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What happened to gold and silver? Both had reached their respective cruising altitudes, were switched over to auto pilot and then - WHAM. Strong turbulence shook the markets as resistance became more of a 'brick wall', stopping all forward momentum. The impact created a "slap down" type reversal, leaving a high body count in its wake. So what is going on? Have the bulls surrendered to the bears?

Research & Outlook Update

From our article Silver Launches Higher Into 2012:

In fact, resistance at $33.50 and $37.50 should not pose much more than a place for silver (SLV) to pause and catch its breath before heading higher.

It is a break with follow-through of that upper zone at $37.50 that needs to occur before stronger upside momentum picks up speed and intensity.

That upper resistance zone in SLV proved to be more of a "brick wall' creating a "mini" cascade of sell orders. It is from this point that taking a closer look is warranted.

Click to enlarge

The advance off the December lows remains intact for now. However, in order to keep this outlook in place, SLV needs to contain downside to the support zone at 31.05 - 29.75. A break below 29.75 would suggest the correction off of the 2011 highs is still in force with new lows under 25.65 on the way.

Gold (GLD)

At the moment, the path of least resistance in GLD is down, and will more than likely remain that way over the near term. With 174 being the "brick wall", expectations would be for gold prices to form a decline, rally, decline pattern . Support for the initial decline comes in at 161.10 to 158.10. Failure of this zone to hold clears the way for a quick slide towards 145.

Platinum (PPLT)

Platinum's long term outlook remains intact for now. A near term correction is underway off of the recent high at 171.46 . Ultimately expectations are for prices to trace out a similar pattern to gold (decline, rally, decline) before a more sustained rally takes over. Support for the initial decline begins at 156.75 and then drops to 152.20 to 147.70.

Background & Conclusion

The fundamentals haven't changed for precious metals. Economically, expectations for another round of deflation are gaining strength and precious metals prices will not escape. An important concept to understand is what defines inflation and deflation? How do they impact precious metals and commodities prices?

Dictionary.com defines inflation (as it pertains to economics) as:

Economics . a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.

and deflation as:

Economics . a fall in the general price level or a contraction of credit and available money.

Going one step further to include defining as it applies financially, "money and credit." Again, from dictionary.com:

"money" -

1. any circulating medium of exchange, including coins, paper money, and demand deposits.

2. paper money.

3. gold, silver, or other metal in pieces of convenient form stamped by public authority and issued as a medium of exchange and measure of value.

4. any article or substance used as a medium of exchange, measure of wealth, or means of payment, as checks on demand deposit or cowrie.

5. a particular form or denomination of currency.

"credit" -

confidence in a purchaser's ability and intention to pay, displayed by entrusting the buyer with goods or services without immediate payment.

Based solely on the definitions given above, it might seem that both are in play right now, depending where on the economic scale you happen to be sitting. Most people are likely feeling the deflationary smack rather than the inflationary pinch. And these two seemingly simple words are often misunderstood-- even by the "experts."

The economy is recovering, but not all sectors are participating and it appears that another major capital shift may be underway and about to take hold. I believe the prerequisites for deflation were met back in 2007, when the massive societal build up of credit proceeded to implode on itself, nearly taking down the global economy in the process.

It could be a costly mistake to ignore or discount the major role socioeconomics plays in swinging the mood pendulum. This particular pendulum is "huge", and the swing from pinnacle to pinnacle (think of a smile) takes a large change in the social mood. Directional changes in momentum create a large amount of energy and take time to unfold. Trying to step in front of it instead of riding with it is suicidal.

When considering gold and silver as hedges, one should not confuse holding "purchasing power" with price declines. During a period of deflation, gold and silver prices will move lower as well. However, when all is said and done, it is the precious metals that will hold their "purchasing power" over other goods.

Observations of recent price action in the precious metals complex could be signaling that the next round of deflation is about to take hold. The verdict is still out as to whether the bull market is complete or not. Current action demands attention, and in some cases portfolio adjustments (hedging your portfolio to protect gains) to ride out the turbulence.

Source: Observations After Gold And Silver Hit A Brick Wall