Zak Mir on gold and silver

By Zak Mir.

Yesterday, as the dear founder of SpreadBet Magazine was in London I took the opportunity to impress upon him my view of the current state of the precious metals markets. As regular readers will be aware, most of my colleagues are bullish on the prospects for gold and silver, but I am less certain about the technicals and fundamentals of both. Although the consensus here is that the only way out of the debt crisis is perpetual QE, so far my view is that the effects have been patchy.

OK, so it is true that central London real estate has behaved as one might expect during a period of runaway inflation, but the 2 year retracement of gold and silver looks deeply entrenched and that it has further to run. On a long term basis, this might not be something too concerned about given how strongly prices had rallied over the preceeding decade, but for traders now it is painful. In fact, as I suggested yesterday, the main hope for the bulls is that there is a sudden flip from the current fears of deflation to a genuine Weimar Republic type scenario. The problem with trading on this basis is that such events are incredibly difficult to predict as to when they will happen and can appear extremely suddenly.

Looking at the daily chart of gold it looks like we are now facing a new and significant leg to the downside:

Evidence for this view comes from the break of the key July uptrend line at $1,270/oz and a break of April’s extened RSI support line. The presence of both of these factors gave considerable support to gold, but now they are comprehensively lost the picture looks much more bearish. While there is no end of day close above July’s support line one would fear a retest of April’s support at $1,200/oz. Such an event would no doubt cause the bulls a great deal of anguish. The worst case scenarios here is a test of April’s price channel floor at $1,020/oz, possibly even by the year end.

Moving over to silver and the picture here is even more sickly than that of gold:

The crucial problem for silver was that during its substantial rally between July and August it was unable to get anywhere near the 200MA, now at $23.15/oz. The situation now is that, following the break of June’s uptrend earlier this month and the fall in the moving averages, this market looks strongly biased towards the downside. As things stand, it would be surprising if 2013 did not end with a retest of June’s $18.23/oz support zone. The earliest buy trigger now, even for the most ardent silver fans, would be a break back above last month’s $20.51/oz floor – a prospect that seems quite a challenge even with the daily RSI at an oversold 28 mark.