Are Precious Metals in Their Final Run Up?

Przemyslaw Radomski
  NOV 30, 2009 11:30 AM

The first half of December will include important extremes for silver and the USD Index .

 


Gold has been moving parabolically in the past few months, but is this the final run up?

I seriously doubt it, because the levels that I expect gold and silver to achieve (mentioned in the previous Premium Update) at the end of this bull market are still very far from where we are today.

Please keep in mind that the road to the top won’t be a straight line, and because that’s the case, it makes sense to take advantage of the inevitable corrections. Let's examine the chart of gold to check if we’re close to another buying or selling opportunity.


Source: Stockcharts.com

Once gold broke out of its resistance line, it moved much higher (as suggested several days ago) and it has been moving in a parabolic fashion.

This type of upswing is usually very profitable for those holding the metal, but confusing for those trying to time the top. This time is no different, as the short-term chart doesn't provide us with any reliable targets for this rally.

On the other hand, gold appears to be the only part of the precious metals market that’s really thriving. Such divergences aren’t really encouraging for anyone long gold, or any other precious metal.

Let's turn to silver and check what the white metal likely to do next.


Source: Stockcharts.com

Silver has more than doubled in the past year, and it’s finally very close to its 2008 highs. However, before these resistance levels are reached, silver much first breach through the rising red line that has proven a strong resistance many times in the past.

The Stochastic Indicator is currently above the 80 level, which means a top might be put here (it’s a necessary condition, but not a sufficient one). The RSI isn’t in the "extreme overbought" territory yet, but it’s now very close.

While it may make sense for super-aggressive speculators to wait for the final signal, from my point of view it seems that most investors would be better off closing their positions a little earlier. The sell-offs in silver are usually very volatile and take the metal much lower in a short time frame, so unless you can monitor the market almost constantly and sell during the early part of the plunge (it’s hard to get your orders filled during that time), it’s best to close early.

Let's take a look at silver from the short-term perspective to see if it confirms the above analysis.


Source: Stockcharts.com

The short-term silver chart confirms the points raised above. Apart from the fact that silver is now near the short-term resistance level (thin blue line), the additional signal comes from the volume. Please note that the volume was much higher on Tuesday, when silver declined, than it was on Wednesday, when it moved higher.

The seasonal tendencies provide us with additional details. This time silver is already closer to the "top" area than it is to the "bottom" one. While the next vertical red line (topping area) is "scheduled" for the second week of December, it’s certainly possible for silver to top sooner.

Keep in mind that these tendencies have been very reliable, but often for a "top/bottom is near" instead of exact dates. So, if the top is to be reached soon (or it has just been reached), it wouldn’t invalidate the whole pattern.

Because this week's Premium Update includes analysis of gold in currencies other than the US Dollar, it’s a good idea to feature similar analysis of the silver market.


Source: Stockcharts.com

The chart of silver isn’t that bullish, as is the case with gold, because there’s no visible rising trend channel.

The late-February to today consolidation may be seen as a flag pattern, which means that the rally following the breakout is likely to take the ratio much higher -- taking into account the size of the October 2008 to February 2009 move preceding the consolidation. In this case, the target would be above 0.75 -- above the 2008 high. Naturally, I expect this to mean higher silver prices in USD as well.

However, this isn’t likely to take place immediately, as the ratio has just reached one of the important resistance levels -- the July 2008 high. This means we may need to see silver trade sideways before a more significant move. Today's price action seems to confirm this.

Moving on to the situation on the Dollar market, let's begin with the long-term chart.


Source: Stockcharts.com

There are no big changes on the above chart since I featured it in the October 30 Premium Update, but I decided to provide you with this chart anyway, as it helps to put things into proper perspective.

The size of the current downswing is still not very big when one analyzes it from the very-long-term perspective, so I don't think that a rally from here is imminent.

Consequently, gold and silver may rally in the long run despite their short- or even medium-term weakness.


Source: Stockcharts.com

The situation on the USD Index evolves in a predictable fashion. So far, the USD Index has been trading lower between two blue borders of the trading channel.

The seasonal tendencies suggest that the US Dollar is likely to put a top (more likely) or a bottom in the first half of December.

This could mark the end of the correction in the precious metals, or at least the end of the first part of the correction. I’ll let you know once we get more information.

Summing up, the bull market in the precious metals -- including the silver market -- is healthy, but it seems that the most probable scenario in the short term is a consolidation.

The analysis of the cyclical tendencies in silver and the USD Index suggests that the first half of December will include an important extreme for these markets.

I’ll leave additional details for my subscribers. I encourage you to join us today -- this week's Premium Update includes detailed analysis of 19 charts, and subscribers have access to all previously posted updates.

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Thank you for reading. Have a great and profitable week!


No positions in stocks mentioned.