Silver and gold have been on fire, but how do we know if this is
the real deal?
Since the beginning of August, silver is up over 23% and gold
(NYSEARCA:GLD) over 7% and both metals have received heavy
Declining Prices Hurt the Miners
Silver's (NYSEARCA:SIL) YTD decline of 35% through June and
gold's similar decline of 25% resulted in gold miners
(NYSEARCA:DUST) writing off over $15B from their books. This
however hasn't prevented hedge funds from continuing with their
busted long trades.
In fact, many hedge funds have taken the stubborn "buy at any
cost" approach. Paulson & Co. has reiterated its commitment to
investing in bullion and gold producers to "hedge against currency
However, as we have pointed out numerous times over the past
ignoring the gold experts
" has proven the much better strategy, and again we think that is
the appropriate route. In fact, ignoring the experts would
have allowed you to participate in an over 500% gain that our time
stamped June GDX(NYSEARCA:GDX) put options provided
Gold's Bear Market
The metals' (NYSEARCA:XME) recent bounce has been admirable and
may be starting to make these hedge funds look smart, but taking a
look at the bigger picture through charts may provide some clues as
to the reality of the situation.
First we must know how we got here.
Gold's most recent top occurred in late September 2012 near
$1800. Prices then gradually fell the next six months to the
very important $1530 level on gold ($151 on GLD) and $26.50 on
silver before crashing through that extremely important support in
This is something we were ready for as that level was identified
many times in our ETF Technical Forecast as a key "support shelf"
and shown in the silver chart below as far back as July 2012.
To view larger image of the chart,
Ever since gold and silver broke down from their key lines in
the sand, their bounces have been more about relief rallies than
new trend kickoffs.
In April, gold and silver got a bounce, but only to fill the
technically open gaps and test resistance levels, before their
This all warned that the underlying trend in the metals was down
and was shown by the next chart provided to subscribers in our
The below chart helped us get ahead of another gold short at its
technical "kiss of death" that occurred near $1450.
Gold and Silver Now
The metals (NYSEARCA:AGQ) bottomed in late June as gold fell
below 1200 (a 17%+ fall from the kiss of death).
Since then gold has rallied to fill its final open gaps from
June, but this time has been different. This time the metals
(NYSEARCA:IAU) didn't just stop at filling their gaps. They
have continued higher and are back near price levels
associated with their large declines in April.
This tells us that the rally is now part of a larger trend.
The chart below shows GLD's decline and subsequent rally as well
as the expectations for the bounce.
It also shows that although this bounce seems large, in reality
it is likely just a normal counter-trend bounce relieving the
oversold condition created by such a swift decline in the
In reality, the rally, although impressive, so far hasn't even
reached the normal retracement levels/mean reversions associated
with relief bounces!
That level starts near $137 and suggests GLD may have a little
further to go on the upside. In this price range, traders
will also find the May $144 resistance (the former "kiss of
death"), a level that may have traders who were caught holding the
bag looking to breakeven and get out while they can. As price
rises to meet that level, more and more longs will likely be
looking to liquidate and attempt to get back to even.
SLV's (NYSEARCA:SLV) chart is similar and points to a rally that
may continue slightly higher to $23, but that metal has traveled
very far very fast and is much closer to its resistance zone.
Since silver's price is reaching previous resistance levels on
overbought momentum this is a warning sign that silver and the
precious metals are likely close to ending their technical
bounces. If so then the time is likely near to again short
the metals. A good way to do this will be by buying the the
ProShares UltraShort Silver (NYSEARCA:ZSL) or the VelocityShares 3x
Inverse Silver ETN (NYSEARCA:DSLV).
Profit Strategy Newsletter
and Technical Forecast ignores the supposed experts and focuses on
the things that matter in the markets;
fundamentals, sentiment, and technicals. And when we
apply common sense, it increases our odds of success.
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