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As it was the case in our
previous essay (Will Gold Price Decline Soon or Is This Summer Really Different),
let’s begin also today’s article by answering one of the
questions that we’ve received from one of our Subscribers. Here is the
question.
·
With the volatility in the stock market, the
fears about the effect of the Greece debt crisis, “fukushima”
in Japan, our various problems with housing, jobs and stunning national debt
here in the U.S., I have to wonder if investors are increasingly looking to
precious metals as a safe haven……in a way that might defy usually
reliable quantitative measures?
·
Also, is it possible the recent detailed study
and report by Standard Chartered, citing the limited supply of gold in the
next few years and projecting a $5,000 per oz top,
tend to drive investors into gold in a way that could defy past technicals?
Here is what we wrote in the past about the
usefulness of technical analysis, and it still holds true today. Here’s
a summary:
September 3rd, 2010 Premium Update:
Well, the most important fundamental that does not
change over time is human psychology and emotionality of individual
investors. This is something by far more stable that one, two, or even three
quantitative easings are not able to change. Will
China's growth cause people to stop being greedy when they see higher prices
and fearful when they see them decline? Will Europe's problems cause people
to act by means of cold logic only? Definitely not. Moreover, even if TA will
someday cease to be useful it is highly improbable that it will happen
quickly. Certainly, it is not a matter of weeks, months or years because TA's
foundations are based on real mechanisms, which are inherent part of each
human being.
September 16th, 2010 Premium Update:
Technical analysis techniques as historical charts
only give support to probability theory. Even the best tools and signals miss
their targets between 20% and 30% of the time. This is important to remember
whenever any type of analysis in undertaken to forecast future movement or
trends - this is why limiting one's exposure is absolutely critical.
October 29th, 2010 Premium Update:
Any analysis (fundamental, technical, cyclical,
fractal, econometric model, etc.) can be suddenly overruled - but that is no
reason to ignore them. At any time someone could trigger a massive rally or
major selloff in any given market, provided that they have enough cash. Does
that mean that we should not invest in anything as there are absolutely no
sure bets?
In our view this approach is wrong because it
confuses what's possible with what's probable. Instead we suggest taking
what's probable (most of the time each of the systems of analyses mentioned
above will be useful, and by combining them we'll get more information than
we could by just using one of them) and position yourself
accordingly.
Fundamentals are favorable for gold, silver and
mining stocks. Dedicate a part of your capital to long-term investments.
Market inevitably corrects from time to time - use charts and other tools to
gain on most of them. Don't expect catching each move, as it's impossible to
accomplish. Financial markets could be destroyed overnight if China dumps its
dollar holdings or derivative holders worldwide
default or the COMEX defaults, etc. There are plenty worst case scenarios. Be
sure to own physical precious metals as well.
As far as the second
question is concerned, discussion of supply and demand is appropriate when
estimating the main trend - which (we definitely agree) is up. Positive
fundamental situation has virtually nothing to do with a few-month corrective
decline that would take gold and silver prices lower. This certainly could
happen, be followed by a turnaround and a rally that could eventually make
gold reach $5000.
What we would like to emphasize is that fundamental factors are not something
driving markets in the short term. Generally (there might be a few
exceptions), if you check fundamental reports (from newsletter writers) from
2007, 2008, 2009, 2010 and 2011 they will most likely agree that the
fundamental situation was favorable for gold and silver throughout these
years (and we agree). However, did the price move up without any corrections?
Didn't silver plunge from above $20 to below $10? It surely did - even
despite positive supply-demand situation. These are long-term factors, not
the short-term ones.
The most important factors driving
prices in the short term are fear and greed (emotions). Cold logic
(fundamental factors)"works" in the long run.
With this in mind, let’s see what the technicals suggest about the precious metals’ price
direction in the short-term. In
this essay we will begin cover the situation in silver (charts courtesy by http://stockcharts.com.)
 
In the medium-term chart for silver, we have seen
yet another move back down to within the trend channel. The recent big rally
appears to be over and based on this breakdown alone, declines are likely to
be seen from here.
The breakdown seen several weeks ago was not
confirmed. It was invalidated by a quick move up at that time but it appears
that this breakdown may indeed be verified. If such is the case, further
declines are very likely.
The short-term SLV ETF chart allows us to compare
the recent moves of silver directly with that of gold. Note that rally for
the white metal in the past few days is barely visible here and is better
described as a pause within the decline. Therefore, gold’s bullish move
is definitely not confirmed by its sister metal.
Silver’s cyclical turning point is coming up
soon. This could mean that we may see a significant decline or possibly (and
it seems a little more likely than not at this point) a slight move higher
for a few days and then a decline. The latter would indicate the turning
point close-at-hand is in fact a local top.
Summing up, a downtrend is anticipated for silver in the medium term, however we might see a few days of higher silver
prices before that. Two breakdowns have been seen recently in silver - below
the rising support lines for both medium-term and short-term timeframes.
Silver does not confirm the bullish move of gold and the picture here remains
quite bearish for the white metal.
Naturally, this does not invalidate the positive
fundamental situation for the white metal – we expect it to resume its
major upward trend after the coming decline.
To make sure that you are notified once the new
features are implemented, and get immediate access to my free thoughts on the
market, including information not available publicly, we urge you to sign up
for our free e-mail list. Gold & Silver Investors
should definitely join us today and additionally get free, 7-day access to
the Premium Sections on our website, including valuable tools and unique
charts. It's free and you may unsubscribe at any time.
Thank you for reading. Have a great and profitable week!
Przemyslaw
Radomski
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