One Last Decline, Then the Rebound in Gold

It's shaping up to be a bad few weeks in precious metals, as the final drop of this big corrective pattern is set to unfold.

Gold has been going sideways right near the recent lows, which is a generally bearish way for a market to consolidate after a strong move down. Plus there have been so many opportunities to break out over $815 - $820, and it's just not happening, which suggests that gold needs to go down further before the right sentiment mix is created for a strong rebound rally.

There are also a few other things that are not helping gold right now, as silver is looking very weak and the dollar index is looking very strong.

In the latest Fractal Silver Report (published on Monday morning for annual and 2-year subscribers), I discussed how silver looks ready for the next "free-fall" decline down to the final lows for this big corrective pattern.

Now on Tuesday it looks like silver is caving in -- as usual, ahead of gold -- so this is a big clue that the next hard down leg for precious metals is gearing up.

This next decline in silver should set up a monumental trade to the upside, as no matter what happens with silver down the road, the next immediate move should be a bounce up to the last major breakdown at $16.50. So silver is likely to move up over $5 on the rebound rally, which should be one of the most profitable trades of the year.

This is the "spring-loading" effect that I discussed in my last article, which is a very powerful -- and more importantly, predictable -- force in a highly speculative and volatile market like silver.

But silver is definitely not ready to be bought just yet, and a big reason for the weakness in precious metals and commodity markets right now is the strong rise in the dollar index.

The dollar index has been in launch mode since the mid-July bottom, which is wreaking havoc on so many parabolic up patterns tied to the dollar's decline.

It's also worth taking a moment to notice the very characteristic complex reversal pattern prior to the dollar's launch, and how the strong move started after the third major test of the initial energy levels of the pattern.

I talk about this a lot because it's very characteristic of the way markets behave during major reversals. Even though it's frustrating to live through such complex bottoming patterns -- especially on a weekly pattern, like this one -- the pay-off is usually extraordinary when the move finally takes off.

I'm expecting a similar sort of complex bottoming process for gold and silver at the bottom of this correction. My guess is the complex pattern will play out on the daily chart, and not on the weekly chart, as on the weekly chart the coming bottom will like more like a "V bottom" and a slingshot move from there.

Since the dollar index is so inversely correlated with gold right now, we can't really expect gold to turn around and head back up until the dollar index tops out. Right now I think the rally in the dollar will flame out in the low $80s, so there is a bit more room for this to extend -- which is what the weekly fractal dimension is telling us -- but the dollar rally is running out of time and energy.

Once the dollar index moves into the low $80s, it's likely to move sideways -- or come back down -- for a few months.

A correction in the dollar should send gold and silver soaring back up, but first we are likely to see one last major decline.

A quick-and-scary decline in this situation will be the best possible way to set up a massive rebound, so ideally we'll see a very large drop in gold over the coming weeks, and that will set up one of the best buying opportunities in years, either at $675 or $720. As always, we'll wait for our specific short-term buy signals around these target areas.

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Comments

[phdinsuntan...:]

why not 500

2008 Sep 10 10:06 AM

[CLH:]

Yes $500 makes more sense as we enter disinflation.

2008 Sep 10 11:18 AM

[Lionheart:]

Its going to be interesting to see what the pundits in these forums say when the class action lawsuits begin. And they are going to happen. I happen to know for a fact a very large suit will be started sometime this month in Canada against all the dirty investment banks naked shorting gold/silver juniors. A Comex suit? Don't know but I suppose if a greedy lawyer gets enough people and sees a profit potential for himself he might just jump on board. Concentration of contracts and naked shorting is illegal. That is the reason gold and silver metals and stocks continue to fall. Is there deleveraging? Yes I am sure there is. But what caused that? The concentration of shorts and the naked shorting along with it. When you have hundreds of billions in your hands and a regulatory body that looks the other way.....you can pretty much commit murder.

2008 Sep 10 11:47 AM

[HBWOW:]

I believe the U.S. stock market and others are and have been the target of foreign "cash (dollars) cow" countries working with a few U.S. based investment firms to purposely manipulate stocks up and down and picking up profits at both sides of the transactions. Due to the tremendous resulting lofty volatility of the stocks, daily margins of 5 % to 50% are becoming more the usual than the exception, more in the options market. We have all seen in the last few days, the "surprise"
discovery of REAL manipulation of oil prices. These parties should be
exposed and fined by SEC/possibly jailed for the tremendous costs
paid by the general public as a result of their manipulations.

