Silver And Gold: Low Risk Opportunity

Includes: GLD, SLV
by: Avi Gilburt

Those of us who have entered the gold and silver market at our bottom call at the end of 2011, and then exited their short term positions at our suggestion on February 28, 2012, have done quite well in the metals market thus far.

Over the last several weeks, those who entered the markets in our target region for the metals have been waiting very patiently for the markets to begin the strong rally that we are expecting from this region. However, the market's machinations over the last several weeks have clearly tried our patience. Yet, the pattern now seems ripe for an explosion to the upside, and we should not have much longer to wait for confirmation. But, as always, I strongly urge you to wait for the confirmation of the break-out before adding to your initial positions.

Bearish Sentiment

Since I am an Elliottician, I analyze price charts for indications of social mood patterns within a chart. When I further read that bullish sentiment has dropped to as low as 33% recently,'s Gold Bugs bearish sentiment is at a maximum extreme, and that the total assets in the Rydex Precious Metals Fund has dropped to its lowest level since 2008, it tells me that these indications are supportive of a large potential rally ready to begin in the metals, as represented in the charts that I follow.

Many market analysts also point to the fact that gold has recently dropped below its 200DMA, and view this as a very bearish occurrence. However, what they do not note is that it has done so approximately 30 times over the past 10 years and stayed below that level each time for less than two weeks. While this is clearly not dispositive of the fact that gold will rally from this point again, my pattern work is suggesting that it will do so again.

I have also mentioned many times in the past few weeks about many within the written and television media suggesting short positions in the metals, and this definitely adds to the overall bearish sentiment that is pervasive in the precious metals markets. In fact, two weeks ago, I noted that:

What I have noticed on Seeking Alpha is that a predominant sector of the readership and the contributors are normally quite bullish with respect to the metals. However, at this point in time, there seems to be more bearish calls being seen in this traditionally bullish forum, with some even suggesting short positions, as well as some confusion, not knowing what to advise. In fact, one article even sited that Jim Rogers and Marc Faber are both bearish on gold at this point in time.

Additionally, Friday afternoon on CNBC, there were two shows back to back after market hours where they suggested a short trade on gold in the first segment and the next had a segment entitled "Gold: The Glitter is Gone."

In this last week, we still see articles coming out on Seeking Alpha suggesting that gold is going to potentially collapse from this region. Additionally, Lance Roberts recently cited a Financial times article which suggested that "investors are losing their enthusiasm for gold." The same article notes that "the U.S. Mint's sales of American Eagle gold coins, seen as a good indicator . . . fell in February and March to their lower level since mid-2008, down about 70 per cent since late February, on Thursday hitting a 10 week low of $1,627.68."

I have also seen many reasons proffered by professional analysts as to why the metals will continue to drop. These include:

  • Weak Asian demand, represented by falling exchange volumes on the Shanghai exchange;
  • There is a much lower trend channel that many believe the metals will approach;
  • Since there is no QE3 definitively on the horizon, many do not see a catalyst to take the metals up;
  • India, the world's largest consumer of gold, instituted a tax hike on imported gold, which the president of the Bombay Bullion Association warned could affect India's consumption of gold to the extent that they would lose their largest consumer status to China.

Although my specific analysis methodology uses charts to identify these types of bearish sentiments, it is rather clear that there is a strong pervasive bearish sentiment regarding precious metals at this time, which I believe is on the cusp of turning.


The USD is still following the Elliott Wave script that we have laid out over the last several months. In fact, it has followed that pattern almost to the penny over these months. Currently, it is likely that the USD will not continue to follow this same pattern, targeting much lower levels in the months ahead. Oftentimes, we may see an inverse relationship between the USD and the metals, but that is not necessarily something that is always bankable.

Two weeks ago, I wrote the following to my clients:

If you listen to many of the market analysts discussing the dollar and its relationship to the metals or the equity markets, it seems as though there is much confusion. The confusion is due to the seeming "correlations" between the dollar and "risk" assets that are no longer holding true. In fact, many were expect that a rally in the USD would coincide with a decline in the metals and the equity market. But, we have recently been witnessing a break within these correlations.

It is for this reason that I continually stress that each chart MUST be analyzed on its own, and it is faulty analysis to base a significant amount of your analysis of a particular chart purely on what another chart is doing. This leaves an analyst in a befuddled state when the seeming correlations disappear just as easily as they initially appeared. This is what is now happening to many in the financial world, as they scramble to figure out what is happening.

At this time, I think the USD will potentially inversely correlate to risks assets once again over the next several months. While the correlations will never be an exact tick-for-tick correlation, it seems as though the USD is setting up to continue into the large decline we have been expecting, while the "risk" assets, specifically the equity markets and the precious metals, seem to be setting up for a strong upside rally. So, it would seem that some news event will potentially be announced in the very near term which will seemingly have a very negative impact upon the USD.

By the end of the month of April, my expectation would be that, based upon this current pattern, the DX will be targeting at least the 77.40 region, while it will definitely be within the realm of possibility to see the DX within the 76 region by the end of May, with the potential to be as low as the 75 region.

However, a move over the 79.53 level in the DX would make me question this larger pattern.

Price Patterns

GLD bottomed within 13 cents of our 158GLD target, and the silver futures bottomed right in the middle of our target region of 30.50-31.90 as well. Since that time, both metals have formed consolidation patterns which should resolve to the upside in a strong rally.

I would expect the first target for silver would be in the 35.45 region, on its way to the 42.50 region. As for GLD, assuming a bottom at 158.13, the targets would be 168 before a smaller consolidation, on its way up to the 184 level.

Since this pattern is has an 85% probability in my humble opinion and based upon my experience, there is always a 15% chance that this pattern will not play out, and that is why I suggest a stop just below the GLD 158 level. This provides for a low risk, high probability entry, with a defined point at which you would exit the market with a small loss, but with much larger potential gains, which could very well exceed 20%, and multiples of that if you use options.

As for silver, there is also the 15% possibility that the pattern fails. This is why I always trade with stops - which I now suggest just below the 31.10 level in the futures, and even use out-of-the-money hedges in the silver market, due to its volatility. The upside potential is for silver to move up by 35% relatively quickly, and, thereafter, potentially double, so I believe the risk of investing in silver at this time is well worth it.

Once the metals begin their move up and confirm their respective patterns, I suggest hedges be removed, and stops moved up. The initial break out levels to watch for are 33.14 in the silver futures and 165 in GLD. We will continually move stops up to higher Fibonacci support levels as the market moves up.

For those who question the potential power of the expected rally in the metals, please refer to the beginning of 2011 in the silver market, when silver went from 27-50 in a matter of 3 months. While GLD did not begin this type of rally until several months later, it went from 144-186 in just under 7 weeks. At this point in time, gold and silver seem to be displaying mirror patterns, and will likely move up in tandem, as they did from their respective market bottoms at the end of 2011. In fact, both can see the type of parabolic rally that was seen last year, and potentially even more powerful due to being within a stronger wave degree.

Disclosure: I am long SLV, GLD.

Additional disclosure: I am also hedged with OTM puts on SLV and GLD until the pattern to the upside is confirmed, as discussed in the article.