Gold and Silver Market Updates

Clive Maund
posted Apr 21, 2006

Gold

Gold fell heavily today [Thurs], and although it was a large one-day drop, it was not unreasonable given the size of the decline in silver and the rally in the dollar. Although gold was certainly overbought and pushing its normal overbought limits it had not become as severely extended as silver had.

On the 6-month chart gold's recent strong rise looks modest compared to what we have recently seen in silver. The rally towards the end of March and this month had opened up a large gap with its moving averages, and it had risen to push normal overbought limits in recent days, as can be seen from the RSI and MACD indicators at the top and bottom of the chart. Even though it is now reacting, this retreat is viewed as a healthy technical development that will serve to partially unwind the overbought condition, and thus create further upside potential. A positive effect of the strong rally of recent weeks is that it has taken the price sufficiently far above the trading range beneath $575, for this zone to provide strong support in the event of the price reacting back that far, which is considered unlikely at this point.

On the 5-year chart we can see that gold has now moved into a higher gear, so that the long-term trend channel it had remained in for several years is now obsolete. Due to the outlook for the dollar, which we will come to shortly, the steeper rate of advance is expected to continue. A period of consolidation is now likely in the $600 area before progress resumes.

On the 1-year dollar chart we can see that the Precious Metals' about face today [Thurs] synchronized with a dollar rally from important support in the 88 area on the index. The dollar was short-term oversold so it was entitled to a brief rally, however, the outlook for the dollar is grim indeed. On this 1-year chart we can see that the dollar has been rounding over for about 9 months beneath a zone of heavy resistance, forming a large Head-and-Shoulders top which it looks set to break down from soon - and with the gap move below the "neckline" of this pattern about a week ago, it can already be said to have done so. Gold is expected to resume its advance once the limited support at the 88 level fails, with the next support being at the 86 level.

On the 5-year dollar chart we can see the importance of the resistance level in the 90.5 - 92.5 area that brought last year's rally to a dead stop and that once the 86 level fails, the next major support comes in the 80 area, and when that gives way, the dollar could go into freefall. The impending serious decline in the dollar presaged by these charts will obviously fuel the ongoing bull market in the Precious Metals and in anything else priced in dollars.

Silver

Sentiment reversed at the flick of a switch in the precious metals markets today, especially in Silver, which had become insanely overbought this week. The "Greater Fool" theory was the only law in town and buyers were piling in aware of the markets' overbought condition, in the belief that they could sell to even bigger idiots later on. This is fine as long as everyone plays the game, but someone evidently shouted "Fire!" in the packed theater today [Thurs] and the result was a stampede for the exits. Given the monstrously overbought condition of the silver market this panic liquidation could continue for some days yet, and the normal pattern is that it will be followed by a period of "wound licking" as shell-shocked and battle-scarred speculators stagger about in dazed disbelief. For those who succeeded in sidestepping this reaction however, or who otherwise have sidelined funds with which to enter the fray, this will be a harvest time when they can buy up silver from the bewildered and disorientated veterans, who may at least be able to draw some solace from the old saying "That which does not kill me makes me stronger," which the writer believes is a load of rubbish.

Our 5-year chart reveals the parabolic rise in silver which had become vertical, and opened up an enormous gap between the price and its moving averages. Due to the disciples of the "Greater Fool" theory putting their beliefs into practice the price rose to an insanely overbought extreme, resulting in short-term oscillators, such as the MACD shown, almost flying off the scale. There was no way of telling when this lunacy would end, the only thing that was clear was that risk was increasing rapidly, and that any factor that came into play that the market didn't like would be enough to trigger an avalanche of selling.

Of course, the bullish fundamentals for silver remain virtually unchanged by the psychotic behaviour of speculators, and this being so, the silver price is expected to steady prior to a new uptrend, once the current wave of panic liquidation has run its course, and the scenario described in the article "How to take full advantage of a Silver Superspike" remains valid, for silver may go on to easily exceed the highs of a couple of days ago. What is happening now is that the market is taking an overdue breather. Thus it is recommended to wait until the current selloff has finished and then buy silver. There should be time to do this before the market moves higher again, as normally sentiment is shattered by the plunge and the price thrashes around for a while forming a base area allowing sentiment to recover before a new uptrend takes hold.

Apr 20, 2006
Clive Maund
email: support@clivemaund.com
website: www.clivemaund.com

Charts courtesy of StockCharts.com.

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