Do You Think That Gold And Silver Are Broken?

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Includes: GLD, SLV
by: Avi Gilburt

If you think that the gold and silver charts point to metals having broken down, then it seems that you are part of the growing masses. In fact, it has been a long time since I have received some vociferous emails regarding how wrong I am about the metals. But, it seems that many are now questioning my analysis once again. That is usually a very good sign to me that my analysis is correct and the metals are heading much higher quite soon.

Much has been written about silver and gold having broken down, evidenced by their maintaining price levels below their 50 DMA and 200 DMA. In truth, historically, this has not been a meaningful way to identify a turn in the metals market. It is simply "predicting the present." But this has clearly been the "reason" to which many point when they try to explain the extreme bearish sentiment regarding the metals.

As I wrote in my last article, analysts

look at the present conditions in the market, and assume those conditions will continue for an indefinite period of time into the future. This type of analysis, which is performed by most analysts, is linear in nature, and works well within an economics textbook. However, we live within a non-linear, dynamic world-wide society, which is why linear analysis cannot work.

Furthermore, we are at 10 year lows in bullish sentiment for the metals, and based upon the extreme in bearish sentiment, this usually does not point to a market collapse in the metals, as collapses usually occur at high sentiment levels, not low ones. And when analysts definitively claim that there is the "no reason" for a market to rise, as I pointed out in my last article, that is usually the point at which we see the market rise.

Yet, many are still short the metals, while some are even adding to their short positions based upon this factor. While they may be correct for the next week, they may have to cover those shorts in May, which, along with the twice-lowered margin requirements by the CME, will add fire power to the strong rally I am still expecting.

Clearly, this corrective downside consolidation has taken much longer than I had initially expected, but what I have noticed about this corrective decline is that the bearish sentiment in the metals has been increasing at a rate greater than the rate of decline in the metals themselves.

One point that evidences this quite clearly is that the Gold Miner's Bullish Percent Index is now at the same lows it reached when we called the bottom in the metals at the end of 2011, yet the metals are much higher than the prices seen at those sentiment levels last year.

As an Elliottician, I believe that markets are fractal in nature, which basically means that they maintain a general pattern which directs price movement. As I have written many times in the past, this pattern represents the movements of investor sentiment, which is what I believe is the true mover of markets.

The pattern we have seen off the lows in 2011 is, more likely than not, a bullish pattern, whereas the pattern seen in the decline since we called the market top at the end of February is more likely than not a corrective pattern. To that end, I want to point out a fractal pattern that seems quite illustrative of the current pattern we are in with silver.

Click to enlarge

This past week, I identified a potential fractal pattern that alludes to one more decline which should then lead to a strong reversal in the market. If you look at the blue box on the left side of the silver chart, you will see our last 4th wave consolidation. While the entire pattern seems eerily similar to the current pattern, even down to the double top to the left side of the b-wave, the one small difference is the b-wave top in the left pattern is a bit higher than the current b-wave top.

Although this may mean we still see a move up to the 32.30 level early this week, I think that this fractal, along with the expectations we have had for a while now, leads us to the conclusion that one more low in silver may still be seen. Furthermore, if we do follow this fractal, it may only be one more week until the low in silver is seen and the rally begins. Again, our target region in the futures is in the 29.00 -31.50 region, with the 31.25 region representing a nice level of confluence.

For those currently holding short positions in the metals, I will warn you that the imminent reversal may present a violent and extreme move to the upside, so be prepared to cover those shorts.

Disclosure: I am long SLV.