The US Federal Reserve's decision not to taper Qualitative Easing was no surprise to some analysts. As Patrick Montesdeoca has discussed before with Rick Rule, President of Sprott Asset Management USA, and he reiterated in a recent interview, QE is not a program to add liquidity. There is plenty of liquidity in the markets. Rule said, "The federal government is spending $1.2 trillion per year more then it takes in." The government can borrow about half of that amount, but to get the other half, it has to create it. QE is a means to create the money needed to cover the difference between government income and spending. Or, as Mr. Rule said, and I agree, "It is counterfeit, plain and simple."
The mainstream media has spent a great deal of time on the current debt ceiling impasse. Mr. Rule believes that the politicians will find a way to agree to raise the debt ceiling for the simple reason that if they do not, they will have to significantly cut spending. As Mr. Rule said, "They will find a way to continue to perpetrate this fraud, and find a way through it... There are some concrete spending measures they could take, but if they save money in one column, it's already spent in several other columns." (click here for full interview)
In my last post, I speculated there would possibly be some further weakness in the silver market. I am using this continued weakness to add to my long term holdings given the strong fundamentals supporting the market. Despite the fact I am a silver and gold bug, I am not always bullish on the shorter term time frames and it doesn't mean that I will buy at any price. That is why I am writing these reports to help those of you who are buying gold and silver to be patient and learn to buy when it makes sense. The key point here is that both technical analysis and fundamental analysis have to match up. This is where indicators like The VC Price Momentum Indicator can come in handy.
Chart 1 is the Weekly VC chart. These numbers are generated before the week begins and can improve your entry points into the gold and silver markets with uncanny accuracy. Throughout the week the S1 level (which is the first red line) served as key resistance in the silver market. If you were long with your swing trades on shorter term time frames this would have been an ideal place to take profits. Today support has come in around the B1 line (the first Green line) which would serve as support going into the weekly close. This would be a great time to add to any current positions or take a short term trade. Notice how the RSI was in oversold conditions as soon as we touched the B1 line. Based off these charts, I would be expecting a quick bounce the beginning of next week; however, the shorter term trends still remains sideways as noted on Charts 2 & 3.
Charts 2 and 3 clearly show the long term trend line from $34/oz. silver back in December 2012. We have yet to clear this trend line and it is quickly meeting up with an intermediate term trend line from the recent lows at $18/oz. Fundamentals put aside, these competing trend lines have been leading to our sideways to lower price action since August. It looks as if we should have a resolution by the end of October or early November. From this a major move should occur establishing a strong trend in either direction. I am expecting the next move to be up, but I do not plan on being the silver "bug" that gets squashed. So as a precautionary, I will be hedging my long position using "puts". If I am right and the move is to the upside, we could quickly see a retest of $26/ ounce. I have writing about this for several months now. (posts)
TRADING DERIVATIVES, FINANCIAL INSTRUMENTS AND PRECIOUS METALS INVOLVES SIGNIFICANT RISK OF LOSS AND IS NOT SUITABLE FOR EVERYONE. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Disclosure: I am long AGQ, PSLV, GLD. 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.