Gold and Silver Market Updates

Clive Maund
Jul 10, 2006

Gold

Although the last Gold Market update was bullish, gold has actually exceeded our expectations, by rising smartly from the base area that formed following the plunge, and now many market players are understandably preoccupied with trying to answer the question "What next?" - will it just carry on up, or is it likely to react first, and if so by how much - and some may be wondering if this rise is just a rally in a nascent bear market in the yellow metal. This update attempts to answer these questions. The fact that golds rally appears to have lost momentum at the underside of a zone of strong resistance very close to its 50-day moving average is the reason for posting this update now, for the time to address these questions is now.

In the last update gold was described as being oversold and in a buying area although it was expected to fluctuate for some weeks between $540 and $590 before an advance got underway. Instead it has just taken off, but has now, as already mentioned, run into a zone of rather strong resistance, which has in recent days slowed the advance.

On www.clivemaund.com we have already examined the reasons for the recent severe shakeout in the Precious Metals, which, in a nutshell, was due to fear of a liquidity crunch and soaring interest rates. We will never know if the "Masters of the System," who have their hands on the levers of power, deliberately manufactured this scare in order to profit from it, which they are clearly well placed to do, but from a practical standpoint, whether they did or not is irrelevant. What is relevant is that it remains a background threat. As Richard Russell has stated innumerable times, it's a case of inflate or die, but this assumes that the objectives of the Master of the System coincide with those of the masses. There are some who believe that their ultimate objective is to ensnare the majority of the population in an ocean of debt, and then, at a moment of their choosing, collapse the system and mop up most private assets at knockdown prices, and then effectively enslave the population, who would be permitted to remain in the homes they could no longer pay for as tenants.

Certainly the extraordinarily low interest rates in the face of across the board exponentially expanding debts, deficits and derivatives provide a strong argument for those who hold this view. But even if this were true, it is still probably some years away as the apparatus for completely controlling the population is not yet fully in place - for example, in the United States it will first be necessary to induce or coerce the population to relinquish their guns. Thus, in the meantime, the policy of endless money expansion can be expected to continue, which means inflation, which means that the prices of assets that represent refuges from the ravages of inflation, such as the Precious Metals, are set to continue to rise. Only in the situation where the Masters of the System have created a monster that they can no longer control, and that runs away from them, resulting in an abrupt liquidity crisis and interest rate spike, which would result in a broad and devastating implosion, would the Precious Metals be at risk from a general meltdown. As already observed in the recent past on the site, we do have a potential Head-and-Shoulders top in the gold stock indices, which would only be expected to complete in the event that the worst case scenario becomes reality.

Gold is therefore expected to continue to rise, and the sharp advance of the past week or so is believed to mark the start of the next intermediate uptrend that should take the price comfortably to a new high. The June base area is believed to have been left behind and gold is not now expected to return to test the June low, or drop back anywhere near it. However, it is considered to have risen rather too far too fast, and is thus vulnerable to a short-term reaction, which would "put the frighteners" on a lot of people but is not expected to carry very far - probably not below $600 at most, where there is support from the recent base area. Experienced and nimble traders may want to sidestep or partially sidestep this potential reaction, and, should it occur, it will be viewed as a buying opportunity.

Silver

The last Silver Market update was bullish, but silver has performed more strongly than expected in the intervening period, and like gold, is now vulnerable to a short-term reaction, having risen into an area of strong resistance rather quickly. Most of the arguments relating to gold set out in the Gold Market update apply equally to silver, and there is thus no need to repeat them here.

Silver has slowed beneath a zone of heavy resistance in the $12 area which is reinforced by the falling 50-day moving average being about at this level. Even if it first rallies a little more, it is expected to get knocked back soon towards the support near the upper boundary of the small base that formed in June, i.e. it is likely to drop back to the $10.80 area. It will be regarded as a buy here as the upleg of the past week is viewed as the probable start of a new intermediate uptrend. As with gold, only in the event of a liquidity crunch and associated interest rate spike will the overall bullish pattern abort.

Jul 9, 2006
Clive Maund
email: support@clivemaund.com
website: www.clivemaund.com

Charts courtesy of StockCharts.com.

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