Gold Market Update

We have seen the severe smackdown anticipated in the last Gold Market update, although it did first manage to trip our overhead stops by a whisker before plummeting. This resulted in a breakdown from the intermediate Head-and-Shoulders top area shown on the 6-month chart. On Friday, however, it surged back above the “neckline’ of this pattern, which is close to aborting. Although Friday’s rally was certainly impressive, we are definitely not out of the woods yet, as will be readily apparent when we look at the 6-year gold chart. The strength of the move on Friday implies that we will see follow through over the next week or so, with a few down days thrown in. However the advance is likely to be capped once it reaches the $645 - $655 area, where there is substantial resistance - if it succeeds in getting that far. We will then need to review it in the light of what is going on in the T-bill and T-bond market and the dollar, with a view to possibly shorting it again.

The 6-year chart is worth studying at this pivotal juncture, as it puts recent action into perspective. On this chart it is clear that gold is playing its hand very close to its chest, for the formation that has developed following the top last May could be either a consolidation pattern leading to renewed advance, or a top area to be followed by decline back to the long-term uptrend line, which would not necessarily mark the end of the bull market, but would be highly unwelcome to those long the sector. “What a great help this guy is!” I can hear you saying, “he thinks the market could either go up or down - a fence sitter.” If that is what you are thinking then there are 2 things that should be pointed out. The first is that sitting on the fence is actually the wise thing to do in certain situations, because you retain the option of jumping down from it on either side, once you have figured out where the grass is greener. Secondly, on www.clivemaund.com we definitely did not sit on the fence at the start of the year when we shorted gold and silver, and closed out our positions last Wednesday - Thursday, and successfully exited highly profitable option trades. Gold permabulls at best achieved nothing during this period.

Let’s now consider further the long-term gold chart. As is readily apparent with the benefit of hindsight, gold got wildly overbought last April-May, as indicated by the huge gap with its moving averages, regardless of whether the large trading range that has since developed is a consolidation pattern or a top area. Notice that the long-term moving average appended to this chart is a 300-day, instead of the customary 200-day. This is because this moving average time period provides a better fit than the 200-day. Observe how gold has found support at or very close to this average throughout its bull market. On the basis of the fact that gold has now corrected back close to this average, and is now not far above it, it is clearly well-placed to break higher again soon, although this in itself does not mean it is going to. Considering both this 6-year chart and the 6-month chart above we can see that a breakout above the December high in the $655 area would greatly increase the chances of a powerful upleg developing, and therefore a break above $660 will be viewed as a buy signal with close stops. Bears would argue, on the other hand, that the spike last April-May was a climactic blowoff move that has been followed by the development of a large top area, and that gold should now react back at least to the long-term uptrend line, currently just above $500, which would be a substantial drop from current levels. The signal for such a decline would be a significant breach of the 300-day moving average, as would be occasioned if the price dropped back to the $575 area.

The bears have a powerful case right now. The year has started with commodities going into a tailspin. Copper has broken down from a top area, Oil has broken down from its long-term uptrend, even though it now looks set to rally from oversold. T-bills and T-bonds are breaking out of their intermediate downtrends in force since last July, which can be expected to fuel a continued rise in the dollar. So if you were to force me to come down from the fence on one side or the other right now it would be on the bearish side, although I would quickly leg it back over to the other side in the event that gold breaks above $660.

Conclusion: the current short-term rally is expected to continue to the $645 - $655 area, where there is considerable danger of gold turning lower again, thus it should be considered for shorting in this zone with a close overhead stop. Gold is a buy for a potential major uptrend in the event of it breaking above $660. A break below support at $600 can be expected to lead to a test of the important support in the $575 area. If support in this area fails gold can be expected to retreat back to the support of the long-term uptrend in the $500 - $510 area, but as long as this trendline holds the gold bull market lives on.

Silver Market Update

Clive Maund

This Silver Market update will be truncated relative to the Gold Market update, as many of the arguments set out in that update apply equally well to silver. Silver suffered a similar New Year smack down to gold, broke down from a similar intermediate Head-and-Shoulders top area, and broke back above the “neckline” of the pattern on Friday, which is as a result also close to aborting. The strength of the move on Friday indicates that we should see follow through next week, but that the advance will stall out either at the resistance in the $13.25 area, or possibly at the resistance zone in the $13.75 - $15.20 area. At this point, depending on conditions prevailing at the time, we will consider shorting it with a fairly close overhead stop.

Having considered the overall picture for gold by means of a 6-year chart, it is only fair to do the same for silver. On this chart we will use the customary 200-day moving average, as unlike in the case of gold, a 300-day moving average does not provide a close fit. Like gold, silver has been stuck in a large trading range since it peaked last April - May after a near vertical ascent. This trading range looks more like a top area than the one in gold, with the December peak looking like Double-topping action with the highs of last April - May. While a break above $15.20 would signal the probable start of another major upleg and would be taken as a signal to go long, with close stops, the odds are thought to favor retreat here, especially given the deterioration across the commodities sector and the breakouts by T-bills and T-bonds in recent days from their intermediate downtrends in force from last July, which indicate that continuing strength in the US dollar is to be expected. The formation that has developed from last April - May looks like a top area that could project the price back to the long-term uptrend line, currently approaching $9. If this line holds, the long-term bullmarket in silver will remain intact.

Conclusion: the current short-term rally is expected to continue at least to the $13.25 area, and possibly higher to the $13.75 - $15.20 area, where we would be looking to short it with close stops. A break above $15.20 will be viewed as the probable start of a major uptrend and will be taken as a buy signal, but again with quite close stops. On the downside, key support levels are not so clearly defined as they are with gold. After the current short-term rally has run its course, there is a considerable risk of silver turning lower and ending up back near its long-term uptrend line, currently approaching $9.

Clive Maund, Diploma Technical Analysis

[email protected]

www.clivemaund.com

Kaufbeuren, Germany, 14 January 2007