Gold Market Update

Gold held up remarkably well last week given the carnage all around, with silver and Precious Metals stocks cratering, and despite the sharp drop on Thursday it did not break below critical support, unlike silver.

While we are certainly not out of the woods yet with regard to the US sub-prime crisis, Central Banks and the Fed have made it clear over the past couple of weeks, and notably with the Fed’s surprise announcement of a 0.50% reduction in the Discount Window early last Friday, that they will use any and every means at their disposal to avert a global deflationary crisis. The main constituents of their “medicine” are massive infusions of liquidity, which we have already seen, and capped or falling interest rates. What all this means is that the party can be expected to resume with stockmarkets resuming their upward march, and inflation continuing to climb. To achieve this the dollar may need to be sacrificed, which from the standpoint of the US is not so dumb, considering its formidable army of creditors. However, it may not need to be as we can be quite sure that the Fed is working robustly to protect the interests of US bond holders, which means that there is some serious arm twisting going on behind the scenes - and not just behind the scenes - In Barrons last week was a small article that essentially said that the EU Central Bank now must seriously re-think any further interest rate rises. Let’s hope for their sake that the European central bankers read this over their cornflakes. Although the Discount Window is in itself not important, the cut implies that the all-important overnight Fed Funds rate is going to come down - and for that to happen other countries, especially major power blocs such as the European Union, are going to have to play ball, and if they do the threat to the dollar will be alleviated.

Thus gold can look forward to basking in the glow of at least two of three major bullish drivers - capped or falling interest rates, robust inflation and a possible significant decline in the dollar. We shouldn’t count on the latter but the other two appear to be “in the bag”.

Looking at the 2-year chart we can see how significant differences have emerged between gold and silver in recent times. Gold has been looking stronger than silver for months, and managed to break above the “Distribution Dome” shown - silver did not achieve this and paid the price last week when the Dome forced its collapse below an important support level. Gold remains within a tight range bounded by the important red support level shown at and above $635 and the strong resistance at and towards the April high approaching $700, and although it is believed to be in position to break higher soon for the reasons set out above, with the fundamental picture brightening rapidly in recent days, we should not overlook the potential Head-and-Shoulders top on the chart that has formed between February and the present. Our stops have been set below the March low at $635 for some time, and stops should continue to be set below this level, although holders should be aware that if it drops below this key level a rapid plunge is to be expected similar to that which occurred in silver last week when it breached its key support. That said gold looks good here and the Head-and-Shoulders danger will be negated by a move above the April high towards $700 which would likely mark the start of a breakout drive above last years’ highs at about $730. It is logical to suppose that gold will mark time for a while before it breaks higher to allow sentiment in beaten down silver to recover sufficiently to enable it to break back above its new resistance level in the $12 - $12.50 zone.

Silver Market Update

Clive Maund

Silver failed to break clear above the Distribution Dome evident on its 2-year chart and paid the price last week when it cratered. This was in marked contrast to gold, which having looked stronger than silver for some time, broke above its Dome and did not break down below important support last week. However, there have been important developments over the past couple of weeks and especially late last week that are believed to be creating a positive environment for gold and silver. These are set out in some detail in the Gold Market update and so will not be repeated here, but in a nutshell they are creating the conditions for falling interest rates, rising inflation and a fair chance of a continued decline in the dollar. In the light of these developments, and despite the breakdown below support last week, silver may already have hit bottom, so that the plunge late last week may come to be viewed as a final capitulative plunge following months of eroding prices.

On the 2-year chart we can see how following its failure to break clear above the Distribution Dome, the accelerating descent of the dome line forced the breakdown last week. Normally, after such a breakdown, we would expect to see the price continue lower over the short to medium-term towards the next major support zone centered on $10 and the precipitous declines in many silver stocks last week appear to be discounting that, but the rapid improvement in the environment for the Precious Metals and the bottoming action in the broad stock market are suggesting a good chance that silver has already hit bottom. That said the plunge last week battered sentiment so we cannot expect silver to turn on a dime and go roaring up again, especially as the drop has significantly increased overhead supply from those who bought late last year and through much of this year. Thus it is considered unlikely that silver will break back above what is now a resistance zone in the $12 - $12.50 area in the short-term and what we are therefore likely to see is a period of intermediate base building below that level for a while that allows sentiment to recover and time for a wider appreciation of the new more bullish reality to sink in.

Clive Maund, Diploma Technical Analysis

[email protected]

www.clivemaund.com

Copiapo, Chile, 22 August 2007