Gold and Silver: Prepare for a Short-Term Decline

Normally, gold and silver are the destination of a "flight to quality" during nervous markets, but that was not the case last month. As margin clerks sharpened their pencils, the gold and silver markets fell precipitously in the final week of the commodity decline. Gold surpassed the $1000 mark briefly, but fell to the deflationary forces by declining $100 before recovering in the last full week of March. Long term, I am extremely bullish on gold, but for the short term, I feel this market may have some more work to the downside.

Fundamentally, nothing has changed; we still have inflation, we still have abandonment of the Dollar and we still have aggressive buying of gold bullion. The psychology has changed, as the weak "longs" have lost their courage. Importantly, the exchanges have increased the margins on gold so aggressively that the small players have been forced to liquidate.

Techincally, gold has broken the "up" trend line that has been intact since the August lows. The intermediate and short-term trends are down, but the major trend remains up. Gold would have to drop below $700 before turning the major trend down. This market may have peaked for the first half of the year and will remain range-bound during the next quarter. However, the sixteen-week low was put in last week, and if I am wrong about the market consolidating over the next several months, I would add to core positions on a close above $1000.

Silver...will more than likely follow the pattern of gold and the CRB index. The fundamentals have not changed, but the margin requirements have been grossly increased. Once again, we have politics driving investors from precious metals futures, reminiscent of 1980, when Bunker Hunt was forced from the silver pits. Only five years ago, silver margins were $1500 per contract. That has been increased to $10,000 in the past couple of weeks.

(Click to enlarge)

Silver Monthly

Technically, the bullish pattern in the charts has been damaged in a way similar to the pattern in spring, 2006. I think it may take several months for the Bulls to gain control again. Certainly, if prices decline to the $15.00 level, it would facilitate ownership of Pan American Silver Corp. (PAAS), Silver Wheaton Corp. (SLW) and iShares Silver Trust (SLV). For now, I have no recommendations other than to just watch it.

Comments

[dieuwer:]

That is why the price of PHYSICAL gold and silver (on eBay, in coinshops) is well ABOVE the price of PAPER contracts, a.k.a futures.
COMEX and other criminals can play their games for a while, but soon they will have to deliver. When it turns out they cannot, they're forever out of business.

2008 Apr 13 02:33 PM

[User 30121:]

To dieuwer: What you say makes sense. Hoard now, make them pay later! Estute shopping is the key! There are some good deals out there, it just takes time to click. Happy hoarding!

2008 Apr 14 02:36 PM

[low:]

This guy has got the big picture. Squeeze the mid-little guy out of the equation before anyone gets wise. The mega powers may be mega but they can only control by way of what they know they can afford to sacrifice to maintain that control. IF every single voting age party on this planet could afford to purchase ONLY ONE bar of gold, what do you think would happen? Particularly since the facts stand as they do. Just like the man says, wise buyers know how to smile on the down tick and pick up whatever they can.

Now this may sound a hint of subversion but the funny thing about that is. The power players do the same thing day in and day out but it's not called that when they do. Micheal Douglas said it well enough for me, .........................

2008 Apr 14 04:04 PM

[Greg Pinelli:]

Another momentum player who has to have the technical swing hold his hand before any cajones grow...Congrats..yet another useless Alpha post!!

2008 Apr 14 11:18 PM