Silver and Gold Short Term Top

GoldSeek reports about silver and gold short term top.

(emphasis mine) [my comment]

Silver and Gold Short Term Top
By: Timothy Silvers
-- Posted 25 February, 2009

“This morning gold and silver broke down sharply after trying unsuccessfully to make new highs. I took profits on my trading positions after seeing this confirmation of a short term top. I don't think we will correct too long or hard and I'll be buying back again when RSI values are near neutral. I am not selling any core holdings, just locking in some profits. I expect that we will see higher highs in a month or two after some consolidation.” I sent that alert to investors on my free email list when spot silver was around $14.23. Since then silver has fallen about $.50 more and gold had its worst day in since early January.

I don’t have a lot of time to write a lengthy article, but I wanted to share why I took profits and what I see going forward for gold and silver. The charts below show silver and gold break out of their recent trend channels and then hit the next levels of resistance. Gold has already retreated back into its channel and silver may do so on Wednesday. This correction is normal and healthy. Silver has hardly seen a down day since I wrote the last article in January and it was getting very overbought. Gold took a little longer to break out of its channel but ultimately hit the physiological level of $1000 and couldn’t go higher.

I also like to look at the COMEX COT reports to get some indication of the flow of speculative money into gold and silver. First, looking at the gold chart below, commercials’ ounces net short and non-commercials’ ounces net long have increased from 2 to 3 year lows to levels approaching the first half of 2008. The rapid increase in speculative buying in the last 3 months fueled the sharp rise in gold and made a correction likely once the speculators took profits. That’s the point we’re at today. There are many reports of gold demand (minus the investment demand from the GLD gold ETF) is drying up. Indians are buying less gold and even selling some for scrap as it hits all time highs in Rupee prices. However, as long as we have economic uncertainty in the world and investors expect that currencies will continue to devalue, gold will rise and carry silver up with it.

Looking at the number of silver ounces held short on the COMEX by commercial traders, we see that there have been modest increases in commercial short positions, non-commercial longs and open interest since November. However, the increases have been miniscule compared to that of gold. Besides the spike low in September 2007, we have to go back to September 2005 to find silver COT readings as low as they are today. This indicates that there are fewer weak hands (speculators and non-commercial hedge funds) holding silver long that may be forced to sell. This continues to paint a bullish picture for the metal going forward and silver should be accumulated on pullbacks. Even though the speculative money has not been flowing into silver like it has been with gold, silver rallied 40% from its January 15 low compared to gold’s 25% gain. That’s why I love silver! Percentage wise, it tends to be more volatile than gold and can offer greater gains during precious metals rallies.

One thing that I will likely analyze less frequently in the future is the US Dollar’s relation to the gold price. I read an interesting article recently which said that the statistical relationship between the Dollar and gold is not 100% opposite (Dollar down = gold up) as we might suppose. Rather, the dollar and gold are oppositely correlated only 27% of the time since 1971.Given that information, it is probably not too productive to try to forecast gold price based on the performance of the Dollar. Other technical indicators and fundamentals should be consulted instead. The current phenomenon of a rising price of gold and a simultaneous strong dollar is not as rare as it first appears. I still believe that the Dollar is benefiting from the “best of the worst” syndrome of currency investing [the reality is that the dollar is the “worst of the worst”]. The US is relatively better off economically than most other countries [No it is not!] (have you heard the depressing news about European banks lately??!!) and that entitles the Dollar safe haven status, along with gold. In the long run, however, I don’t think you will be better off investing in Dollars than gold and silver, for reasons too numerous to discuss right now. Gold has hit all time highs recently when priced in many currencies, and it should hit another all time high in Dollars soon. [Agreed]

Summary

Right now I am looking for a consolidation that will take us down to neutral RSI levels. This will probably correspond to approximately $930 gold and $12.75 silver. If those levels don’t hold, then we’ll be heading back down to the low end of the trend channel at $880 gold and $11.75 silver. This correction will setup the next upward move where gold will take out its previous high of $1033 (spot price) and silver should trade in the $15-16 range or higher. I expect this will happen by the end of March or early April [next two week in my opinion.]. As was true this past month, I believe that silver will have a greater percent price rise from the next bottom to top than gold.

My reaction: The technical picture is only part of the reason why gold plugged. The other part was a wave of gold futures selling by commercial banks.

Open interest in COMEX gold increases 13,868 in three days

This increase means that someone (commercial banks backed by fed) sold 13,868 contracts, which is approximately 40 tons (1,386,800 ounces). These sales, together with profit taking are responsible for gold’s plunge.

Friday, February 20:

Tuesday, February 24:

Wednesday, February 24:

Side note: Been doing a lot of research on central bank balance sheets and reserves. Hence the slow pace of updates.

Eric de Carbonnel

Market Skeptics

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