Gold Market Update

The outcome of the Greek vote at the weekend was not favorable for the markets, or for Precious Metals in particular. This is because it did not precipitate an immediate worsening of the acute crisis in Europe, and thus did not create the pressure needed to bring forward the major QE that must eventually come in order to delay Europe's eventual complete collapse. Why then have markets not caved in already? - because investors are "smoking the hopium pipe" and waiting for the Fed to pull a rabbit out of the hat at Wednesday's FOMC meeting, by making positive noises to the effect that QE3 is ready to be rolled out. What is likely to happen instead is that they will come out with the same old line about "being ready to act when the SHTF" but other than that remain vague and non-commital. If this is what they do then markets are likely to throw a tantrum and sell off, and the charts are indicating that it could be hard.

The broad market is believed to be at a good point to short here, as its earlier oversold condition has been substantially unwound by the rally of the past week or two, which was fuelled by QE hopes related to the Greek vote and now the upcoming FOMC meeting. It has rallied into a falling 50-day moving average, which is usually a good point to short it, as even if a major downleg isn't starting it would normally back and fill to give this average time to at least flatten out before a significant rally could start.

How does all this square with our bullish stance toward gold in the recent past? - well, it doesn't. We have been strongly positive on gold in the recent past for 2 big reasons. One is the proximity of a very strong support level that has reversed the price to the upside twice since last September, and the other is the favorable COT picture. However, pattern development has been unfavorable in recent weeks, with gold unable to break above a key resistance level, and the COTs have started to deteriorate noticably. These developments put us on notice that a nasty surprise may be just around the corner.

The 3-year chart for gold reveals that it is now at increasing risk of breaking down below nearby strong support at its September and December lows. The recent rally has been weak as it has lacked follow through and moving averages have now swung into bearish alignment and are pressuring the price from above. It is now looking increasingly likely that the nearby support will fail soon leading to the price dropping swiftly back to the next zone of important support in the $1400 area, and with the MACD indicator close to neutrality there is certainly scope for such a move and the trigger for such a breakdown could be the failure of the Fed to be sufficiently positive on a big QE fix at tomorrow's FOMC meeting as mentioned above. A clear break out above the top of the major downtrend channel shown will of course negate this scenario.

On the 6-month chart we can see that gold's impressive move at the start of the month, when it staged a big "one day wonder" rally has not led to any follow through. Instead the price has been held in restraint by the resistance level shown at which a bearish "shooting star" candlestick appeared to mark the top of the rally early in the month, and then a bearish "hanging man" appeared just yesterday after the price rallied over the past week or so to complete what is suspected to be a double top with the highs early this month. This looks like a good point for traders to either bail - and/or short.

Gold's COT structure had looked quite strongly bullish at the end of last month, and this did precede the sharp rally at the start of the month, but the Commercials' short positions have ramped up considerably since then, and they can be presumed to have risen still further early this week after the unfavorable (for the markets) Greek vote, especially as the Commercials are unlikely to be hanging on the outcome of the FOMC meeting tomorrow as the less evolved investor is. This has opened up downside potential once more, although we should keep in mind that overall this COT chart is not seriously bearish, so we should watch carefully what happens to it if as expected gold breaks lower and drops sharply soon. If it does it will be viewed as throwing up a MAJOR buying opportunity, as the mega QE to save Europe from collapsing into total chaos is not off the table, just delayed for a while longer.

Gold stocks have rallied well in recent weeks, but are close to massive resistance at the underside of the large top area now, and thus we are at a good point to take any profits you may have on the recent rally or take protective measures, so that you are not adversely impacted by a reversal to the downside.

Silver Market Update

Clive Maund

The outcome of the Greek vote at the weekend was not favorable for the markets, or for Precious Metals in particular. This is because it did not precipitate an immediate worsening of the acute crisis in Europe, and thus did not create the pressure needed to bring forward the major QE that must eventually come in order to delay Europe's eventual complete collapse. Why then have markets not caved in already? - because investors are "smoking the hopium pipe" and waiting for the Fed to pull a rabbit out of the hat at Wednesday's FOMC meeting, by making positive noises to the effect that QE3 is ready to be rolled out. What is likely to happen instead is that they will come out with the same old line about "being ready to act when the SHTF" but other than that remain vague and non-commital. If this is what they do then markets are likely to throw a tantrum and sell off, and the charts are indicating that it could be hard.

How does this square with our bullish stance toward silver in the recent past? - well, it doesn't. We have been strongly positive on silver in the recent past for 2 big reasons. One is the proximity of a very strong support level that has reversed the price to the upside twice since last September, and the other is the highly favorable COT picture. However, pattern development has been unfavorable in recent weeks, with key support at the key $26 - $27 continuing to be eroded and the COTs have started to deteriorate noticably. These developments put us on notice that a nasty surprise may be just around the corner.

On silver's 6-month chart we can see that it has failed to gain traction and establish itself above its 50-day moving average and thus get away from the danger zone, and now this average and the 200-day, which are bearishly aligned, are descending on the price from above and pressuring it increasingly to crash the key support - the pattern that has formed since the mid-May low now looks like a potential bear Flag, and if this is what it is then a sudden severe downleg is likely to occur soon that will crash the key support, and given the huge importance of this support, such a development can be expected to lead to a vertical plunge. How far will silver drop if this support fails? - let's now look at the 3-year chart to see.

The 3-year chart for silver shows that since the April - May 2011 blowoff top, it has been in a quite orderly major downtrend, and we can readily see that the downside target on failure of the nearby key support is defined by the lower boundary of this downtrend at about $20 - $21, which fits nicely with the next zone of major support arising from the extensive trading just below $20 in 2009 and 2010 coming into play as $20 is approached. From all this we can reasonably conclude that the downside target for silver on failure of the nearby support is about $20 - $21, although a vertical plunge may briefly take it below this level - if it does jump in with both feet, for this should be the final bottom, as QE is not off the table at all, just delayed.

The recent silver COT has been hugely bullish, although it didn't end up producing much of a rally. However, over the past couple of weeks it has gotten less so as the Commercials have started to build up short positions again - and it is suspected that early this week, after the unfavorable (for markets) Greek vote, they may well be piling them on ahead of the FOMC meeting this Wednesday. This does not augur well at all for the short-term. Nevertheless it is important to keep in mind that overall this silver COT is still strongly bullish, so the scenario that now looks likely is a near-term failure of support and plunge into what should prove to be a final bottom in the $20 - $21 area ahead of the major uptrend that will be activated by the mega QE that must occur to save Europe from collapsing into total chaos.

Clive Maund, Diploma Technical Analysis

[email protected]

www.clivemaund.com

Copiapo, Chile, 20 June 2012