Gold and Silver Updated

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Yesterday I made a post with the provocative title Silver is in a Bear Flag in response to some bullish headlines and well… silver’s Bear Flag, which remains intact and viable by daily chart.

A favorable bigger picture risk vs. reward situation was also
highlighted for gold and silver in that post.  Among the reasons for
this:

  • Technical upside potential appears greater than downside.
  • The inflation-dampening Operation Twist is now put in the rear view
    mirror in favor of good old fashioned T bond and MBS Monetization.
  • The Commitments of Traders structures are improving.
  • Sentiment – especially among gold newsletter writers tracked by Mark Hulbert – is in the dumps and contrarian bullish.

Importantly, there is also the value proposition
of gold, which has not changed throughout the long and bullish
consolidation these last 1.5 years.  By the graph below, courtesy of the
St. Louis Fed, it has not changed since the beginning of the secular
bull market either.


Here we have the gold price adjusted by the Monetary Base, which is
the key money supply measure to be watching (as opposed to M2, MZM or
their velocity measures) for signs of inflation.

gold and base

So gold has barely gotten going in its secular bull market as
measured in Adjusted Monetary Base which, when viewed nominally has been
flat lining for the duration of nominal gold’s correction.

BASE

The weekly chart of gold below shows a touch of the top of the big
support zone, which would roughly be defined as a ‘higher low’ to last
summer’s lows.  MACD is green and trending up, but triggered down on the
current correction.  RSI is below the important resistance level at 50
and AROON is weekly trend up.

Gold could prove it is not in a Bear Flag by breaking above the
weekly EMA’s 20 and 35, which was the area that loaded the target in the
low 1600′s when it failed as support.  Gold has however, already
satisfied our target of low 1600′s and a 62% Fib retrace.  Keep an eye
on it.

gold weekly

The weekly chart of silver dials out to a bigger picture of poor man’s gold as well.

silver weekly

Silver has also Fib’d 62%, is weekly trend up and over sold enough to
qualify for an end to the correction.  But the Bear Flag will not be
disqualified unless it climbs above 31 and then breaks the weekly EMA’s
20 and 40.

Bottom Line

Gold needs to take out 1700 to end its correction and then a break of
1800 to target new highs.  From that point, the sky could be the limit
when considering the value that has been pent up in the monetary metal.

Silver is a would-be leader to bullish activity in the metals,
although it could be argued that it is the mining stocks that are
actually setting up as leaders to the entire precious metals complex,
given the ongoing bullish divergence in the HUI-Gold ratio’s bottoming
process.  Back on silver, it must get above 31 to begin signaling an all
clear.

The precious metals correction has been a challenge for 1.5-plus
years now.  When it ends, the pent up energy is going to be something to
behold.  I intend to hold quality equities – those with measurable and
favorable metrics as opposed to stories about holes in the ground – and
the metals in an environment that might be less about the intensive risk
management of the last 1.5 years and more about bull market
continuation.

A happy and prosperous New Year to you.

http://www.biiwii.com

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