2008 Sep 10 03:19 PM

[HBWOW:]

In respect to the current discovery of real manipulation of oil prices, THERE CAN BE NO DOULT THAT THE PRICING OF GOLD IS AND HAS BEEN UNDER ATTACH FOR WEEKS NOW. Whatever world or U. S. economic news occurrence, good, bad or terrible, happens, gold goes down - totally contrary to all logic, value basis, charts, historical data, etc. - gold goes down. WHY, because the foreign country cash cows want to slowly accumulate gold and mining stocks at low costs
using up their hoards of dollars (with overvalued dollars). These manipulations like the oil manipulations can be traced to the source
and appropriate actions then taken.

2008 Sep 10 03:28 PM

[DR. Ray T:]

I believe the heavily manipulated precious metal market, so as US currency, is significantly influenced by incoming US election. If democrats come to the White House, which I think they will, the blood transfusion to this gunshot wound, US economy, will be stopped. As a result, we may see the worst recession known to mankind since industrial revolution, 1750's. The precious metal market is very unpredictable prior to US election. I can see the low of 9.5 $ for silver and 660 $ for gold. Then, it will be dream comes true for the precious metal investors, of course those who have not been completely wiped out. The actual price of silver should be around 95 $ and 3300 $ for gold per ounce today. I personally predict sliver will be the best investment of the decade, next to some odd biotech stocks, in next year and so. One piece of advice for short term investors, run before get caught in the hurricane.

Thanks
Dr. Ray Taheri

2008 Sep 10 03:42 PM

[JBP:]

Lionheart,

So what is your prediction for gold?

2008 Sep 10 04:26 PM

[Lionheart:]

JBP - I think it will eventually hit $5000 USD an ounce once the lawsuits and criminal investigations begin. As I said....I know for a fact (because I know the company launching the suit) is filing a large (10s of millions) class action suit in Canada. Other suits and criminal charges will follow.

You need only look at a chart of the USD Index versus Silver to see how blatant this is. Silver is nearing a THREE YEAR LOW and the USD Index is only at a one year high. Except that.....silver stocks are at ALL TIME LOWS. Its so SO blatant. But as I said....if you are the guy pushing the keyboard strokes to allow for billions of dollars available to "globalist" (and thats being nice - we all know who these people really are) bankers to naked short silver day after day after day - then of course there is going to be a disconnect between silver and supply large enough to push an aircraft carrier through. We must carry on, keeping buying silver every time it drops a dollar (I bought another 1000 ounces today) and eventually we will be rewarded.

2008 Sep 10 05:39 PM

[bearfund:]

Yawn. More manipulation talk. Who cares? If the market wants to give you more for whatever dollars you have, so much the better. If the market is offering you 75 oz of silver for 1 oz of gold, buy some. Complain less, profit more.

2008 Sep 11 12:56 AM

[vespuce:]

agreed, which is exactly what I did yesterday, sold 14.5oz gold for another 1000 silver....sweet 70:1, free money!

It doesn't matter why this is all going on, just try and keep a clear head and if you have cash to spend, there are tons of opportunites out there. PM stocks look a fantastic candiate for a bounce after yesterdays action and the fact there are at historic ratios to spot.

If you really want one more guess as to who is behind this forcefull selling, why not consider Lehmans, and the multitude of HF's desparately trying to raise cash now for redemptions. They were all long comod's short dollar and this squeeze is a vicious spiral to sell your liquid assets first just to survive.

Getting what they deserve for their greed!

2008 Sep 11 06:18 AM

[Cesato:]

Agree, cash raising means liquidation of portfolio, funds and investment bank have good money on it and its probably the only liquid asset at the moment. No matter what the news bring their goal is to raise cash. Their will be relief rallies, sell them, for a long term only a consistent consolidation in charts will give a buy signal. Consolidation in metals takes about 4-5 months.

2008 Sep 11 08:14 AM

[GMiki1:]

Sunday night and DOW Futures is down about 270. Bank of America is picking up Merrill Lynch. People at Lehman are packing their desks--yes, Sunday night. All bets are off for gold on Monday. Interesting and a wee bit scary.

2008 Sep 14 09:34 PM