The gold and silver market have met all expectations for a major bottom to take place towards the late part of December 2013. The spiked lows and the subsequent rally to the target and resistance zones published in Seeking Alpha have fulfilled our multi-year downside objectives preparing the market for a multi-year rally that could last until July 15, 2016.
The action in the silver market that lead to the bearish sentiment last week is increasing the possibility that the lows of 18.97 made on January 30 potentially was the capitulation and completion of the long-term downside objectives. This confirms that silver and gold could ultimately extend this rally into the late February time frame as published previously.
The gold market came down to the bottom of the range projected by The VC Price Momentum Indicator documented on January 20, 2014. "Cover short on corrections at the 1242 to 1231 levels."
In the January 26 report I additionally made the following comments, "Since then we have seen a test of the 1181.4 low on December 31, and rallied to the high we saw last week of 1273.2. This validates the probabilities that the expected bottom has taken place. Any corrections towards the 1241 to 1215 price should be used to add to your long positions."
After making a second attempt to break above the 1273.2 resistance level, the yellow metal made a new high of 1279.8 before correcting to the lower end of the price range and subsequently triggering a Buy signal at 1241 for the February futures contract.
Are low prices for gold and silver creating a shortage of physical supply?
"It all starts with the major mining companies," says Steve Todoruk from Sprott. "These companies take on tremendous risk, along with their shareholders, in operating mines. Upfront infrastructure costs typically range in the billions and it takes years to permit and build them." He continues, "Because of the long lifetime of a major mine - which can span several decades - miners must allow sufficient margin for their production to remain profitable over its lifetime. If prices crash and they lack the ability to maintain a margin, they might never generate sufficient return to get their money back."
There is also the risk of higher costs to produce the metals, through higher labor or equipment costs, for instance. Thus, as Steve says, "mines must make strong profits, because the more marginal the mine, the higher the risk that it could end up losing money."
The artificially low prices in the physical market have put tremendous financial stress for these companies to remain solvent and maintain production quotas. With the increase in interest rates adding additional pressure for the ability of these companies to obtain long-term financing for future production and remain active even at a loss. Many companies are reluctant to shut down.
Steve commented, "It is not a simple thing to shut down a mine," he says. "You have to lay off all the miners, who may be under contractual obligations and part of a union. A lot of mines lease those big yellow mining trucks and shovels. The company will have to pay a lot of money to send all that equipment back to its owner."
"My guess is that mining companies will shut down money-losing operations in less than a year and maybe closer to six months," says Steve.
Is future production at risk?
Based on the present economic conditions, many production companies have put any future project on hold until prices can produce enough investment equity from the yellow metal.
"For instance, New Gold Corp. just announced that two of their planned new gold mines in Canada are uneconomic at today's gold price. Therefore, it is highly likely that the company will cease plans of bringing them through to production for now," says Steve.
"If we get to the point where lots of mines are closing, then simple supply and demand fundamentals will start kicking in; buyers will have to pay enough for the metals that the mining companies can turn a profit producing them. So we will either see lots of mines shutting down or gold prices going up, allowing mining operations to run at a profit."
"We are about six months into a low gold-price environment. That means something has got to give sometime in the next six months," he concludes.
Let's take a look at the technical picture for the gold and silver futures (paper) markets for next week and see what trading opportunities we can identify.
The February gold futures contract closed at 1244 . The market closing above the 9 MA (1237) is confirmation that the trend momentum is bullish. A close below the 9 MA would negate the weekly bullish short-term trend to neutral.
With the market closing below The VC Weekly Price Momentum Indicator of 1254, it confirms that the price momentum is bearish. A close above the VC Weekly, would negate the bearish signal to neutral.
Cover shorts on corrections at the 1228 to 1212 levels and go long on a weekly reversal stop. If long, use the 1212 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 1270 to 1296 levels during the week.
The March Silver futures contract closed at 19.16. The market closing below the 9 day MA (19.64) is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bullish short-term trend to neutral.
With the market closing below The VC Weekly Price Momentum Indicator of 19.23, it confirms that the price momentum is bearish. A close above the VC Weekly, it would negate the bearish signal to neutral.
Cover shorts on corrections at the 18.99 to 18.33 levels and go long on a weekly reversal stop. If long, use the 18.33 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 19.40 to 19.63 levels during the week.
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
Trading derivatives, financial instruments and precious metals involves significant risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGOL, AGQ, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GLD, GLDI, GLL, IAU, PHYS, SGOL, SIVR, SLV, SLVO, TBAR, UBG, UGL, UGLD, USLV, USV, ZSL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.