Gold & Silver Futures Short-Term Bearish

The gold and silver futures markets show considerable technical weakness and should seek lower levels in coming days. This short-term weakness is to be expected coming off a frenetic rally above recent highs, and in no way jeopardizes the long-term developing bull markets in these respective metals.

We wrote last Monday, "April gold futures on the COMEX are at the psychologically important $300 level, and from an immediate-term view this shows strength. The gold market has rallied from its recent lows above $290 and are consolidating within a classic triangle pattern. If prices break out above $300 they will climb to retest recent resistance at $308, which proved to be a double top early last month. Will gold manage to break above $308 this time around? Not likely. At $308 an even bigger triangle pattern appears that extends all the way from late January and encompasses almost $30. The measuring implication of this triangle pattern on the breakout is therefore $30 from the breakout point, whether up or down. What makes us so sure the breakout will be to the downside? Because gold's cycle channels turn down slightly above $308, at which point heavy supply pressures will be encountered. Gold should bottom, however, above $276." This forecast still stands.

In fact, gold has already broken out of its large contracting triangle formation without even testing the recent highs, pointing to technical weakness. Gold futures appear headed down to $276 and possibly as low as $273. This trading floor is where the cycle channels point down to. The cycle channels are all cascading downward in waterfall fashion indicating that the short-term trend in gold has turned bearish.

The XAU index has broken out of a trading box and has touched trading channel support at 60, finding at least a temporary support at this level. The XAU has shown more weakness than we originally anticipated. While we still envision a trading range environment in the XAU in coming weeks, its parameters could stretch as low as 60 with the top at 70. A further decline below 60 would endanger the recent uptrend and would mean the gold stocks are in a weak position since the 60 level represents the 50% retracement point of the XAU's 3-month rally. A decline beneath 60 means sellers outnumber buyers in this market. It would also mean a violation of the bowl-shaped accumulation pattern that developed between last September and this past February, a further bearish sign.

Barrick Gold (ABX) has broken beneath a classic descending triangle on increased volume and has downside potential to $16 (currently $17) based on the measuring implication of this triangle. Placer Dome (PDG) should find support above $10 and Newmont Mining (NEM) should bottom above $22. A decline below $22 on a closing basis jeopardizes the recent upward trend.

Gold analyst Irwin Yamamoto, whose metal markets analysis we highly respect and whose short-term outlook mirrors ours, makes the following comments on gold: "The metal's in the midst of an advance. Does gold have enough fuel to resume its rally? Yes. Will it continue upward? There's strength for a move to the $290-$295 range. Perhaps, over the $300 mark. But beyond that, the journey would be short-lived. The technical charts don't indicate a major bull cycle yet.

"In the short run, a retracement is in order. I like the bullion long-term. I really do. However, another visit or two to the downside might be in the offing. Everything is not in place to begin a bull market in the gold market. Whether you are talking about the technical underpinning or the fundamental landscape, something seems to be lacking for the big one to develop at this juncture."

Yamamoto advises keeping two separate accounts for gold, one for the short-term and one for the long-term. For the short-term, he recommends collecting gold shares when they fall to the lower end of their trading range. For the long-term account he advises purchasing strictly on weakness.

This is sound advice. He surmises it aptly: "The big rewards are coming. But don't expect it tomorrow."

James Flanagan, editor of Past, Present, Futures newsletter, made these insightful remarks about the white metal: "In terms of this final bankrupting decline, we would not be surprised if the market did not break the $4.15 low before establishing a final low. Everyone knows this was the low which preceded the Warren Buffet inspired advance to $7.50 an ounce on February 6, 1998." This was written in May 2001 and silver did indeed break below $4.15/oz. However, a further test of this level can be expected before the bottom is established and the silver market is signaling its intent to test the lows at $4.10 very soon. A rather large contracting triangle in the daily chart from January through March projects down to almost exactly this level. Granted, triangles can forecast moves either up or down, so how, you may ask, can we assume the breakout will be to the downside? Simply because the cycle channels show a number of short-term trading peaks accompanied by heavy short-term supply pressures. This virtually guarantees a final wash-out to establish the lows in silver futures.