Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Precious Metals: Too Far Too Fast? What’s Likely to Happen Now?

Commodities / Gold & Silver Stocks Jun 03, 2009 - 09:55 AM GMT

By: Przemyslaw_Radomski

Commodities

Best Financial Markets Analysis ArticleThis year’s bad economic news overshadowed the aspect of geopolitical risk, which again reared its ugly head over the past few weeks. North Korea has conducted a new nuclear test and fired short range missiles. Iran has made several moves that in slower news cycles would have dominated the headlines. Israel, worried about the situation in Iran, is conducting a five day drill, dubbed ‘Turning point 3,” to prepare Israel’s rapid response capabilities in the event of simultaneous missile strikes and terrorist attacks. All this is bad enough without mentioning other flash points, such as Afghanistan, Pakistan, Nigeria and Venezuela.


Yes, geopolitical risk is back. It never went away, we just overlooked it while being inundated with the worst financial news in recent memory. However, faithful subscribers to Sunshine Profits Premium Service have gold and silver in their portfolios and that makes us feel a bit safer, at least financially. Remember the Golden Rule: he, who owns the gold, makes the rules. Moving on to the technical side of the analysis, I’ll begin with the silver market.

Silver

I covered the white metal in one of the previous essays (April 20th), in which I wrote that silver formed several cup-and-handle patterns. The implications at that time were that once silver completes this pattern, the following move would be substantial. Since I first wrote about it, silver did indeed complete a cup-and-handle pattern and did move 30% higher. (There is nothing like a good cup to make a trader happy when proven right.)

On the other hand, since this move has been swift, it is natural to expect some kind of a consolidation. There were signs that a local (short-term) top may have formed during the past several weeks/days, but none proved to be the true top. However, now we are approaching a long-term resistance level, more significant than its short-term counterparts.

The first thing to notice when looking at the lower portion of this chart, is that silver, always known to be volatile, has grown even more so this past year. This can be partly attributed to the big-pullback effect that we have seen in the entire precious metals sector, and to the plunge in the general stock market which dragged virtually every asset class much lower.

Why did this happen? The answer can be found in terms such as “deleveraging” and “fear.” When all hell broke loose last year, massive amount of money were needed to be raised immediately by hedge funds and other financial institutions to cover losses on the stock and futures markets. When in a desperate need for cash to offset gargantuan losses, a hedge fund manager will sell everything in sight, no matter how favorable the fundamental situation might look in a particular asset, such as silver, for example. Once investors see the plunging prices of their favorite investment, they tend to forget the reasons why they bought silver in the first place and that they planned to hold it for a long time.  Driven by fear, they sell, sell, sell, usually near the bottom.

It was only several months ago when we experienced a massive plunge in precious metals and mining stocks. Since the plunge was severe while the precious metals market fundamentals remained bullish, we saw a sizable rebound in the entire sector. Those, who sold their holdings began to realize that this was just a temporary downswing and were eager to buy back – as the fundamentals are still intact.

During especially emotional periods in the stock market, we can see every asset class move in the same direction, driven by emotion rather than logic and analysis. Once the smoke clears and emotions subside, most investors begin to look at the fundamentals rather than relying on gut-feelings.  They get back to the logical side of the market, which in this case, means back to investing in the precious metals.

If we take a look at the silver chart, we see that silver is just about to reach the $16 level. I have used the SLV ETF as a proxy for the silver market. The price of spot silver is about 1% higher than the value of this fund, so the resistance price level is not much affected given the size of the preceding move and the fact that the resistance is “around” the $16 level rather than precisely on it. This situation is caused by the fact that apart from the classic 61.8% Fibonacci retracement level which points to the $16.08 (SLV ETF) level, we have seen several bottoms and tops around this price level. I have marked them on the chart with red ellipses. Please note that price has not stopped precisely at $16, but it has hovered around it many times.

Gold Stocks / General Stock Market

The GDX: SPY ratio measures the way PM stocks perform compared to the general stock market. The ratio can be analyzed technically just like any other chart. By doing so, we can gain additional insight. At times, we may be able to spot something otherwise not visible when analyzing these markets separately.

If you recall, I already mentioned earlier in this essay that silver has completed its cup-and-handle pattern and moved much higher afterwards. It seems that a similar cup pattern is visible on the GDX:SPY ratio chart. It is not yet very certain that the full formation will materialize, and we are still missing the “handle” part of the formation. In previous weeks I have emphasized that a correction in the PM sector is likely. Should it take place, the GDX:SPY ratio would also most likely decline. In other words, if we get a correction in gold, silver and mining stocks, that event would most likely create the “handle” in the cup-and-handle pattern. Should this cup and handle formation complete, the implications for the PM sector in the medium-term would be important and positive, as the move following a cup-and-handle pattern is often substantial. Additional details will be made available to our Subscribers once we complete this formation or it will be canceled in any way.

The key question is what will happen to the general stock market? Of course, it is much too early to make any calls, but with the correlation table, we’ll be ready to take the appropriate action either way.

Summary

The precious metals market has been rallying very strongly in the past several weeks, which has happily contributed to increasing our net worth through our long-term holdings. Still, at the moment, it seems that the prices of precious metals and corresponding stocks have gone too high, too fast, and a healthy correction is likely. Although prices of gold, silver and mining stocks are reaching their own resistance levels, such a correction will most likely be caused by some kind of catalyst, most likely a strong move in the U.S. Dollar, or in the general stock market.

To make sure that you get immediate access to my thoughts on the market, including information not available publicly,  I urge you to sign up for my free e mail list. Sign up today and you’ll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM investors and speculators. It’s free and you may unsubscribe at any time.

This essay is based on the Premium Update posted on May 30th, 2009

P. Radomski

Editor

Sunshine Profits

Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

Sunshine Profits provides professional support for precious metals Investors and Traders.

Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free trial to see if the Premium Service meets your expectations.

All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in