"The fundamentals for gold are unassailable, the long term technical picture is excellent and gold remains very inexpensive when compared to almost every other alternative (most particularly, bonds, treasury bills and bank deposits). With currency debasement assured and some form of hyperinflation probable, gold should trade at several multiples of the current price before this bull market reaches its end." John Embry, Chief Investment Strategist for Sprott Gold and Precious Minerals Fund.
Current market sentiment in the gold and silver markets is running at extreme levels not seen since 2008. According to the COT reports, managed spec funds have the largest short position in the past 4 years. It appears the risk has been transferred from bullion central banks to the managed money spec funds. This is the combination of players we want to see in the gold and silver COT reports to validate the possibility that a strong rally is about to occur.
On Friday, February 22, gold trader Andrew Maguire noted:
The paper market longs have been tricked into selling. Obviously the managed money and the specs are now being tricked into short selling. Who do you think is on the long side of those trades?
These bullion banks have actually successfully transferred massive short positions into very weak hands. And this next week is going to provide large short fuel above the market as soon as this leveraged selling is insufficient to meet the bullion bank buying, which will happen, if not today, it will be early next week."
The gross short position held by speculative traders in U.S. gold futures and options has neared or exceeded 60,000 contracts only five times before in the last 8 years. The average 6-month change in gold prices, according to analysis by BullionVault today, has been +28%.
A 28% rally in gold at the March 1, 2013 price of $1,577 would take gold to $2,017.28 and silver to $37 per ounce.
In a recent interview with Eric Sprott (Sprott Asset Management), I asked him if we are we in for a short squeeze in the paper market for gold and silver? He said, "I think we are in for a shortage of physical gold. I mean the data I look at, one just wonders how long can these Western central banks keep doing this. Sooner or later you run out of gold. They only have so much gold, and it was estimated they had as little as 18,000 tonnes back in 2000, I would think they might be running on fumes these days."
Let's take a look at the gold technical forecast and see what live trading opportunities we can identify for next week.
The April gold contract closed at 1577. The market closing below the 40 day MA (1665) is confirmation that the trend momentum remains bearish. A close above the 9 MA (1638) would negate the weekly bearish short-term trend to neutral. With the market closing below the VC Weekly Price Momentum Indicator of 1584, it confirms that the price momentum is bearish. A close above 1584 would negate bearish trend to neutral. Look to take some profits, if long, as we reach the 1603 and 1633 levels during the week. Buy corrections at the 1554 to 1535 levels to cover shorts and go long on a weekly reversal stop. If long, use the 1535 level as a SCO/GTC (Stop Close Only and Good Till Cancelled order).
If this week's lows in gold are not violated by closing below this level on a weekly basis, we can build a strong argument that the lows are in and that this week's selloff was the capitulation of this correction and the foundation is in place to support a bigger and stronger move to the upside.
If the lows of this week hold, it will support a rally into the following Fibonacci targets short-term:
A close above 1704 puts into perspective the upper end of the target zone of 1800. A weekly close above this level would set the stage to challenge the highs made in November 2012.
Was last week's action in gold and silver a capitulation point or a continuation pattern? In a recent report entitled "Will silver drop to $26?" I wrote, "The $28 to $28.50 price level serves as a maximum extension for this correction using Gann Trend lines. It confirms a major level of support based on the downtrend line support extension starting from the November/December 2012 lows, and connecting the January 2013 low measures almost to the dime (a pre-1964 dime that is!)."
I also wrote, "The fact that the market broke the January 4 and December 20, 2012 lows does not constitute a major top in the market. It is simply a test to lower levels of support and a huge opportunity to accumulate at these levels for the long term."
On Friday March 1, the low in spot silver was 27.92 during the overnight session, closing the day session at 28.55 (-.54%) for the week. What is interesting to note is that the lows made during the overnight session identified the physical demand buying and established clearly a strong level of support. These lows were rejected exactly at the downtrend line support levels of 28 to 28.50 mentioned in the article.
Let's take a look at the silver technical forecast and see what live trading opportunities we can identify for next week.
The spot silver contract closed at 28.55. The market closing below the 40 MA (30.65) is confirmation that the trend momentum remains bearish. A close above the 9 MA (30.38) would negate the weekly bearish short-term trend to neutral.With the market closing below the VC Weekly Price Momentum Indicator of 28.60, it confirms that the price momentum is bearish. A close above 28.60 would negate bearish trend to neutral. Look to take some profits, if long, as we reach the 29.24 and 30.03 levels during the week. Buy corrections at the 27.81 to 27.17 levels to cover shorts and go long on a weekly reversal stop. If long, use the 27.17 level as a SCO/GTC (Stop Close Only and Good Till Cancelled order).
If this week's lows in silver are not violated by closing below this level on a weekly basis, we can build a strong argument that the lows are in and that this week's selloff was the capitulation of this correction and the foundation is in place to support a larger move to the upside.
If the lows of this week hold, it will support a rally into the following Fibonacci target areas over the short-term:
A close above 30.75 puts into perspective the upper end of the target zone of 32.53. A weekly close above this level would set the stage to challenge the 34 to 34.50 highs made in November 2012.
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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AG, AGQ, PSLV, GLD, SLV, GDX, SLW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any futures or options contracts.