The Requirements For A Silver Turnaround

Let’s take a look at the short-term and intermediate-term technical pictures for both gold and silver. 

Before we get too excited over the rally in silver, consider that whenever a commodity rallies after a multi-week sustained decline, there’s always the danger (indeed, the probability) that the advance will be arrested and prices will be forced back to re-test the recent lows.  This is how double bottoms are formed.  Sometimes a re-test of the low is a double bottom and, in particularly strong markets, it can be a higher low.  In weak markets the previous low will fail to hold up under testing and a lower low will be made.

In silver’s case this means we should prepare at least for a re-test of the early December low near the $19.00 level.  Let’s assume for purposes of this discussion that the most recent low will continue a few more days and that silver makes it to the 150-day moving average at the $21.42 level (see chart below).  Since the 150-day (30-week) moving average, which is an important long-term trend line, is still declining it reflects continued downside momentum. 

Silver must not only overcome the 150-day MA, but must also establish a base of support before we can have any assurance that its interim decline has been completely halted.  Further, a multi-week basing pattern is essential to forming the launching pad for a new bull market.  In other words, regardless of what happens in the next few days, silver has a ways to go before convincing us that the bear market has ended.

The same can be said for gold.  The 150-day moving average for gold, even more so than silver, is a dominant longer-term trend line which has checked ever rally for gold of the past year.  The daily chart of the SPDR Gold Trust ETF (GLD) provides the clearest example of the resistance exerted by this important trend line.  As long as gold and the gold ETFs remains below this trend line, bear market conditions can be presumed to still hold sway.

Commodities guru Jim Rogers made a high-profile statement yesterday to the effect that silver looks better than gold on a relative basis.  A number of financial writers picked up on this and used it as an excuse to promote silver as a “hot” investment choice.  What Rogers actually said, though, was “I'm not buying either gold or silver...but if I had to buy one today, I’d buy silver because it certainly has gone down more than gold.” [Source: Adrian Ash, Bullion Vault] 

Rogers is correct, IMO, not to be purchasing gold or silver right now in light of the continued path of least resistance for both metals – which is confirmed down.  He may be on to something, though, in terms of silver’s future turnaround potential at some point in the coming months if global volatility re-emerges and scares investors away from equities and back into the safe havens. 

Remember, though, that the chief technical near-term obstacle for the white metal is the 150-day (30-week) moving average, which continues to shepherd the metal lower.  Until silver decisively breaks above this important trend line, it should be assumed that sellers retain control over the market.

Turning our attention back to gold, declining demand from India -- one of the world’s major gold consumers -- has been a major factor behind the downward trend in the gold price.  A recent report on India’s projected gold imports for 2014 put a further damper on the yellow metal.  According to All India Gems and Jewelry Trade Federation, gold imports are expected to fall to 500 tons, from an estimated 650-700 tons in 2013. 

ETF and institutional trading demand for the precious metals has also taken a hit lately.  According to the CFTC, net combined long positions in gold contracted by nearly 16% to 26,774 contracts during the week ending Dec. 3.  This level was last seen in mid-2007.  Investment bank Barclays has stated that should the gold price drop below $1,200, an extra 100 tons of gold-backed ETF holdings will become loss-making, which may prompt more ETF selling. 

In light of the above points it’s evident that gold and silver need a significant catalyst to recover from the malaise currently hanging over the market.  Fear and uncertainty are the two catalysts which gold feeds upon and indeed these two widespread investor emotions kept gold in a strong uptrend until the summer of 2011. 

As we’ve talked about in past reports, however, an economic slowdown in Asia and/or Europe in 2014 would have profound consequences for the global economy and would be a definite stimulus for a return to gold among safe haven investors.  Early next year a repeat of the “fiscal cliff” saga in the U.S. would also likely help bolster gold’s prospects as a safe haven. 

All in all, the return of economic volatility in 2014 – regardless of where it comes from – would almost certainly harbinger a revival of interest in gold as a safe haven du jour among investors with silver benefiting as well.

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Kress Cycles

Cycle analysis is essential to successful long-term financial planning.  While stock selection begins with fundamental analysis and technical analysis is crucial for short-term market timing, cycles provide the context for the market’s intermediate- and longer-term trends.

While cycles are important, having the right set of cycles is absolutely critical to an investor’s success.  They can make all the difference between a winning year and a losing one.  One of the best cycle methods for capturing stock market turning points is the set of weekly and yearly rhythms known as the Kress cycles.  This series of weekly cycles has been used with excellent long-term results for over 20 years after having been perfected by the late Samuel J. Kress. 

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Clif Droke is a recognized authority on cycles and internal momentum and is the editor of Gold & Silver Stock Report, published each Tuesday and Thursday since 1998.  He is also the author of numerous books on trading and investing, including most recently, “Kress Cycles.” For more information visit www.clifdroke.com