Tuesday, 7 June 2011

Gold and silver - summer coming - tedium in the extreme. 2011-06-07


We have continuing rally in gold and silver from the lows about a month ago. Who knows where or whether it is going to stall?

looking at the charts since the May tops, gold at $1548.20 has retraced most of its downmove, more than 61.8% of it, more like 75% in fact. Silver has been much more tepid. It hit its head three times on overhead resistance after retracing close to 38.2% of the downmove, a typical Fibonacci level - and today at $37.32 or so is only about 30% of the way from the May bottom back to the previous high. The gold:silver ratio is 41.48, way above the 31 it reached in May at the tops, when the excitement in silver was red hot.

I am wondering whether we get rangebound here, if we get possible new highs in gold soon or whether we get another downleg like 2008. Ross Clark did an interesting piece on Howestreet.com on the US dollar last week, looking for the possible start of a multi-year cyclical rally. However, it is no certainty, he says, but he sees some parallels to 1987 and 1995.

Then, Adam Hamilton did a nice artivle on silver downlegs. However, when he measured the 2008 downleg, he counted the initial one from $21 to $15 in his comparison. There was another large downleg after a few months, when the Lehman business blew up in September 2008 and silver was smashed down to about $8.40. With credit spreads widening and other leading economic indicators going negative, one might wonder if we are going to get a repeat of a 2008 style crisis that could smash silver again in another downleg from here in a large C downwave in an A-B-C correction (that would mean that we are in a B-wave up now). That as I see it is the danger to the long side of silver - and possibly even for gold.

However, gold has shown a lot of strength, surpassing a 61.8% upside retracement of the May slump. that looks good. A repeat of 2010 with serious jitter over European Eurozone debt and some stock market scares might serve gold well on the upside as it did last year. There were a couple of $100 corrections for gold last year but it had good upside strength in US dollar terms overall and absolutely rocketed to over €1000 in Euros too before correcting in Euros later in 2010. The gold price has again surpassed €1000 in 2011 and has wrestled with the highs in Euro and British pound terms just lately on this rebound. It seems that any breakout in £ and € gold would be unlikely to be coincident with a big fall in USD terms. A major and fast dollar rally would be required for that. Of course, if we get a Lehman style crunch, that could happen. So really, who wants to bet on this market right now, especially since we are in the typical seasonally weak season? James Turk as usual sees a big gold rally coming (this summer). I like him but he has been far too bullish on gold, predicting a top at $1500 in the 2008 spike that reached only $1030 for instance. So I take that with a pinch of salt. He sees $1800 this year. Maybe it will happen in the fall when seasonal strength could come into play. I think it is a fool's errand to try to predict this market for the rest of 2011, especially since we do not know what Bernanke and the Fed are going to do about stopping, slowing or revamping the Quantitative Easing QE2 money printing that is scheduled to end in June 2011.

To a significant extent, all bets are off until then and markets are on hold.