Tuesday, August 23, 2011

Gold and Silver Chart Patterns: an update

There is an old stock market saying: When in doubt, stay out. But in current politically and economically turbulent times, investors appear to have created a new maxim: When in doubt, buy gold (and silver).

Gold Chart Pattern


Gold is being bought as if the financial world is going to collapse tomorrow, or latest by next week. What else can explain a vertical $200 surge from 1700 to 1900 in the two weeks since my previous post?

Admittedly, there is sovereign gold buying, and Venezuela created a flutter by planning to repatriate $11 Billion worth of gold held in overseas banks. The sorry state of Eurozone banks is a major concern. But ask yourself: Is the global economy in a worse situation than it was in 2009?

One can debate the state of the global economy till the cows come home. The bottomline is that the parabolic rise in gold’s price over the past couple of months is unsustainable. The chart is looking extremely overbought, with the 14 day SMA (as well as the 30 day and 60 day SMAs – not shown in the chart above) climbing away from the rising 200 day SMA. A sharp correction, if not a crash, is around the corner.

If you are an investor who would rather buy gold (instead of Colgate or ITC shares), use the likely dip to buy gold ETFs. My preference is for the hefty dividends that Colgate and ITC shareholders receive – not to forget the occasional bonus shares.

Silver Chart Pattern


After a four month lull, during which silver’s price went through a decent correction, prices have risen sharply to touch the 44 mark. I had recommended that investors use the recent dip to buy, or to wait till the 42 level is crossed convincingly.

If you missed out on the buying opportunities, wait for a likely pullback towards 42 to enter. The 14 day SMA is turning upwards. The 200 day SMA didn’t stop rising right through the four months of price correction. The bull market in silver is alive and well.


Anand said...

Hi Subhankarji,

Thank you for your wonderful analysis. It came just in time when I sold some of my Mutual Funds and was about to put that money into Gold.
But what is your opinion of the US economy over the medium(2-5 years) and long term(10-15 years). Have read some senior macro economists suggesting that US would go into recession during these periods and Gold would reach some really astonishing prices as a result. So what do you say about Gold in the long term ? Would it be a worthy diversification if I already have part of my money in say HDFC Equity Fund. Your feedback would be much appreciated. Thank you
- Anand

Subhankar said...

Appreciate your comments, Anand.

The timing was fortuitous - gold prices corrected by a whopping $68 on Aug 23 '11!

The US economy is likely to have anaemic growth for the next two-three years. But fear-mongering is part of the American culture - apparently it helps to generate retail sales!!

An analyst friend, who is a gold bull, has predicted gold at $3000 by 2012. I have no idea if it will get there or not.

You can allocate 5-10% of your portfolio to gold - as a diversification. Remember that it gives no returns whatsoever. In terms of capital appreciation, ITC, M&M, TCS, Colgate are way ahead.