold price (average of London am and pm fixes), gold spent 18 consecutive days above the preceding high ($454 set on 6th Dec 2004) and the consolidation concluded with a "testing low" that stopped $3 above the 6th Dec 04 high, after which gold climbed nearly 60% in an almost uninterrupted advance. Gold looks set to react soon back to the $725 area (spot) and then take off much higher.
The present pattern is very similar to what occurred back in the Fall of 2005. If the pattern is repeated then we are now in mid-consolidation which should conclude in about a month's time with a test of support at and just above the May 06 high at $725 (spot). If this holds it will be a strong buy signal, especially as there is a very rare $9 gap in the price structure between $689 and $698 on the spot gold chart. Should this occur as expected we can look forward to a massive ramp in the gold price, which many big gold stocks are already clearly signaling is an upcoming development. We will therefore be highlighting the better gold stocks for accumulation on the site, regardless of whether it reacts back or not, and should it react back over the next several weeks back towards the $725 area (spot), $733 (futures), it will be viewed as presenting an exceptional opportunity to take positions in stocks at better prices, and also for more experienced traders to leverage returns by means of Traded Options.
As we can see on the 3-year chart, despite gold rising by nearly 60% from September 2005 through May of 2006, it stopped to take a breather 3 times on the way up, once soon after breaking out in September 2005 as detailed above, and during each of these consolidations the price reacted back close to, or a little below, its 50-day moving average, which enabled it to recharge for the next runup. Thus it is reasonable to expect it to do the same shortly, and as we will see, there are other factors, principally the latest COT data, which suggest that it will react back in coming weeks towards to its 50-day moving average. This should throw up one of the biggest buying opportunities in this long gold bull market.
On the 3-year chart we can see that, following its breakout last month, gold opened up a substantial gap with its 50-day moving average, hence the current slowed rate of advance, and we will now look at recent action in more detail on the 6-month chart. On this chart we can see that gold has broken out of a Distribution Dome over the past week or so, but that it has since made hesitant progress with the advance from mid-September taking the form, at least to date, of a Rising Wedge, which suggests that a reaction is imminent. Others factors also suggest that a reaction is to be expected shortly and the most likely target for any such reaction is the $730 area, where there is an obvious line of support and longer-term support dating back to the May 06 high, with additional support in the vicinity of the 50-day moving average which is rising up beneath. Given the strongly bullish longer-term outlook we will therefore seize upon any such reaction as a MAJOR BUYING OPPORTUNITY.
The latest COT chart shows the Large Specs falling over themselves with enthusiasm for gold, with the Commercials short positions rising to a high level, so that both are viewed as being at an extreme that calls for a reaction soon. As the former usually get their backsides kicked we will want to see this moderate in coming weeks, which should fit with the anticipated reaction.
It is important not to be fooled by the fact that silver hasn't yet broken out to new highs, unlike gold, and to interpret this as a sign of weakness, for the current setup in silver is very bullish, even if it reacts back significantly short-term as now looks likely.
Many traders don't appreciate that silver has ALREADY BROKEN OUT, even if it hasn't made new highs, and to see what is meant by this we will now look at the silver chart.
On the 3-year chart we can see how silver broke out above a bearish dome pattern in September that had earlier been suppressing the price and forcing it lower. What is not generally understood is that this breakout marked the start of a major new uptrend - the fact that it hasn't yet broken out to new highs is a "red herring" - and that once the current consolidation/reaction is completed the price should breaks to new highs and then the advance should accelerate dramatically. Like gold, the reason that we are using a 3-year chart in this update is so that we can compare recent action to that just preceding the late 2005 - early 2006 ramp, for as we can readily see, there are striking similarities. One big one is that at that time gold had already broken out to new highs, whereas silver hadn't - just like the current situation. In late 2005 silver had just broken out of a large triangular pattern that ran from late 2004 through September of 2005 and it then went into a consolidation pattern before breaking out to new highs and advancing rapidly. This is very similar to the current situation where silver is now consolidating, having broken out above the dome pattern. The only question now is how long silver will remain in the current consolidation pattern and how far it may react back within it in coming weeks. It is quite possible that silver will remain in the consolidation pattern for several weeks longer, perhaps a month, and during this period it is considered likely that it will react back to support towards the lower boundary of the pattern at about $13.25 or a little lower to support in the $13.00 area. Should it do so it will be regarded as a strong buy as will many silver stocks.
That there is less belief in silver right now than in gold is evident on the latest COT chart, where we can see that the Large Spec long position is much more modest than that for gold, which serves to underline silver's big upside potential.
One final point. Some commentators have referred to silver's recent performance as "pathetic" compared to that of gold, especially as it has not broken out to new highs, whereas gold has. However, as we have seen here, silver had also not broken out to new highs in September - October of 2005, but look what happened to it after that - it took off like a rocket. So it is important not to be fooled by the fact that it hasn't made new highs yet.
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.
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