Gold & Silver: Market Update
I don't normally look at fundamentals in these Gold Market updates, but it is worth stopping for a moment to consider the implications of the latest stroke of genius announced last week by the Fed in its desperate attempts to prevent a credit crunch, as it has important implications for the price of gold.
Like a magician pulling a rabbit out of a hat, the Fed and foreign central banks announced that they will conjure up $50 billion to inject into the system, which they will generate by selling low interest rate loans for those who like throwing good money after bad, or have no choice but to. The point to grasp though is this - the Fed will ultimately be liable for these loans - and we all know what the Fed does when it needs money, with a few simple keystrokes it creates it out of thin air - so why stop at a paltry $50 billion, which with respect to the liquidity problem is like approaching a guy who has just had his arm chopped off and is gushing blood all over the place with a drugstore plaster for a minor cut - why not really get serious and create $100 billion, a trillion, or, inspired by early 20's Weimar Germany, ten or a hundred trillion?
While it only takes a few keystrokes to create endless trillions, so that the guys at the Fed can lay down in a sea of money and make whooping noises as they throw handfuls of it into the air, in the real world outside the perimeter fence, there is, as ever, a finite supply of goods and services that this money, so easily created, is going to end up chasing and competing for. So the result of this endlessly expanding creation of liquidity must be more and more inflation - if they succeed in staving off a credit crunch and deflationary implosion, that is, and because a deflationary implosion would be catastrophic, they MUST succeed. So you see how they have finally painted themselves into a corner where they have to continue to ramp the money supply exponentially, a "catch 22" situation which could easily runaway into hyperinflation. Once you understand this, you will immediately realize why they stopped reporting the M3 money supply figures several years ago, which have since gone off the scale. The only caveat to all of this is the possibility that they actually want to see a credit crunch and deflationary implosion, for reasons set out in the No Way Back article last week.
So, faced with accelerating inflation what do investors do to preserve their wealth? They do what they did in the 70's, buy tangibles - hard assets, gold and silver, paintings, coins, stamps etc - anything with a scarcity value which those desperate to get out of cash will flock to buy. Last week's announcement by the Fed of another liquidity boost was just another staging post on the road to hyperinflation and has provided yet another reason to buy gold, as if there aren't enough already. Now we will examine gold on the charts to see how it is shaping up.
On the 3-year chart we can see that gold has actually held up well since the last update about 2 weeks ago, given the dollar strength which was predicted at that time. We were looking for it to react back to the $765 area, give or take $10, which would have involved a minor break of the 50-day moving average, and this is still regarded as a possibility in coming days, or perhaps over the next week or two. Even if we see such a reaction, however, as was the case in the last update, the current trading range continues to be regarded as a consolidation pattern - a Pennant - and therefore any short-term dip will be viewed as a buying opportunity. The situation is of course rather different with Precious Metals stocks, which are subject to the vagaries of the stockmarket.
The following paragraph is lifted from the last update, as with gold still in the trading range it remains relevant.
With respect to the last sentence of the above paragraph, the HUI index broke down from an intermediate Head-and-Shoulders top late last week, which may be telegraphing a short, sharp drop by gold in the near future back to the $765 area, which, as stated above, will be viewed as presenting a buying opportunity.
On the 6-month gold chart we can see that with the triangular Pennant that has formed in recent weeks appearing to be close to completion, we are likely to see a sharp break one way or the other soon. The most likely scenario as made clear above is thought to be a drop to the $765 area that spooks a lot of traders, followed by a resumption of the larger uptrend.
On the 6-month dollar index chart we can see that the dollar has continued its powerful snapback rally, exactly as predicted in the last update, and it had its strongest day for a long time on Friday, no doubt fuelled by those who were impressed by the Fed's largesse last week. The following paragraph, related to how far the dollar rally is likely to get, is also taken from the last update.
With regard to the above paragraph, the one modification that we need to make is that as the 100-day moving average has now dropped to about 78.3, we should lower our upside target for the dollar from approximately 79 to about 78.5.
In the last Silver Market update on 2nd December it was stated that if dollar strength continued as expected, silver could drop below the support zone centered on $14 and head lower towards the next support level in the $13.25 - $13.50 area. Since that time it has held up above the $14 support zone, but it dropped quite sharply late last week on renewed dollar strength and at the time of writing on Sunday 16th it has just broken below this support.
On the 6-month chart we can see how last week's drop signals that the reactive phase that began early in November is continuing, with the break of the support calling for probable further short-term weakness that is likely to take silver down to the next support level shown quite quickly, resulting in it being oversold. There the reaction should terminate and silver is expected to then turn up and begin a new uptrend. This fits with the outlook for the dollar, set out in the Gold Market update, whose predicted snapback rally is now at quite an advanced stage, meaning that after some further progress it is likely to turn lower again, which would of course take the brakes off gold and silver. Buyers of silver on a decline to the support level should limit downside risk by placing a stop just below $13.00.
The 3-year chart reveals that after the early November breakout attempt, the price has slumped back into the large trading range that started to form after the May 2006 peak. The real action in silver will start once it finally breaks out upside from this range, and especially when it breaks out of this pattern against the Euro.
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.