Lower Prices Likely for Gold and Silver
February 4, 2010
Timothy Silvers
Ugly is the best word to describe the market action today. Equities, commodities and precious metals all suffered from the flight to quality into the dollar. We saw this phenomenon when the financial crisis started a year and a half ago. Beneath the catchy headlines of economic recovery are enough negative fundamentals to drive investors out of risky assets and into the relative safety of the dollar. In mid December I thought it was safe to buy gold and silver as long as gold held above $1100. Gold did not hold that level and I have been sitting in cash ever since, watching the market for a good buying opportunity. I was optimistic that the precious metals would break out of their downtrend until gold failed to break through key resistance yesterday. So far, this correction is still in process and there is a fair chance that the metals will fall further. We had two false rallies (in the first two weeks of January and the first two days this week), but the overall trend is still down since the correction started in early December. I am not even sure that we will see the typical Spring rally in the precious metals this year.
The main area of concern is dollar strength and overall market weakness. For a long time I have been concerned that the precious metals have been rallying right along with the broader market. Since March 2009, investors have been piling into risk assets (stocks, foreign stocks, commodities, precious metals, etc) and shunning the dollar. This trend started to change in December and the dollar finally broke above it's 200 day moving average at the end of January. Look at the USD chart below and the Gold chart further down. The highs and lows mirror each other since the beginning of December.
If you look at the chart of the S&P500 below, you'll notice a few things. First, there is a good support line at 1085 that held from November through December. The stock market took a long time to penetrate the important 1120 level. The rally that resulted moved the index up another 30 points but it all fell apart in mid January. The 1085 level was breached last week and again today. This is not promising for the overall stock market and I think it bodes ill for all risk assets, gold and silver included.
Today the metals totally fell apart, gold and silver hitting lows not seen since September and October. $1075 has been an important support for gold since mid December and that failed today. On the chart below, notice that gold was pushed back strongly yesterday at the resistance of the 20 day moving average and the new downward trend line. Also compare the highs and lows for gold with that of the S&P 500 chart. Gold has typically been viewed as negatively correlated with stocks but this was not true last year. There is a strong similarity between the charts in September and October. In November, gold broke away from the broader market as investor enthusiasm pushed it to new highs. The stock market did not experience the same correction as gold in December, and they both started rallying together around Christmas into the first two weeks of January. Now both are suffering together. I'm spending a lot of time on this point because the common knowledge is that gold tends to do well when the stock market does poorly and vis versa. Lately this has not been true and, should the broader market suffer more declines, this will weigh on the precious metals.
As far as silver is concerned, it has fallen through all support and penetrated the 200 day moving average for the first time since April. New support is projected in the $14.00 to $15.00 area. Silver, as it has a strong industrial component, tends to be have much more volatility than gold. When gold and stocks are both doing well, silver will gain more than gold. When gold and stocks are doing poorly, silver does even worse. The only bright spot I can mention is that silver outperformed gold in 2009 and will likely outperform gold from the point at which we reach the ultimate bottom. I included a 1 year chart of silver to display possible support levels.
Summary
The precious metals have corrected hard since their peak in early December. The trend is still down and the broader stock market has broken through important long term support. The metals have sold off harder than equities and may bottom sooner. I expect Gold should find support around its 200 DMA of $1017. It would be very bearish for the metals if this support fails. It remains to be seen how long this downward trend will last. At some point, possibly soon, we will have a great opportunity to buy gold and silver. There are usually one or two great buy and sell points in the metals each year, and I have been waiting patiently for the best opportunity to buy again. There are many good fundamental reasons to be invested in gold and silver and those that buy and hold for the long term will be rewarded. I'll send an email update when I'm buying again or have other pertinent market thoughts.
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On another topic, I'm sure you have been deluged with charities offering to help the people devastated in Haiti by the earthquake. If you are still interested in making a difference in the lives of these shattered people, there is an organization called Mission Possible that I have been supporting for almost 20 years. They operate schools in Haiti and the Dominican Republic. Children sometimes receive their only meal of the day at a Mission Possible school. Some of their schools were destroyed or damaged by the earthquake and their staff are stretched thin helping Haitian people however they can. I guarantee your money will be well spent and go directly to help those in need if you send them a donation. For more information, please visit their updated website: http://www.ourmissionispossible.org/2010-01-12%20Earthquake.htm
Best wishes on your investing and future and God Bless,
Timothy Silvers
Disclaimer: This article represents the opinions and personal views of Timothy Silvers and is not intended to be investment advice. If you choose to use this analysis for your personal trading, Timothy Silvers assumes no liability for the direct or indirect losses you may incur due to using this article to make your investment decisions. You are totally and completely responsible for your own investments. At any given time, Timothy Silvers or his friends and relatives may have positions in silver related investments that may or may not follow the recommendations contained in this article. The information in this article may not be completely correct and accurate. Even though Timothy Silvers has done his best to review the content and accuracy of this article, he is in no way liable or responsible for any mistakes or omissions.