Thursday, April 7, 2011

Gold & Silver Chart Patterns: in strong bull markets

I have been writing about gold’s chart pattern for more than a year. There has been a few requests of late to write about silver. So, here is my first shot at silver’s chart pattern. I must confess that I’m not a great fan of investing in precious metals because there are no returns other than capital gains.

Part of the ‘fun’ in stock market investing is being able to analyse Annual Reports to uncover what businesses have been doing to stay ahead, and discover ‘below the radar’ small companies that can become future stars. Buying precious metals is as exciting as investing in a cumulative fixed deposit in a bank – only riskier.

If an investor is looking for diversification, allocating 5-10% of one’s portfolio to gold and silver may not be a bad idea. More so now, because investments in both precious metals have been performing phenomenally well.

Gold Chart Pattern


Last month, profit booking caused gold’s price to fall below the rising 14 day SMA and the triple top at 1421. I had expected a drop to the support level of 1400, and advised investors to buy the dip. The chart pattern played out exactly as per expectations.

The upward bounce from the 1400 level reached a new high of 1440, followed by a brief consolidation within a symmetrical triangle pattern. The break out from the triangle touched another new high of 1461.50 in quick time. The yellow metal seems to be on an unstoppable ride. Fasten your seat belts, maintain trailing stop-losses, and enjoy. Buy only on dips below the 14 day SMA.

Silver Chart Pattern


Silver’s gains have been more spectacular. While gold gained nearly 4.4% from its recent low of 1400, silver rose 16.5% from its recent low of 34 to a new high of 39.63. The rise has been too sharp too soon, as can be seen from the rapidly widening gap between the 14 day and 200 day SMAs. Both moving averages are rising, which is the sign of a strong bull market.

A correction down to the rising 14 day SMA, or even lower, can occur at any time. 37 should be a good support level, and an upward bounce can be expected there. Stay invested, and use any dips to add.


Harry said...

Subhankar ji, I have some investments in US and hence can buy silver ETFs. Recently I was introduced to 2X ETFs which give 2 times the index returns, in this case silver. When we talk of buying on dips, would you take the same approach with these 2X ETFS also? The reason I have kept away from this because silver has already gone very high, and any correction will hit the 2X much much more.

Subhankar said...

Buying on dips should work well for ETFs as well.

Not sure about the 2x ETF to comment. There is a market adage: When in doubt, stay out.