Last three months were sort of a roller coaster for
precious metals investors – gold and silver hit a local bottom at the
beginning of November and it looked like nothing could stop a strong rally to
follow. Yet the fears concerning the “fiscal cliff” issue seem to
have won and stopped the prices at the end of November. Moreover, gold &
silver correlations structure that used to propel the rally got distorted and
even though the dollar weakened and the general stock market got stronger,
precious metals were unable to react.
As it turned out that the end of 2012 was not the end
of the U.S. economy and the “fiscal cliff” was a mere scarecrow
and not the doom of the financial markets, a rally begun. Will it be the
long-awaited rally that could bring precious metals to their new all-time
high? There are no certainties on any market, but as the correlations seem to
be returning to normal, it gets more and more likely. This is because
precious metals are not the only assets that have gone up in price recently
– the general stock market, in fact, seems to be doing even better and
the dollar is in a downtrend.
To see what the markets themselves can tell us,
let’s jump straight into today’s technical part –
we’ll start with the general stock market, using S&P 500 Index as a
proxy (charts courtesy by http://stockcharts.com.)
Stocks closed above their 2012 high (on Thursday) last
week, even when considering intra-day price levels. This is a bullish
phenomenon which is not yet confirmed. We prefer to wait and see that stocks
close above this level next week as well, before saying that the breakout is
completed, but the situation is clearly more bullish than not at this time.
It’s also more bullish than it
was last week because back then we only had an unconfirmed breakout above the
highest closing price of 2012. This week we have it confirmed and an
additoinal, unconfirmed breakout.
Let’s now have a look at the
financial sector (Broker/Dealer Index serves as a proxy here) chart, a sector
which often leads stocks higher or lower.
Recent moves here have been strong to the upside. The
financials have broken out above the declining resistance line and verified
it. Weekly closing prices have been there for three weeks. With RSI levels
now above 70, some consolidation is possible but will not necessarily be seen
Let’s move on to the silver market –
we’ll start with the long term chart.
As we have previously mentioned, recent trading
patterns here have been similar to early 2010 and this continues to be the
case. Back then, lower prices were not seen again once the bottom was reached
and the rally began. This could very well be the case once again.
The correction was very significant from the very
long-term perspective. Silver appears ready to rally once again but prices
have not yet broken out above the 10-week, 50-day moving average. Only a
small rally is needed to accomplish this, and the picture will then be
To finish off, we take a shot at projecting possible
long-term moves on the white metal’s market.
We include a second very long-term silver chart today
because if this is the final bottom (the long-term support line suggests so)
and if after a prolonged consolidation, we get a rally similar to 2010-2011,
we could be looking at a rally to the $77 level. This may not happen, but
several technical tools align and such a move is not out of the question.
Now, there could be a breakdown, weakness or consolidation and the
indications do not say the rally is very likely to happen, but such a
rally would not be out of tune with historical patterns. In other words, it
would appear quite normal. This is a very early heads-up and something to
keep in mind, the next time you hear that silver can’t move so high
– it can and it can do it quickly.
Those new to the market may think this is impossible,
but $10 silver was similarly “impossible” when its price was less
than $5 for years. Now, $10 seems impossible because it’s too low a
price. If you are long silver for the long run as we are, this picture should
make holding silver easier.
Summing up, the
outlook is bullish for the general stock market, and this is supported by the
financial sector as well. Even though correlations are not in their normal
state yet, recent moves indicate that they are moving back there, hence the
implications are bullish for the precious metals sector. The picture for
silver looks favorable as well for the long and medium term. The short term
is a bit unclear, at least based on the above charts, as recent rally may be
followed by a brief consolidation.
Thank you for reading. Have a great
and profitable week!