Maund on Gold & Silver

April 5, 2008

Gold Market Update

Gold’s uptrend channel from its August low failed last week as predicted, leading to an immediate plunge to $875, from which point it bounced. The failure of the uptrend and the drop well below the 50-day moving average, now way above the 200-day, are events that together typically lead to a prolonged period of consolidation/reaction. This fits with the fundamentals where there is likely to be a significant easing of concerns about the potential insolvency of major banking and mortgage corporations and institutions as the US Fed and Treasury organize an effective taxpayer funded bailout to get them off the hook. Even though the implications of this are hyperinflationary, the general relief resulting from the aversion of immediate crisis is likely to fuel a strong rally in the broad stockmarket, as already set out in detail last week

Even though gold may react back to the $830 - $850 area in coming weeks or over the next month or two to complete its corrective phase, the underlying forces driving its bull market remain intact, the primary one being the general massive expansion in the money supply, not just in the US but worldwide, fuelled in the US by the need to service careening deficit spending and bailout banks etc and overseas by competitive devaluation, whether officially acknowledged or not. Several weeks back it was thought that deflationary forces might be about assert themselves, and widespread concern about this was probably an important factor behind the sudden plunge in commodity markets, including gold and silver. However, a very important and timely article by Steve Saville of The Speculative Investor, entitled Is the Fed deflating quickly reveals that the notion is nonsense - on the contrary the money supply is going ballistic.

Even though gold may have further to react as described above, there were two indications last week of general resilience in the Precious Metals sector. One was that although silver fell along with gold, it did not drop below its mid-March low on a closing basis, and unlike gold has not thus far broken down from its uptrend channel. This, of course, is suggestive of an increase in silver’s relative strength compared to gold. The other important development was that Precious Metals stocks held up remarkably well last week - on a day when gold dropped over $30 they suffered only modest losses. Observing this disparity we quickly ditched our speculative Put options for a profit an hour before the close and during the following morning before a strong advance by the sector resulted in a net rise in Precious Metals stocks for the 2-day period, despite gold’s savage plunge the day before. This resilience by stocks represents a turnaround as up until now they have miserably underperformed gold and silver and it is viewed as a very positive sign that bodes well for the sector, so that even though gold may have further to fall, the chances are that stocks have bottomed. As our chart showing the XAU index relative to the gold price makes clear, there is a lot of room for stocks to play catchup, and if that’s what they decide to do, we are likely to see spectacular gains on the next run up by gold and silver. Who knows - even the juniors may come to life.

Silver Market Update

Although silver dropped back quite sharply last week as expected, in tune with gold, it was interesting to observe that the decline halted EXACTLY at its channel support line shown on our 1-year chart, and that it did not drop below its mid-March low on a closing basis. These are signs that it may just have bottomed, especially as it is now noticeably outperforming gold. What this means is that even if gold goes on to drop towards our intermediate maximum downside target in the $830 - $850 zone, silver may not react much further and might hold above last week’s low. Traders should be remain aware of this and depending on how it pans out in the near future could aim to buy close to last week’s lows with a tight stop, possibly re-entering the position in the event of being shaken out by a short-lived drop to lower levels, on subsequent strength.

Normally, the failure of a parabolic uptrend such as we have recently witnessed with silver means that “the show’s over” for a while, and for reasons discussed in the Gold Market update, gold and silver may have to surrender the limelight to the broad stockmarket in the weeks ahead, although because of the highly inflationary backdrop, they are unlikely to give up much more ground, and Precious Metals stocks, which showed great resilience last week for the first time in ages, may actually firm as the rising tide of electronically created money lifts all boats.

In conclusion, we may just have seen the low in silver. The worst case is a breach of the trendline followed by failure of the support level leading to a decline back towards the next support level near the 200-day moving average where, should it get that far, it would be viewed as strong buy. Action in Precious Metals stocks suggests that it is unlikely to break below the current support level.

Clive Maund, Diploma Technical Analysis

Copiapo, Chile, 8 April 2008

Fed has done all it can to fix US economy's non-structural issues, now it must hike rates