Silver Crashes; Gold Breaks Key Support

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.

The silver market had a major crash on Friday -- there is simply no other way to put it. Spot prices were down as much as 17.1% or $6.18 an ounce. Gold was damaged as well, but not nearly as much. At its worst, it was down 6.3% or $108.60 an ounce. Both gold and silver traded below previous lows set earlier this year.

The drop in silver was truly spectacular. It was down by double digit amounts on Thursday and then by an even  greater amount today. The main silver ETF, SLV, has two huge gaps on its chart. The spot price low of $29.76 reached an area of major support. There is chart support, moving average support and a Fibonacci retracement at that level. A tradable bounce should take place soon and the gap in the chart from today is likely to be covered in that move. Those with a longer-term investing horizon might want to wait before buying. The next level to keep an eye on is around $26 where there is chart support and another Fibonacci retracement.

The silver selloff is much more advanced than is the one for gold. Silver peaked in April and had its first big selloff in May. It made a double bottom in May and July and didn't trade below those levels until today. Gold on the other hand made a double top in mid-August and early September. It confirmed that double top today by trading below its August low. Spot gold fell to $1628.60 an ounce at its worst point, breaking its support in the lower 1700s by quite a bit.

The precious metals charts are showing technical damage, with silver in much worse shape than gold. Gold broke its 50-day simple moving average yesterday for the first time since June. Today, silver pierced its 325-day simple moving average -- an important support level for any commodity. The DMI technical indicator gave a sell signal for SLV on the daily charts today and was about to do so for the major gold ETF, GLD. In the short term, both are very oversold however.

The huge price drops in silver and gold can only be explained by substantial hedge fund selling that smacks of credit crisis panic. Both of these markets have risen on highly leveraged buying. Once a few overextended funds are forced to sell because of the financial turmoil in Europe, things can go downhill pretty fast. Stops get taken out and this causes more selling, which in turn takes out more stops and leads to more selling. After this, a rally will follow and there should be a test of the low. If it holds, then a sustainable rally can take place. We are not nearly at the point yet. 

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.

Mark to Model GDP

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.

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The 3rd quarter U.S. GDP figures were out this morning and they came in slightly above expectations. GDP was supposedly up 3.5%. Almost half of this, 1.7%, was accounted for by increases in auto production. This in turn can be traced to the Cash for Clunkers program and government spending. Overall spending on durable goods was up 22.3%. Housing investment was up even more at 23.4%, also thanks to government tax breaks and FHA mortgage insurance backing loans that a subprime lender wouldn't have touched at the height of the housing bubble. Federal government spending was up 7.9%. On the flip side, business investment fell, net exports fell and inventories fell. In other words, any part of the economy not manipulated by government spending is still declining. Even though they went down, inventories still added 0.9% to GDP growth, because they didn't go down as much as they did previously (no that doesn't make any sense to anyone except a government statistician).

An economy that is only robust because of government spending is essentially dead in the water. This is the same picture as Japan in the 1990s and first decade of the 2000s. The headlines this morning trumpeted that the U.S. is out of recession. Those headlines were common in Japan during the last two decades as well. The U.S. can only avoid this fate by coming up with one Cash for Clunkheads program after another. After all why have only a trillion dollar yearly budget deficit when you can have a two trillion dollar yearly budget deficit? Just as a reference, the Dow Jones Industrial Average was at 2753 the day the Nikkei peaked at just under 40,000 at the end of 1989. Both averages are around 10,000 at the moment.

How long the stock market continues to buy the current U.S. econo-fantasy remains to be seen. There is serious technical damage in the stock charts. The Russell 2000 (small cap stocks) has made a confirmed double top as of yesterday. The usual sell off scenario is small caps go down first, the Nasdaq next and the big cap Dow the last. This pattern was writ large in yesterdays action. The Russell 2000 dropped 3.5%, the Nasdaq 2.7%, the S&P 500 2.0% and the Dow 1.2%. Of the indices, only the Dow has held above its 50-day average. We have seen this picture before in July by the way. The market was significantly technically damaged, but managed to rise from the ashes and rally for the following few months. Things may not be so rosy this time. If there is a rally on low volume that fails to get the indices to a new high, the current rally is likely over and a good shorting opportunity is presenting itself.

There are two assets that have experienced no change in their technical pictures - the U.S. dollar and gold. The dollar is just as bearish as it has been for months and gold is just as bullish. Even with its recent small rally the dollar didn't even go up enough to reach its 50-day moving average. It's 50-day moving average is trading well below its 200-day moving average in an extremely bearish pattern. The gold chart is almost the mirror image of the dollar's chart. It is trading above its 50-day moving average, which in turn is well above its 200-day moving average in a very bullish pattern. Spot gold bounced off its breakout point of $1025 yesterday (a normal action which takes place about 50% of the time) and has traded as high as $1040.40 this morning. Spot silver has also tested its breakout level at $16 and has stayed in its $16 to $18 trading range. So far, so good.

NEXT: The Long and the Short of It

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.