A Technical Look at Gold and Silver at the End of 2011

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

While gold and silver are in long-term secular bull markets, they have experienced price weakness in the last few months of 2011. The technical picture indicates that they are likely to remain pressured for a while longer before recovering in 2012.

GLD (the major ETF for gold)  fell below its 200-day simple moving average earlier in December and at the time, I pointed out in a previous article that this indicated lower prices in the future and it would next fall to the 325-day. After bouncing back up to the 200-day, gold did indeed fall to 148 on December 29th, which was the 325-day moving average. At the time that gold was breaking its 200-day, the DMI (directional moving indicator) also gave a sell signal on the daily charts. The RSI (relative strength index) fell below 50 and MACD (moving average convergence divergence) below the zero line -- both bearish. The sell signal on the DMI does not seem to be exhausted just yet.

The moving average picture overall still indicates that gold is in a short-term bull market. For this to turn negative, the 50-day would have to fall below the 200-day moving average and even then it shouldn't be considered as serious unless it was confirmed by a cross below the 325-day. The gives gold a lot of room to fall, even if the chart remains bullish. Even though a short rally in the beginning of 2012 is indeed possible, lower prices are likely to follow. A break of the 325-day moving average should be considered significant and would next bring GLD down to the 140 level. The 40-month simple moving average however is the most solid support below the 325-day. 

Silver shows greater weakness than gold on its charts with the selling much more advanced. Unlike gold, silver has hit new yearly lows and when this happens the first time, it is likely that a series of  new lows will then be made, although short rallies frequently take place first.  For SLV, the major silver ETF, the 50-day moving average already fell below the 200-day in October and the bearish pattern was confirmed when the 50-day then fell below the 325-day at the end of November.  On the daily charts, the DMI is on a sell signal and this seems to be only halfway done at this point. The other technical indicators are also bearish. SLV is currently being held up by support around 26. Much stronger support exists around 21 (really a band of support between 18 and 21).

The recent drops in gold and silver should be considered to be buying opportunities, although investors with a longer-term horizon should not be pushing the buy button just yet. The charts do not indicate a definitive bottom has been put in, nor that this is likely to happen in the next few weeks. Secular bull markets tend to last for around 20 years and this indicates the ultimate high for gold and silver will be around 2020. While there is always a higher high in the future during secular bulls that doesn't mean that there aren't major reversals along the way. The stock market secular bull between 1982 and 2000 had the 1987 crash, the 1989 and 1997 flash crashes, the 1990/91 bear market and the 1998 bear market. Smart investors used these declines as buying opportunities and made lots of money when they did. The same will be true for gold and silver for the rest of this decade. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Gold Breaks Down, Where to Look for a Bottom

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Gold fell and closed below its 200-day moving average yesterday, December 14th. This indicates a technical breakdown and the last time this happened was in August 2008. Gold bottomed approximately 30% off its high three months later in November.

Any analysis of an investment's technical state should begin with the big picture, so recent events can be put in context. Gold is in a secular (long-term) bull market which will last until approximately 2020. This means that the greater trend will move prices higher over time. No market moves straight up however. There are always reversals in a secular bull market and these are sometimes steep. The 1987 stock market crash which took the U.S. indices down 40% and some individual stocks down 70% or even 80% took place in a secular bull market that lasted between 1982 and 2000. Stock prices went to new highs after the crash despite many pundits claiming the crash meant a new depression was coming. Anyone who realized stocks were in a secular bull market could easily have predicted stocks would recover.

Even though gold has dropped below its 200-day (40-week) simple moving average, this does not indicate that it is even in a short-term bear market. At the very least the 50-day (10-week) moving average would have to fall below the 200-day to indicate that. Gold will have to trade below it's 200-day for approximately the next two weeks before that would happen. This did indeed occur in 2008, when it could be said that gold experienced a brief cyclical (short-term) bear market.  The 10-week moving average traded below the 40-week for about four months from September 2008 to January 2009. See a four-year weekly chart of the Gold ETF GLD below.

The bearish behavior of gold in latter 2008 was caused by the Credit Crisis. While you have probably heard ad nauseum that gold is a safe haven in a crisis, this does not include credit crises
(which are crises in the financial system when the banking system has difficulty functioning). We just saw that gold went down during the 2008 credit crisis and yet many gold "experts" somehow can't figure out that it should go down during the current 2011 credit crisis coming out of Europe. In our era, gold can drop during a credit crisis because central banks lease gold at low rates to the big banks and hedge funds. These entities are desperate to raise cash, so they sell the gold into the market (they can't sell many of the assets on their books). This depresses the price of gold -- temporarily. But at some point, they have to buy the gold back and return it to the central bank it was leased from. This makes the price of gold rise again. I explained the entire process in the second volume of my book "Inflation Investing", which covers gold, silver and other metals.

Gold has support at the 65-week simple moving average, but this is not the likely bottom in a full-blown credit crisis.  In order to find that, it is necessary to look at a monthly chart. It can be seen from this that the ultimate support would be at the 40-month simple moving average. Currently, this is around 120 for the gold ETF GLD. This possible buy point, which should be considered a worst-case scenario, was discussed in the October meeting of the New York Investing meetup. See the five-year monthly chart for GLD below.



It's important for investors to focus on the big picture and not get carried away with all the distractions of day to day price movements. Markets go up and down. No market goes in one direction. Every time gold drops, commentators come out of the woodwork saying it means the rally is over and deflation is taking place -- neither is true. It is the bigger price movements that have meaning and gold is in a long-term uptrend. In any secular bull market, a large drop is always a golden opportunity to buy. Just wait until there is some evidence that a bottom has been put in.  

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York
Investing meetup http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.