It seems that at present, every financial commentator worth their salt is grappling with the price action in the yellow metal and its brethren silver. They are either attempting to call the bottom in the near two-year decline or, talking gold in particular down to sub $1000. Of course, the vast majority of these very commentators were also proponents of the new paradigm as gold approached $2000 in the decade leading up to 2011. It was in fact us here at SBM that was a lone voice last year when gold was at $1750/oz that was calling it down to $1200. Take a look at the 2013 outlook below in which, certainly in the global markets arena, we had pretty much a clean sweep.
So, what can be said now? The “trick” that the metal played on bull traders including poor old John Paulson, in not taking out $2000 an ounce seems quite a cruel act as it was supposed to be perfectly correlated to “Helicopter” Ben Bernanke’s money printing antics. The fact that it reversed trend just as QE4EVA was getting going really had commentators scratching their head – such is the nature of markets of course, to confound and perplex the masses and it is only those of clear head that can see the wood for the trees and take advantage of mass emotions. And so, should we now expect a new act of cruelty before any new leg to the upside begins as well..?
On this basis, let us say that the low over the next couple months may be indeed be between $1000 and $1100 (I do not believe it will reach the $900 recently predicted by commodities/hedge fund guru Jim Rogers). Unlike the founder of SBM, I personally am in no hurry to pin any tails on the precious metal donkeys for at least three reasons.
The first is that, rather like buying USDYEN for years before the end of 2012, calling the floor of gold has just been embarrassing in terms of how many failed attempts there have been by many eminent commentators. The second reason is that it is likely that the mining sector will lead the underlying commodities higher anyway, and we are starting to get the first signs of this with the mining proxies outperforming gold over the last 10 days – not surprising given the Armageddon level valuations doing the rounds presently. Therefore, if you are keen on getting exposure to the bounce, I think that there will be plenty a chance to get on board.
Finally, thirdly, after any extended counter trend move, it is normally best to go for a momentum buy trigger, rather than the catching a falling knife approach. For instance, in the case of Gold, even though the metal bounced off the floor of a falling March price channel on the daily chart at $1200, the minimum requirement in terms of a momentum buy trigger here, certainly to me, would be an end of day close back above former June $1269 support. During the historic April the slump, in the ensuing rebound, the best we received was a brief spike through $1420 – still some $20 below the then position of the key50 day moving average.
It may be worth also noting that the last time this market sustained the 50 day line on the bull side was in December 2012 when it was trading at $1750. Therefore the observation to avoid this market on the long side unless or until the 50 day line (now at $1361) is broken would not only have saved the average punter a lot of money, but also emerging markets central banks who injured themselves financially by buying into this alleged safe haven way too soon after the peak.
Therefore, to sum up my view on gold, if you are really keen you can go long on a break back above a $1,269. But the really safe play would probably to wait for the 50 day line to be broken again – and this could still be some weeks away even if the worst is over.
Moving onto silver, and I am essentially wheeling out the weekly chart that I used last time I covered the metal. Here we see how, at least in charting terms, a bell was actually rung at the top of the market in early 2011 when there was the sharp spike towards $50. In fact, the descending price channel on this chart effectively says everything I would like to say about what may happen here over the next few months.
While it can be admitted that the metal is very oversold now with a daily RSI of just 21, and is due a bounce off of the red line of support towards $19, it is difficult to regard this as meaningful support unless you look back to early 2010 when the $20 level was resistance. Nevertheless, it would appear that the cautious and sensible way forward is to wait on at least an end of wk close back above the 10 week moving average – currently at $21.21 before taking the plunge on the long side. It might also be possible that the extended RSI resistance line from last year through RSI 30 might also provide a kick to add some spice to a dead cat bounce.
Overall though, while I do see a possible roadmap for these two markets back from the two year beating given their present configurations, to be honest, I would almost welcome the opportunity to be kicking myself for missing out here – if that does not strangle the metaphor too painfully!