CHARTWORKS - NOV 8, 2010
Precious Metals

Technical observations of RossClark@shaw.ca

Bob Hoye
Institutional Advisors
Posted Nov 10, 2010

The volatile action in currencies and bonds over the past three months has produced the classic environment for a bull market in precious metals; silver leading, followed by mining stocks, then gold and finally the general stock market. However, excesses similar to others in the past decade are beginning to appear.

(Click on images to enlarge)

Within the mining sector the junior and emerging producers are leading the way with the GDXJ more than 20% above the highs of 2007 and up 340% from the lows of 2008. While subject to volatility, we expect this trend to continue. The $31 to $32.50 area is now considered a worst case scenario on a pullback.

Key support and resistance levels in silver continue to relate to the deflated levels of the previous decades. When adjusted for inflation by the Bureau of Labor Statistic’s CPI* we see that the September breakout, following a pause for the past two and a half years at the equivalent of the 1987 highs, is now approaching the next level of significance. At $30, the price will be the equivalent of the February 1974 high ($6.46), the May 1980 low ($11.16) and the February 1983 high ($15.83). A consolidation/correction from there would be anticipated.

*If one uses the www.shadowstats.com version of the CPI then silver prices are only approaching the lows of May 1986 and gold is approaching the lows of February1985.

A close of $27 or higher in silver this coming Friday will produce a weekly upside Exhaustion Alert, last seen at the highs in March 2008.

The later part of interim rallies in the metals generally sees an accelerating move in the Silver/Gold ratio just as we are currently experiencing. The higher the RSI level, the deeper the ensuing correction becomes. The current level of 83 in the daily RSI(14) has only been seen ten times in the past four decades and we would not be surprised by a test of the 100 day moving average in the HUI, XAU and GDX mining indices.

The downside daily Capitulation Alerts in the US Dollar in October produced an interim bottom with two rallies back to resistance at the 20-day moving average. The subsequent move lower has now created a weekly Sequential Buy Setup. The Euro will create a Sell Setup if it closes above 139.72 on November 12th. These signals are generally seen around highs in the precious metals. As noted below, attractive purchases in the metals and mining indices are available when the Dollar rallies back to its 20-week exponential moving average (currently 80.03).

The gold correction should be capable of holding around the 50-day moving average ($1310) and 20-day Bollinger Band ($1315).

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Nov 8, 2010
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com

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