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Precious metals tumbled again this week and spot gold closed at its lowest level since August on Thursday. Analysts cite a combination of factors for the continuing declines: some say investors cashed out on the likelihood that 2013 will bring higher taxes on investment income, others blame end-of-year volatility.

Spot gold managed to hold around $1,700 in the first half of the week, although there were sizable and rapid selloffs midday on Tuesday and Thursday, when it broke below the key 200 MA around $1,662 to make new lows around $1,635.

As we approach the end of 2012, gold stands to end the year with its smallest annual gain since 2008. GCG3 +0.75% tacked on about 5%. Silver SIH3 +1.07% gained more than 6%.

This year, gold peaked near $1,800 using the March 2013 daily continuation chart, while the silver market has been undergoing a correction during December. The market action from the last couple of days is giving us signs that we may have reached a capitulation point for this correction and here's why:

According to Steve Roy, Chief Technical Analyst with the Equity Management Academy, " The corrections in the gold and silver markets the last few days have met all downside targets."

"The silver market has made what appears to be is the second corrective wave pattern, which most Elliott Wave Analysts call an ABC completion," Roy said. "This correction indicated the Golden Ratio 61.8% Fibonacci retracement was completed at Thursday's lows for the gold and silver markets."

Using the March 2013 daily continuation chart, the silver market has been undergoing a correction during December, and the last several days look as if we've been doing a "Fiscal Cliff" dive." Roy said. "The market action from the past couple of days confirms that we may have reached a capitulation point for this correction."

Roy gave his reasoning; First, based on the impulse move that began on June 28 at $26.105 and ended on October 1 at $35.445, a number of things are coming together, just at the right time. We are in the Fibonacci time zone for the end of the correction. Using the first high of the move, made on September 21, we show the cycle ending on December 17. Using the second or actual high, made on October 5, we show that the cycle completes on January 4 of next year. That gives us a time frame of December 17 through January 4 for the low to be in place.

Secondly, using Fibonacci retracements of that impulse wave, higher, the corrective "A" wave ended at the 50% retracement level, and the "C" wave hit the 61.8% retracement on Thursday, December 20. We may see some backing and filling until January 4, but we should not go much lower.

Third, if you think that Leonardo de Fibonacci is just an old dead Italian, we drew trend lines connecting the June 28 low to the first low of the impulse wave, and another trend line from that same low, connecting the second low made during the impulse wave. That gives us a price target during the time zone of between $30.40 and $29.30. The 61.8% retracement level mentioned above is at $29.675, while the low of the week was $29.635 and the week's closing price was $29.995. If the market moves higher next week, it would be a strong indication that we may have begun the next impulse move higher.

Gold, in particular, had many reasons to rally, but didn't perform as well as most analysts expected, while silver did well.

Both gold and silver could do better in 2013.

"When a market should be acting bullish on bullish news yet does not, it represents a nervous condition," said John Person, president of NationalFutures.com. "when investors are nervous, they tend to stay out or sell, regardless what market it is."

The highly bearish sentiment developed last week perfectly fits into the cyclical wave pattern expectation and contrarian opinion of a bottom or cyclical change. It increases the odds that last week's lows should hold and serve as the foundation for the next bullish leg which is usually the most exciting and profitable based on Elliott Wave principles. Note that gold began 2012 at $1,536 and analysts see a major technical breakdown if the yellow metal closes out the year below that level.

On a recent interview I did with Eric Sprott from Sprott Asset Management I asked him if he still feels silver is the best investment of this decade?

Here's a preview of what he had to say, "I absolutely do, and the one thing that most strikes me when I look at, for example, I look at the US Mint web site and I look at the dollar value of gold sold and the dollar value of silver sold and I see that investors bought as many dollars of silver as gold which means they bought 50 times more physical silver than they bought gold because the price is over 50 to 1 and but when we look at production of silver there is about 11 times more production of silver than there is gold, but half of silver's production goes to industrial production whereas almost all gold production is for savers which then takes a ratio of about 6 and a half ounces of silver you can buy every year for investment versus one ounce of gold, but people are buying it 50 to 1."

Sprott added, "When we did the last PSLV issue we raised 320 million, we did the last gold PHYS issue and we did 349 million . For all intent and purpose almost the same amount. We almost bought about 50 times more silver than gold. Well, how can investors buy silver in a ratio of 50 to 1 when it is available at 6.5 to 1, that cannot last. So, that's why I think you give it time and you take the paper guys out of the market, you know the Comex, and all this ridiculous trading of paper silver that goes on... the physical story will win out and we will go back to a more normal ratio ie., 16 to 1. If we go to 16 to 1 silver will triple the performance to gold and gold will have a great performance as well, it is like a super charged story."

