Maund on Gold & Silver
A week of dramatic developments ended with the dollar surging to 6-month highs and silver crashing an important support level and plunging. Gold, however, did not break below its important $850 support level, although as we shall see this certainly does not mean it won't soon.
On its 1-year chart we can see that there has been no real panic selloff yet in gold, whose decline thus far from its July peak has been modest and measured compared to that of gold and silver stocks, but if the $850 support level gives way we can expect it to plunge into a selling climax that should terminate the decline. How far would it likely drop? - probably to the $800 - $825 area where there is continuing support arising from the triangular trading range of November and December last year, and also arising from the proximity of the 300-day moving average near which gold has found support on its bigger reactions throughout its bull market. How likely is it to break the $850 support? - very likely for 3 reasons: one is that the dollar has broken out above an important resistance level and appears to be headed higher short-term despite already being extremely overbought, another is that silver has just crashed a strong support level and gone into a near-vertical descent, and finally Precious Metals stocks are heading precipitously lower towards targets at 280 on the HUI index and 125 on the XAU index.
On the 1-year chart for the dollar index we can see how it spiked dramatically late last week. Technically, the reason for this was that it had succeeded in breaking clear above its 200-day moving average and in overcoming the lower resistance level shown towards and around 75. There are several important points to note regarding this development. One is that the size of this move implies follow through to the upside towards the next resistance level shown on the chart, which would probably precipitate a breakdown by gold as described above, but at the same time the entire steep advance including the sharp gain late last week is and will be regarded as a final "blowoff" move that should mark the end of the uptrend that began in mid-July. This is hardly surprising as the dollar is already way out on a limb here, extremely overbought and climbing up through up steeply falling long-term moving averages, hardly conditions that usually result in a sustainable rally.
On the Precious Metals stock index charts we have witnessed breakdowns from Head-and-Shoulders tops leading to precipitous declines. On the HUI index chart shown here we can see that the downside target for the H&S pattern is the strong support shown in the 275 area. Right now the index is extremely oversold on all short-term oscillators, and it is therefore rather difficult to picture it dropping as far as that. However, a breakdown by gold below $850 could easily trigger such a further drop, and the almost insanely oversold condition that would then exist would provide a MAJOR OPPORTUNITY to load up with the better gold and silver stocks, as this should be the bottom. In trying to buy stock on an intraday plunge below 300 on the HUI index, we would be trying to catch the low, which is worth attempting as the reversal hammer that is likely to end this selloff can be expected to involve a big daily range, but remember there is no law saying that the index has to drop this low before it turns up - we could be at the low right now. If we are, we are likely to see a reversal hammer on Monday.
The silver support level in the $16.00 - $16.50 area finally buckled on Friday in the face of the dollar spike leading to a rapid plunge that has taken the price below its 300-day moving average. We can see this development on the 1-year chart, and how it has opened up the risk of a continued decline to the next support level in the $14 area. Although the dollar is already entering extremely overbought territory that is expected to lead to a reversal soon, there is room for it to continue to advance short-term, which would likely lead to gold following suit and crashing its support, and silver dropping back to the $14 area. That said we should keep in mind that it is already deeply oversold and near its 300-day moving average, and could reverse to the upside at any time, in sync with a dollar reversal to the downside.
If silver drops to the $14 area as expected over the short-term it will be viewed as a strong buy as this should mark the end of the downtrend. This would be expected to coincide with Precious Metals stocks bottoming out as signified by the HUI index dropping to the 280 area and the XAU index dropping to the 125 area.
Copiapo, Chile, 9 August 2008
No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.