Gold and silver are
testing key technical support levels this week. Some analysts have already
flipped their outlook to bearish over the past few days, but I believe the
uptrend remains intact as long as current support levels are not breached.
Goldman Sachs has predicted new lows for gold in
2014, but
physical buying remains strong and precious metals represent a good safe
haven during increasing political tensions worldwide. I also believe that
precious metals are one of the only asset classes that remain undervalued at
current levels. Stocks, real estate and just about everything else has
climbed to unreasonable valuations by any number of measurements.
During late January, gold
broke through resistance at the downward sloping trend line that had been in
place for over year. This key breakout is circled in the chart below. A new
uptrend support line was established starting in December and gold is now
testing this support line at $1,300, also the 200-day moving average, for the
second time.
A bounce off this support
would be very bullish for gold as it would represent a higher low and verify
the new uptrend has staying power. The RSI shows that gold has room to fall
lower before becoming technically oversold. I will be looking for gold to
find support at the 100-day moving average of $1,275, on any dip below
$1,300. However, a failure at $1,275 support would suggest that gold will
continue dropping to test the prior low of $1,195. This would mean the gold
price drops back below the long-term resistance line and marks a reversal
into the downtrend channel once more.
So, all eyes are on
$1,300 and then $1,275 gold as critical price levels for determining the
future trend. Investors might consider reducing exposure, hedging positions
or going short gold on two consecutive days of closing below this support.
Silver Underperforming
Gold in 2014
Silver has underperformed
gold in 2014 by a wide margin. Some analysts view this as a bearish
indicator, as silver usually leads the gold price higher. However, much of
the underperformance can be explained by slowing economic growth in 2014.
Gold outperforms silver in such an environment, as only 10% of gold’s demand
is industrial versus roughly 50% for silver.
The silver chart shows
greater volatility, but a more gradual uptrend line with support just above
$19. Silver broke out from its long-term downtrend a bit later than gold,
with a sharp move higher in early February.
Silver has given back
most of its 2014 gains in the past week, as it has fallen back below $20. The
uptrend remains intact as long as the silver price holds above $19.16, which
is a key level as it is precisely where the two trend lines converge. This level
around $19 is also key as it was strong resistance on numerous occasions in
the past and this type of resistance often turns into strong support.
I will be watching for
silver to find support above $19.16, which was the previous low in February.
This would mark a ‘higher low’ for silver, which would be bullish and suggest
a continuation of the 2014 uptrend. However, the RSI shows a bit more room to
drop and if support fails, we can’t rule out a deeper decline towards $16 in
the short-term.
Please keep in mind that
technical charts are just an additional data point to be viewed in the
greater context of your total decision making matrix. Technical charts can be
useful, but they are only slightly more predictive than a dartboard.
I would not make too much
of the recent ‘golden cross’ as the 50-day moving average for gold crossed
upwards through the 200-day moving average. Silver came close to doing the
same thing, but stopped just short. Those on the short-side of things also
watch these signals and what better time to sell millions of paper ounces in
a not-for-profit manner? Besides, the last golden cross occurred in November
of 2012 with gold around $1,750 and we all know how that turned out.
Time to Exit Positions?
Despite the declines over
the past week, I don’t think it is time to panic out of precious metals quite
yet. The fundamentals have grown
increasingly bullish in the past months and technicals remain bullish as long as the
support levels mentioned above hold. So far, they appear to be holding,
although sentiment is turning bearish and speculators/bots are quick to exit
positions on any failure of key technical support.
Even if technical support
fails and precious metals drop towards previous lows, I do not believe they
will remain there for long. While deep-pocketed players can utilize paper
derivatives and extreme leverage to manipulate prices however they wish in
the short term, commodity prices rarely drop below their cost of production
and never stay at those levels for long.
If producers of oil, food
or any other commodity are not able to sell their product at a profit, they
are forced to shut down operations. This causes supplies to drop and prices
to rise again, assuming reasonably stable demand.
So, we should see a floor
for gold and silver prices near the all-in sustaining costs. The industry
average for gold is around $1,200 and for silver it is around $20. Therefore,
I believe the downside risk with precious metals is limited at this juncture.
In the short-term we could see prices fall another 10% or 20% at most.
However, the upside
potential is limitless. A move bak to previous highs would represent gains of
roughly 50% for gold and nearly 150% for silver. The more money that
central banks around the globe continue to print, the higher the potential
price of precious metals. There really is no ceiling as there is no limit to
how much money can be printed and how much debt can be monetized by desperate
banks and governments clinging to a decaying system that gave them power.
Of course, a 10X move to $13,000 gold does not equate to a 10X increase in
purchasing power for gold investors. But we can expect the nominal price
increase to far outpace inflation, resulting in a significant increase in
purchasing power over time. More importantly, investors can sleep well at
night knowing their hard-earned wealth is not stored in fiat paper form that
can be wiped out by the whims of a few bureaucrats or banksters.
With exploding sovereign debt levels, the ballooning FED balance sheet,
increasing consolidation of the banking industry, the ticking time bomb of
toxic derivatives still in existence, growing distrust of governments,
growing geopolitical tensions, increasing chances of Russia and China dumping
U.S. debt/dollars as economic warfare, end of the petrodollar world reserve
in sight and rise of alternative monetary systems, it is difficult to imagine
gold and silver prices remaining at the currently depressed levels for long.
While I can’t predict exactly when the upward revision to gold and silver
prices will take place, I believe we are witnessing the last great buying
opportunity in precious metals. Whether prices rocket higher this year or
next year, I believe those that were willing to buy when gold was out of
favor will be handsomely rewarded. It is the most difficult time to buy when
everyone around you is bearish and fearful. But these are exactly the moments
when the most successful investors are able to seize the opportunity and buy
when everyone else is selling.
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