Gold Market Update

Just who does the Fed think it is kidding, making noises about choking off QE and Treasury purchases? Any serious attempt to do this at the eleventh hour would crash both the bond and stockmarkets and send interest rates skyrocketing, and they know it – it would be like the Captain of the Titanic grabbing a bullhorn and announcing “You see that Iceberg over there? – we’re going to head straight at it” – actually he might as well have, for all the difference it made. So it almost looks like they were engaging in a bit of “tree shaking” for their crony pals, especially with respect to the resource sector. In any case, when it comes to QE they have got some serious competition this year with Japan entering the fray as the new big QE kid on the block, so it hardly looks like they are going to bow out of the QE game at this stage. There is something tragi-comic about the way most investors hang on to the Fed’s every word, as if they were gods instead of what they really are which is an elite racket who have painted themselves into a corner after years of malfeasance.

So the sharp shakeout late last week, in a panicky response supposedly due to the Fed freaking out investors, looks to have thrown up another opportunity to accumulate more PM sector holdings ahead of the next uptrend and as we will now see, there is strong evidence that Friday’s intraday plunge marked the end of the correction in force from early October.

As we can see on our 6-month chart for gold below, Friday’s steep intraday drop brought the price down exactly to the bottom of our earlier delineated channel and just look what happened there – it bounced strongly on robust volume to close little changed on the day, leaving a fine large “bull hammer” on its chart, and it is no coincidence that silver did likewise. This large bull hammer is a sign that the downtrend has now run its course, and that a reversal is occurring. Notice how the C-wave decline of the 3-wave A-B-C correction matches the A-wave in magnitude, approx. $120. This looks like the final low and gold should now ascend from here.

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The 7-year chart for gold, which shows almost no technical change from the last update, reveals that it remains well within its long-term uptrend and so there is little for long-term investors in gold to worry about – substantial investors in gold can comfortably settle into their all-important leisure pursuits such as fishing, or hanging out in Las Vegas. The only proviso is that it is considered prudent to maintain a stop below the key support at $1500, to guard against the lurking risk of a deflationary implosion that could result from another collapse in the still extremely fragile banking system, which would take down most everything.

 

 

The latest COT chart shows that Commercial short and Large Spec long positions are in middling ground after having contracting significantly in recent weeks, and these positions are not at levels that would prevent a sizeable rally developing from here.

 

 

The latest Hulbert Gold Sentiment chart, courtesy of www.sentimentrader.com shows that sentiment has worsened considerably since the last update, which is really good news for bulls, as it means that the mob are bearish. This sentiment indicator is now at the sort of levels that usually coincides with a bottom and a reversal.

 

 

An ongoing riddle in relation to gold is the outlook for the dollar. At the end of last year we had anticipated a rally in the dollar index on the site, despite its looking like a Head-and-Shoulders top was completing in it, due to the weight of public bearishness and the big Commercial long position that had built up. Last week the dollar did rally strongly as we can see on its 18-month chart below.

 

 

The latest dollar COT chart, courtesy of www.sentimentrader.com, remains strongly bullish, however, which ordinarily would be a negative for gold. However, this may be the harbinger of further mayhem and strife in Europe, in which case the dollar and gold could rally in tandem.

 

 

The other much more dangerous possibility that we need to keep in mind is that the high Commercial long position in the dollar may be a warning of an imminent dash to cash that could be triggered by the sudden re-emergence of a major banking crisis. Despite ongoing bailouts and handouts of almost free money many banks’ balance sheets are in tatters, and they are stuffed with bad and deteriorating assets. The situation could rapidly get completely out of control and spiral into a crisis and deflationary implosion that would make 2008 look like a walk in the park. I’m going to digress here to tell you a story that should serve to make clear both the magnitude and unpredictability of this crisis.

When I was a kid there was a film about 2 hardened criminals serving long jail terms, who were offered a pardon on condition that they drive 2 trucks of the dangerously unstable nitroglycerine over the mountains to a dam construction site where it was needed. These guys were sweating buckets as they eased their trucks slowly over bumps and potholes. This stuff could explode at any moment if shaken about too much. One driver wasn’t careful or fortunate enough and his truck exploded and he didn’t even have time to think about saying his prayers. The other made it. This is the kind of dangerous instability that exists with respect to the banking system and derivatives right now. The Central Banks are setting a course for hyperinflation – that is where we are headed – but if they fail to shore up the banks and prevent a collapse – and they may be physically unable to prevent it due to the magnitude of bad asset decay – we could see an extremely rapid implosion in which virtually everything craters, but the dollar soars due to mass liquidation – this may be what the high Commercial long position in the dollar is warning of. This implosion could happen at any time with very little warning and it is why you need to keep $1500 gold and $25 – $26 silver in mind as a line in the sand – if these levels fail be ready to be stopped out or hedge. Otherwise, as long as the truck doesn’t explode and the game can be kept going, gold and silver look set to embark on another major upleg soon.

 


 

 

Silver Market Update
Clive Maund

After the Fed induced scare on Thursday, silver at first dropped again steeply on Friday before staging a dramatic turnaround to close little changed on the day, leaving behind a large bull hammer on its chart that is a sign of a probable final low for the correction.

 

We can see this action in detail on silver‘s 6-month chart, and how Friday’s positive close meant that the support of the lower trendline held. It looks like the classic 3-wave A-B-C correction in force from early October has now run its course, and it is interesting to observe that the A and C waves were of almost equal magnitude, which is often the case with these 3-wave corrections.

 

 

If the observations above are correct then we can look forward to a new major uptrend developing from here, which will be really nice for new buyers around this point, and augurs well for silver stocks too. Keep in mind that the reaction from early October through to now is simply a correction to the impulse wave that occurred in August and September, which itself involved a breakout from a potentially bearish Descending Triangle that we can see on the 7-year chart, which we will now turn to, to get a handle on the bigger picture.

The 7-year chart presents a positive picture and makes clear that silver bulls have nothing to worry about, unless the hugely important support at $25 – $26 fails – if that happens it’s time to head for the hills.

 

 

Otherwise we appear to be at a classic buy spot right now, for following the breakout from the Descending Triangle in August and September, silver has reacted back to what is now support at the top boundary of the Triangle, and it should now advance away from this point, and Friday’s bull hammer is a sign that this is what it is going to do. If it should continue to drift sideways/down in coming weeks it will continue to be a buy right down to the buy spot green circle above and in the key support at the $25 – $26 level and above the long-term channel support line shown.

The latest silver COT chart shows that, while Commercial short and Large Spec long positions are still on the high side, they have moderated sufficiently in recent weeks to allow for renewed advance.

 

 

The picture for gold is very similar and much of what is written in the parallel Gold Market update, such as the commentary on the dollar, applies equally to silver and so will not be repeated here.

Before closing, the importance of the support at $25 – $26 cannot be overstated. If this should fail it will probably be due to another major deflationary episode associated with the eruption of another acute banking crisis, as discussed in the Gold Market update, which the COTs for the dollar are showing is a definite risk at this time. For this reason evasive action or hedging should be undertaken in the event that this support fails. Other than this precautionary note, silver looks set to embark on another major upleg very soon.

Clive Maund, Diploma Technical Analysis
support@clivemaund.com
www.clivemaund.com


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