What's wrong with the mining stocks?

According to Eric Sprott, "Well they have all had their own issues by the way, I mean it is always difficult to increase production, grades are going down and costs are going up but I would say generally when you look at the stock market performance, gold stocks only do well when the momentum in gold is positive so when we went from 1550 up to 1750 we had a bit of a surge in the price of gold the stocks tripled the 10% or 12% increase in the price of gold. Now, in the last whatever number of weeks 6 to 8 weeks gold has been going down or trading sideways and the minute it goes down of course everyone loses confidence in the gold stocks. But I would argue if gold turns around here and it starts heading towards 1800 everyone will look at it differently, you know, it's like half empty or half full."

"And if it the price looked like it was going back to 1800 I think everyone would reverse field again and away go the stocks, and you're not going to get stocks going up when the price of gold is going down and then unfortunately the price of gold going down you get triple impacted on the stock and again vice versa. So I think we need a sustained move in the price of gold thru 1800 and the investors will come back in." Sprott concluded.

With that in mind, let's examine a few derivatives in the precious metals sector and see what the technical forecast looks like for the holiday week.

GOLD

The gold contract closed at 1657. The market closing below the 50 MA is confirmation that the trend momentum is bearish. With the market closing below the VC Weekly Price Momentum Indicator of 1666, it confirms that the price momentum is bearish. Look to take some profits, if long, as we reach the 1695 and 1734 levels during the week. Buy corrections at the 1628 to 1598 levels to cover shorts, and go long on a weekly reversal stop. If long, use the 1598 level as a SCO/GTC (Stop Close Only and Good Till Cancelled order).

SILVER

The silver contract closed at 29.98. The market closing below the 50 MA is confirmation that the trend momentum is bearish. With the market closing below the VC Weekly Price Momentum Indicator of 30.74, it confirms that the price momentum is bearish. Look to take some profits, if long, as we reach the 31.84 and 33.70 levels during the week. Buy corrections at the 28.88 to 27.78 levels to cover shorts and go long on a weekly reversal stop. If long use the 27.78 level as a SCO/GTC (Stop Close Only and Good Till Cancelled order).

AGQ
The ETF contract closed at 43.14. The market closing below the 50, 200 MA is confirmation that the trend momentum is bearish. With the market closing below the VC Weekly Price Momentum Indicator of 45.24, it confirms that the rice momentum is bearish. Look to take some profits, if long, as we reach the 48.44 and 53.74 levels during the week. Buy corrections at the 39.94 to 36.74 levels to cover shorts and go long on a daily reversal stop. If long use the 36.74 level as a SCO/GTC (Stop Close Only and Good Till Cancelled order).

SLV
The ETF contract closed at 29. The market closing above the 200 MA is confirmation that the trend momentum is bullish. With the market closing below the VC Weekly Price Momentum Indicator of 29.67, it confirms that the price momentum is bearish. Look to take some profits, if long, as we reach the 30.69 and 32.80 levels during the week. Buy corrections at the 27.98 to 26.96 levels to cover shorts and go long on a daily reversal stop. If long use the 26.96 level as a SCO/GTC (Stop Close Only and Good Till Cancelled order).

GDX
The ETF contract closed at 45.18. The market closing below the 50 and 200 MA is confirmation that the trend momentum is bearish. With the market closing below the VC Weekly Price Momentum Indicator of 45.35, it confirms that the price momentum is bearish. Look to take some profits, if long, as we reach the 46.53 to 47.88 levels during the week. Buy corrections at the 43.99 to 42.81 levels to cover shorts and go long on a daily reversal stop. If long use the 42.81 level as a SCO/GTC (Stop Close Only and Good Till Cancelled order).

GLD
The ETF contract closed at 160.33. The market closing above the 200 MA is confirmation that the trend momentum remains bullish. With the market closing below the VC Weekly Price Momentum Indicator of 161.11, it confirms that the price momentum is bearish. Look to take some profits, if long, as we reach the 163.84 to 167.43 levels during the week. Buy corrections at the 157.61 to 154.88 levels to cover shorts and go long on a daily reversal stop. If long, use the 154.88 level as a SCO/GTC (Stop Close Only and Good Till Cancelled order).

Source: Is Silver Ready For Takeoff?

Additional disclosure: *Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.