The Great Silver Standoff...
The immediate outlook for gold very much depends on the outcome of the silver "war of attrition", being fought in the $8.80 - $9.30 zone. Silver’s late December - early January rally stalled out EXACTLY at the early December high, and the metal has since kept everyone guessing - is it making a Double Top or not? The battle has been going on all this month and there are already a lot a dead bodies lying around.
Silver’s stubborn refusal - so far - to confirm gold’s break higher this month has now got gold spooked. It’s advance has lost momentum in recent days as it waits for silver to show its hand. It’s a nail biting situation for traders, especially as gold is sitting up there still very overbought, but still having upside potential.
Throw into the pot the fact that the dollar is now very oversold, and thus has the potential for a strong bounce, which MAY negatively impact gold, and you can see why gold and gold stocks are at an important juncture.
Looking at the 6-month silver chart we can see that resolution of the standoff is fast approaching. However, this is a very difficult one to call. On the one hand, the fact that silver has managed to stay up there very close to the December high for weeks suggests that it is going to break higher soon. On the other, the 50-day moving average has opened up a very large gap with the 200-day, which normally calls for a corrective breakdown, as it signals that the market has gone up too far, too fast. The 50-day moving average now closing up with the price, and this is expected to force a resolution - a breakout, one way or the other. An upside breakout by silver above $9.30 can be expected to lead to another rapid rise by gold towards the $610 area, and further strong gains by gold stocks. A breakdown by silver from here would likely be hard and fast and send shockwaves through the gold market, leading to a correction in gold and a violent reaction in gold shares. This would, of course, present a great buying opportunity.
The 1-year chart for silver provides a somewhat different perspective. Silver does look toppy on this chart, but remember that this is partly psychological because the price is right at the top of the chart.
I regret that, on this occasion, I cannot be more clear about the outcome of this battle. When this is the case it usually means that the situation is very finely balanced and the outcome is to be decided by some exogeneous event or events - something as yet unknown to the market that tips the balance one way or the other. However, this is no reason for gold stock investors to remain in a state of paralysis, waiting nervously for the outcome of the standoff. Some gold stocks have made spectacular gains and are obvious candidates for partial or full profit taking at this juncture, with a view to reallocating the funds either now or a little later in stocks which have more upside potential. This was the reason for our recent profit taking in Linux Gold, Kenrich Eskay, Northgate Minerals, Samex Mining and Yamana Gold. Use this time to adjust your portfolios. This was the basis of the recent article How to handle the gold stock correction.
On www.clivemaund.com we have been doing just that and have taken profits in some issues that have made very substantial gains but are now extremely overbought, but bought other issues that are yet to perform. Notable examples were when we sold Linux Gold at $0.50 a few weeks back, and then bought Silverado just before it started to advance on massive volume.
Clive Maund, Diploma Technical Analysis
Kaufbeuren, Germany, 24 January 2006