Gold and Silver Market Update

By Clive Maund

Here are some important facts about gold. The long-term uptrend in force since the start of this bull market remains intact. The price is currently in the late stages of a symmetrical triangle trading range that started to form following the peak early in December. Symmetrical triangles can break either way, but other factors normally provide clues as to the probable direction of breakout. The fact that this triangle is forming above and within a zone of important support strongly suggests that an upside breakout will eventuate, particularly as the long-term uptrend remains intact and moving averages are now in bullish alignment. The previous major reaction/consolidation, which occurred during the first half of last year similarly ended at a zone of strong support exactly at the long-term uptrend line.

The 4-year chart shows the entire bull market to date. The importance of the long-term uptrend shown is amply demonstrated by the fact that the price has rallied from it on 5 distinct occasions. THIS UPTREND CHANNEL IS VERY IMPORTANT - GOLD IS AN AUTOMATIC BUY WHENEVER IT APPROACHES THE LOWER BOUNDARY OF THIS CHANNEL - AND TRADERS WILL WANT TO HAVE A DEFENSIVE STRATEGY IN PLACE IN THE EVENT THAT THIS CHANNEL FAILS (which is not expected). As it is still close to the lower boundary of the channel, having just successfully tested support there and broken higher, it is a buy at the current price for any interested parties. Silver also looks positive at this juncture, although silver is in the late stages of a much larger symmetrical triangle formation, with correspondingly big implications. Precious metals stocks, many of which have been severely trampled down during this latest gold consolidation, are also an across-the-board buy - sentiment in this sector stinks, which is exactly what you want to see ahead of a substantial rally. Many small exploration stocks in particular are showing signs of completing long low bases.

A 2-year chart is also shown in order that we can see the symmetrical triangle formation in detail, and the underlying support provided by last years price action. This strong support, coupled with the long-term uptrend support shown on the 4-year chart, and augmented by the bullishly aligned moving averages, powerfully suggests that a vigorous new uptrend, taking the price to new highs, is in prospect.

The 6-month dollar chart shows how the dollar has started to wilt, as predicted in the last update, beneath heavy resistance in the 85.50 area, and appears to be starting a new intermediate downtrend, which fits with the interpretation of the gold chart.

The 4-year dollar chart shows the overriding long-term downtrend. The intermediate downtrend late last year appears to have halted at an inner downtrend channel line that can be seen to correspond with the one on the 4-year gold chart.

The silver price has been in a giant contracting trading range for a little over a year now. From a glance at the accompanying 2-year, it is clear that a breakout from the giant symmetrical triangle that has formed is likely soon - probably within the next couple of months. Given the duration and size of this formation it is clear that a substantial move can be expected to follow a breakout.

The big issue for investors and speculators in silver and silver stocks is to try to predetermine the probable direction of breakout before it happens, in order to maximise gains from the ensuing move, as it is obvious that once it happens everyone is going to pile in and a sharp move will follow.

There are several factors pointing to an eventual upside breakout. The first is the general long-term trend, which is definitely up. On the 2-year chart we see that the lower line of the triangle formation, when extended back, is also the long-term uptrend line, from which the price has rallied no less than 5 times, which is actually rather surprising considering that this is supposed to be a rigged market. The importance of this uptrend line is reinforced by the proximity of the 200-day moving average, near which we would expect reactions from intermediate overbought levels to terminate. The huge ramp during Spring of last year, which resulted in a hideously overbought condition, was in good part due to the voluminous amount of hype by opportunists and cheerleaders, and was followed by a mini-crash that resulted in the price correcting back to the area of its rising 200-day moving average. Given the clear validity of this long-term uptrend line, and the continuing upward march of the moving averages there is no reason to suppose that the breakout is going to be anything other than an upside breakout. Currently, the moving averages are in positive alignment, meaning that a breakout could happen soon.

There are two other compelling indications that silver is destined to break out to the upside. One is the condition of the gold market, which also looks primed to break out to the upside before long. In regard to this it is very important that silver traders pause to take a good look at the long-term gold chart, and compare it to the silver chart, which we will do now. Notice how gold appears to be consolidating in a symmetrical triangle pattern above a zone of strong support. Like silver, it is not far above a very important long-term uptrend line, from which it has also rallied 5 times over the past several years. This uptrend has also formed near the 200-day moving average, which has risen relentlessly during this gold bull market. Yes, gold and silver MAY break down from these long-term uptrends, as in markets anything can happen, but the odds are greatly in favour of upside breakouts by both metals, and we are not attempting to determine what is going to happen with absolute certainly, our approach is to assess the probable outcome and then position ourselves accordingly. Fortunately, in the case of gold and silver and precious metals stocks at this time, we are looking at a very favourable risk/reward ratio, due to the great upside potential that now exists, coupled with a clear exit strategy should things not pan out as expected. Precious metals stocks are bombed out and sentiment in the sector is at abysmally low levels. A big fear prevalent in this market right now is that the sector could be dragged down by a severe decline in the broad market, and while that COULD happen, Adam Hamilton’s latest essay, which addresses this issue in detail, makes it clear that there is no historical basis for this assumption. The clear exit strategy that establishes the very favourable risk/reward ratio is based on exiting positions in gold and silver, and in precious metals stocks, should the price of gold and silver close significantly below their long-term uptrends - as they are currently not far above these uptrend lines, risk is clearly defined and limited. Such a strategy obviously involves some danger of being whipsawed, but that’s no problem, as there is always the option to re-enter positions should any breakdown subsequently prove to be a false move - better this strategy than to be caught by a significant decline.

The other big reason that silver looks destined to break higher is the bullish patterns that have developed in many silver stocks, following the severe corrective phase of the past year, detailed in the Silver Stocks Review article that went up on the site on 13th April.

Conclusion: we are at a great buy spot, not just for silver, but for gold and precious metals stocks generally. Upside is large, and risk at this juncture can be clearly defined and therefore limited. The time is right to buy across the board.

With this in mind we will be examining a broad range of gold stocks on the site in the near future.