Gold And Silver: Are Shorts About To Panic?

by: Avi Gilburt

For those that always complain that I do not provide enough "fundamental" analysis, well, this article is for you. One of the highly respected traders at posted this "analysis" in our Trading Room this past week, which I feel provides as excellent a reason as any as to why the metals have now rallied:

Gold in the US has rallied on Friday as a massive snow storm hit the east coast and has kept millions of people confined in their homes. The storm has forced many husbands and wives to spend a lot more time together than they were expecting, and has led to the "rumor" of a major increase in disagreements between marital partners. This has, in turn, led to a huge surge in online web traffic coming out of the United States to gold jewelry stores around the world, in the expectation that these husbands are now trying to make up with their wives, causing a sharp increase in price today.

Yes, this is a joke. But, in truth, it is no more foolish than some of the reasons I hear bantered about as to why the metals have rallied.

Moreover, in my usual perusal of the articles on the metals, it seems that the world has gone metals-bullish once again. Just last week, everyone was so sure that $1000 gold was imminent. While some authors are admittedly "confused" by the recent gold action, others are hailing the oncoming of the Messiah . . . er, I mean "new" gold bull market.

But, is it really a gold bull market, or just a counter-trend rally within the larger degree correction?

For those that remember, the last larger degree trade we did in 2013 was shorting GLD at 138 and then taking our profits at the 115 region. And, it was at the end of 2013 and into 2014 that my message was rather consistent:

Currently, I am still tracking the set ups which can take us to the 136-140 region in GLD before we target the 100 region, which I have been warning about for weeks now. But, remember, even if we do get that break out towards the 136 region, it is just a set up for a bigger short trade to the 100 region. -January 5, 2014.

But over the last several weeks, the rally off the 115GLD region was less than ideal. In fact, as we moved to the 121-123 region, which was my break out trigger in GLD, the pattern concerned me greatly, especially with silver lagging so far behind. It was for this reason that I had suggested the strangle in the metals. But, as GLD continued to move up, I continually moved up our stops on the long side, until silver broke out this past week, which caused me to sell the short side of the strangle.

At this point in time, my expectation is that this rally will continue up to our ideal target region of a minimum of 25 in silver and 136 in GLD. And, the next phase of this rally can actually see an even stronger move up on the next phase of the short squeeze of those who were so certain of the metals imminent demise.

Since I never trust 4th wave patterns, within which we now find ourselves on the larger degree, I will continually be moving up stops to make sure profits are protected. Right now, our stops on our longs are just under the 20.70 region in silver and, in GLD, depending upon how tight a stop you want, either just under the 125 region or just under the 123 region.

But, I remain resolute in my longer term perspective that I see "this as the Year of the Whipsaw or the Year the Bulls Die." The market seems to be setting everyone up. First, the shorts who were so sure that we were heading to the lower lows are about to get completely squeezed out of the market. This will set up a strong resurgence of gold bulls who will be certain that the bull market of 2010-2011 is back to stay. However, once this pattern off the last lows has completed, it will likely be time to short one last time, as I still expect that we will see the 90-100 region in GLD and a 17 handle minimum in silver.

One final note. For those who trade the gold miners, please do not assume that the pattern I present in the metals is the same as that in the miners. I sincerely believe that each chart should be viewed upon its own merits, and you cannot assume that the miners are working on the same pattern as that in the underlying metals.

Disclosure: I am long GLD, SLV. 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.