Gold/Silver Market Updates

Clive Maund
Jan 26, 2009

Gold

Gold is now in position to break out to new dollar highs and embark on a very powerful run. It is not its action on Friday which gives rise to this positive view, although that was certainly impressive enough, but the extremely bearish action in the dollar last week, which suggests that it is on the verge of a breakdown and savage decline.

On the 1-year chart for gold in dollars we can see how the sharp rally on Friday broke it above the resistance at the December highs and above an inner downtrend line. We were earlier inclined to the view that gold would probably drop down to form a symmetrical Right Shoulder to complement the Left Shoulder of the large Head-and-Shoulders bottom shown on the chart, but Friday's breakout has negated that scenario. On this chart it looks like gold still has considerable work to do before it can break free from the lengthy reaction phase from last March, with it needing to clear the resistance at the September - October highs and break above the downtrend channel return line, now coincidentally at about the same level as the resistance, and then go on to break above the highs of last March, but the rapidly worsening outlook for the dollar means that gold is likely to make light of these tasks. Before leaving this chart note the bullish alignment of the 50-day moving average and the fact that continued progress by gold in the near future will son lead to a ·golden cross", involving the 50-day moving average rising up through the 200-day, so that the latter later turns up, creating the classic alignment that underpins a dynamic advancing phase.

The asymmetrical Head-and-Shoulders bottom in gold (Right Shoulder much shallower than Left Shoulder) is also evident on the charts of many large gold stocks. Barrick, which broke out from such a pattern on Friday, is a good example.

In the last update we allowed for the possibility that the dollar could exceed our earlier target at 84 - 85 on its index and break into the October - December top trading range to make a run towards the November highs. This is did, perhaps benefiting from Obamamania spillover. However, despite it making a new intraday high for this uptrend from December on Friday morning, the action last week, and especially on Friday, was very bearish. We will now examine the action last week in more detail, using candlestick analysis, to see why.

When a "gravestone doji" candlestick shows up on a chart after a long rally, it is a strongly bearish sign. A doji is a candlestick that appears when the day's open and close are at exactly the same level so that the candlestick has no "real body", and a doji signifies a market in a state of indecision, which is not what you want to see after a big rally, unless you are a bear. A gravestone doji is where the open, close and low for the day are all at the same point and it is a particularly bearish type of doji, because it shows that while the bulls succeeded in taking the stock, or in this case currency, to new highs, they were completely overwhelmed by bears during the session who took it all the way back down to where it started. Strictly speaking it was not quite a gravestone doji on Friday, as the low was a little below the open and close, but it wasn't by much and the candlestick we got was the result of the same dynamic - with the same implications. Those who ignored the message of an identical doji in gold back last March ended up paying a heavy price, and it is very interesting to compare the earlier gravestone doji in gold last March and what happened following its appearance to that which has just manifested in the dollar, which is presented above.

That the outlook for the dollar is bleak should hardly be surprising given that both the bond market and the dollar can be expected to collapse in unison - and last week the 30-year Treasury Bond suffered its heaviest weekly loss in 22 years, breaking down from a Head-and-Shoulders top area. The 10-year Treasury Note is on the verge of doing likewise, as can be seen on its 6-month chart below, whereupon the entire Treasury complex will be at risk of cratering.

You were warned to get out of Treasuries right at the top in the Gold Market update of 22nd December, as the following chart posted at the time attests.

While gold may seem to face considerable overhead resistance on its dollar chart, it is worth reminding ourselves that such is not the case against many other currencies. Gold's chart in Euros is a fine example. On the long-term Gold in Euros chart we can see that gold is already on the point of breaking out to new highs, and only has a tiny amount of overhead resistance to contend with near an intraday high last October - on a closing basis it is already at a new high.

Last week on my site, being unsure of which way gold would break we concentrated on mopping up the absurdly cheap oil bull ETFs, which have been marking out base areas on colossal volume, and they started to pick up strongly on Friday. It is hard to imagine who would be mad or stupid enough to sell them at such low prices. The most charitable interpretation we can make is that they have been distress sellers - liquidating due to margin calls etc. An interesting development of recent weeks has been the leasing of oil tankers to store crude by speculators, who apparently no longer trust the paper markets and want the real thing. Oil tanker lease rates have been climbing as a result. The increasingly bullish outlook for oil is important to Precious Metals investors, as oil and the PMs tend to advance in tandem, and the rise of both signals the resurgence of inflation that may quickly ramp up into hyperinflation as a result of continuing global fiscal profligacy.

Silver

Silver's break higher on Friday was an important positive technical development that has cleared the way for a rapid advance towards the resistance in the $14 area. This move negated the potential small Head-and-Shoulders top pattern that appeared to be forming and makes clear that the trading range that had developed following the breakout from the severe downtrend early in December was a zone of consolidation.

There are several factors in play that point to an acceleration in silver's advance. One is that it is advancing away from its rising 50-day moving average and getting well clear of last year's savage downtrend, thus allowing sentiment to steadily recover following last year's heavy losses. Another is that the rising trend of the MACD indicator shown at the bottom of the chart is a sign that silver is gathering upside momentum. However, the 200-day moving average is still falling overhead which is a restraining factor reinforcing the resistance in the $14 area, and last year's severe downtrend has of course created considerable overhanging supply concentrated especially in the resistance zones drawn on the chart. These are factors that will challenge silver on the way up as its advance progresses and accelerates. Nevertheless, these are not formidable obstacles, especially when you bear in mind that silver tends to lag gold and to perform best towards the end of major gold uptrends - gold is just powering up for a major uptrend now and as its uptrend progresses we can expect silver to continue to accelerate. In addition the dollar is now looking acutely vulnerable to a steep drop as set out in the Gold Market update, and if this comes to pass it will be an additional driver for silver gains measured in US dollars.

As usual, many of the factors discussed in detail in the Gold Market update section, such as the dollar outlook already mentioned, are equally applicable to silver, and are thus not repeated here.

Jan 25, 2009
Clive Maund
email: support@clivemaund.com
website: www.clivemaund.com

Charts courtesy of StockCharts.com.

321gold Ltd