Gold, Silver Forming Major Bottom: Market Technicians

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After melting down for three weeks straight, gold and silver prices are oversold and finding support at nine-month lows thanks to short covering and bargain hunting -- even as the U.S. dollar continues to strengthen.

This suggests precious metals are forming a significant bottom, market technicians say. Meanwhile, traders await the February employment report due Friday to assess whether the Federal Reserve has reason to taper its aggressive monetary stimulus program, known as quantitative easing, or QE.

The price of spot gold was down 0.5% at $1,577.10 early Thursday after rising up 0.58% Wednesday. On the stock market today ,SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, eased 0.4% Thursday to 152.65 after climbing 0.56% Wednesday.

After losing ground for three weeks straight, the ETF is trading 11% below its 52-week high and 18% below its all-time apex reached in October 2011. It fell into a strong downtrend in early February, breaking key price support at its 200-day moving average, as the greenback rallied off of new lows against the yen and euro. Japan is purposefully debasing it currency to stoke inflation and the eurozone's economic malaise hurt the euro. PowerShares DB U.S.Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, has climbed for five weeks straight to a six-month high of 22.52.

Now trading 5% below the 200-day line, GLD is very oversold and prone to a sudden rally from bargain buying and short covering. That's when traders betting on falling prices borrow shares and have to close their positions by buying them back, creating demand.

At the same time, traders have dumped positions in gold ETFs en masse, a sign of capitulation typically seen at market bottoms, Tom McClellan, editor of the McClellan Market Report, wrote in his newsletter Wednesday. SPDR Gold Shares and iSharesGold Trust ( IAU ) unloaded more than 100 tons of gold in January and February.

"The drop to test the 2012 lows just below $1,600 is causing some traders to abandon positions in ways that they were not doing at any time in the past several years," McClellan wrote. "That kind of extreme stress is usually a sign of a big turning point, although it is worth noting that just because we are noticing the stress now does not necessarily mean that the stress is all done."

Ben Woodward, chief investment officer of Black Diamond Investment Partners in Atlanta, Ga., suspects forced selling by hedge fund tycoon John Paulson -- the biggest investor in GLD -- prompted other holders to follow his lead.

"Redemptions have hit his hedge fund complex," Woodward said in an email. "Investors are worried that he may have to liquidate against his actual investment desires if he is faced with more massive redemption. This is something no one can predict, but it often happens in financial markets."

The most recent reporting period ended Dec. 31 shows Paulson & Co. owned 21.8 million shares of GLD, valued at $3.3 billion, amounting to about 4.6% of total assets in GLD.

Although investor demand for gold ETFs may have dropped, interest in gold bars and coins is exploding, dealers say.

"Remember Russia imported 600 tons of gold last year, central banks are continuing to buy and China is near passing India as a world gold importer," Terry Sacka, chief strategist at Cornerstone Asset Metals in Palm Beach Gardens, Fla., wrote in an email. "The U.S. mint sold more silver in February than four months combined last year. They actually stopped selling for a period and have raised prices. That doesn't sound like a market softening, just shifting."

The gold bugs contend the underlying fundamental reasons to own gold remain the same.

"With the Fed printing money via the QE programs, the dollar will devalue, inflation will rise significantly above average historic levels," Tim Dyer, vice president of Sage Capital Advisors in La Jolla, Calif., said in an email. "The primary way to combat this is to own hard assets, including commodities and precious metals."

The Federal Reserve pledged that it would maintain the current QE3 program until unemployment falls to 6.5%. As of January, the headline rate was 7.9% about where it's been since September.

As the year goes on, investors will realize that more government borrowing will be needed to keep the economy afloat, which will lead to a "stagflationary economy," says Peter Spina, president of

He's piled all of his trading accounts into precious metals and gold and silver mining stocks, which he believes are "oversold and undervalued."

"There is a lot less risk vs. the metal at these prices, with many of the miners pricing in a substantially lower gold price," he said in an email.

Market Vectors Gold Miners ETF ( GDX ) eased 0.8% Thursday to 37.13, reversing from an early gain after surging 4% Wednesday as it rebounded from a 3-1/2-year low. Trading deeply below its 200-day line and 32% below its 52-week high, it's long surpassed the 20% correction indicative of a bear market.

Silver Prices

Spot silver prices slipped 0.6% early Thursday to 28.86 after surging 1.18% Wednesday.

IShares Silver Trust ( SLV ) slipped 0.7% to 27.91 after climbing 1.26% Wednesday.

Global XSilver Miners ETF (SIL) was down 0.6% Thursday after rallying 3.58% Wednesday to 18.25 from its lowest level since July intraday.

They also trade deep below their 200-day lines at oversold levels.

Follow Trang Ho on Twitter @TrangHoETFs .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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