Friday, April 12, 2013

Thoughts on gold and silver

A reader writes: “I have some thoughts regarding precious metals and would like your opinion on them: 

1) All gold and silver have done is trade sideways for two years.  In gold’s case it has been sideways for two years in August.

2) The news in gold is very bearish as one hears that Soros and other hedged funds have bailed out.  Which is typical if they don't make money they leave the asset.

3) If gold and silver break down from these critical support levels one needs to see acceleration in price right now if you look at the move down it is taking much more time than the move up.

4) If you are right about a problem in the world coming [in 2014], gold and silver should start moving up soon in a trending fashion without people talking about it.”

My reply: On the first thought I would point out that while both gold’s price is essentially unchanged from two years ago, the pattern in gold has been one of declining tops and bottoms, which by definition is that of a downward trend.  The declining trend is even more pronounced for silver. Thus we must continue to assume that bear market conditions hold sway over the precious metals instead of giving the metals the benefit of the doubt.  A trend reversal requires definite technical indications, including an upward turn of the 15-day and 30-day moving averages.  Gold and silver continue to be held captive below both these critical trend lines, meaning the short-term trend is still down.  Remember: a new bull market begins with the short-term trend.

The second point is that while it's true that most hedge fund traders are momentum traders who follow the prevailing market winds, this alone can't be used as a contrarian indicator for gold and silver.  When billions of dollars are pouring into a given market direction (namely down), the downward momentum this generates can be self-sustaining for many weeks and months before eventually become exhausted.  There's a reason why Soros and his peers are billionaires.

On the fourth and final point I would say that gold should certainly begin to move up once the insiders with access to key information on geopolitical and financial affairs see trouble on the horizon.  That such trouble isn't forthcoming yet is proven not only be gold's failure to rally in a sustained fashion, but also by the relentless advance in risk assets such as equities.  It will likely take a major shift in the prevailing economic and/or geopolitical winds to catalyze a revival of gold's fortunes.  Such a shift is expected in 2014 as we approach the final bottom of the 120-year Kress cycle.

One thing I still believe is that investors are still prone to run to gold as a safe haven when headlines are troublesome, as we saw in the last couple of weeks.  We have good reason for believing, therefore, that the next gold trend change will most likely be catalyzed by the market's perception of a shift in the political and/or economic winds from good to bad.  

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