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Tuesday, August 9, 2011

Gold and Silver Chart Patterns: divergent directions

In my previous update of gold and silver chart patterns, both precious metals had bullish upward breakouts. Gold broke out from a rectangular consolidation pattern to touch the 1600 mark. Silver broke out from a symmetrical triangle pattern to reach the 40 level. However prices have taken divergent routes in the past three weeks.

Gold Chart Pattern


Gold’s price had risen almost vertically to the 1600 level, and I had expected a pullback to 1550 (the top of the rectangular pattern). The price did dip, but only to 1580, before resuming its rally. It has once again climbed almost vertically past its 14 day, 30 day, 60 day and 200 day SMAs to 1717 and is looking overbought.

The debt ceiling wrangle followed by S&P’s downgrade of US credit rating has caused a flight of safety to the yellow metal. According to data from the Commodity Futures Trading Commission, gold purchases leaped to more than 18 million ounces over the past month - from 8.4 million for the entire year up to July. Is it too late for investors to enter now?

Yes and no. No, if you believe the US and Eurozone economies will take a long time to recover, and the US dollar will continue to lose its value. Yes, if you think stock prices have come down to reasonable valuations can provide better percentage returns in the long-term.

If you are paralysed by fear because of the sudden, sharp fall in global equity markets, hold on to your cash. You are not in the correct mental frame to take rational buy/sell decisions. If gold forms only 5-10% of your portfolio allocation, past three week’s rise in price coupled with the fall in equities has probably pushed your gold allocation above the limit. Book part profits. If you are a new entrant enticed by the prolonged bull rally, wait for a dip below the 14 day SMA to buy.

Silver Chart Pattern


Silver’s sharp price rise was followed by a sideways consolidation during which it touched a high of 42 but slipped below the 14 day SMA to a low of 39. It is struggling to cross above the 14 day SMA, and may correct some more.

The dip may be used to buy. Conservative investors can wait for a convincing cross above the 42 level. The rising 200 day SMA indicates that the bull market is intact.


Pinals said...

Dada, Thanks a lot for update. One thing can you tell us, through your observation, analysis, wave counts - can price go still up from current level to Parabolic Height to say levels of $2000-2500-3000..??!!

Subhankar said...

As per Taran Marwah, a gold bull, prices can touch $3000 by Dec '11. I have no idea if it will or not. The way fearful investors are flocking towards gold, any price is possible!

Pinals said...

Thanks Dada. Now million Dollar question remains - To Be Greedy or to be FEARFUL..!!!!???

Subhankar said...

Buffett has already provided the answer: Be greedy when others are fearful, and fearful when others are greedy. Time to be greedy about stocks and fearful about gold.

K said...

Market seems to be betting on risky assets. Time to be greedy per buffett. Don't you think?

Subhankar said...

Market participants are fleeing from risky assets into safer havens like gold.

That makes equities a better bet for the longer-term, but the time for bottom-fishing may be further down the road.