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Is a Move Up in Precious Metals Likely at the Moment?


A short-lived correction in the dollar is likely to be seen, and if so, it will have positive implications across the precious metals sector.

Although my firm had described the fall in precious metals prices, we can understand the shock for those who had gotten used to the idea that gold prices only go in one direction-up. A good metaphor here would be gold taking the stairs to go up, but the elevator to go down. Last Friday it was more like gold falling headlong down the elevator shaft with the worse one-day drop in five years. It definitely got ugly, but that's normal. It's part of the game, part of the ride. Investors fled to the U.S. (fiat) dollar and to U.S. Treasuries (that just got downgraded last month by Standard & Poor's.) Go figure! They have to settle their debt in dollars. The sharp decline was difficult to digest especially since we had come off a period in August where it seemed that gold could do no wrong. It shot up when markets plummeted, and shot up when markets soared.

On September 16, 2011, we wrote the following regarding the following gold and silver correction (see Will Gold and Silver Move Lower Together?):

(…) the situation in gold is bearish for the short term and is certainly more bearish than it [has] appeared [before]. Such a sentiment is now confirmed by the gold market. The current situation for silver is very much the same as it is for gold, which is quite bearish for the short term. Additional confirmation comes from the recent action in both the Euro Index and in the U.S. Dollar Index.

So just how far did gold fall? The high earlier in the month was $1,920 and on Monday morning gold touched $1,530, almost a $400 drop. Let's keep in mind that at the beginning of July gold was at $1,480, so even at the drop we were higher than we were at the beginning of July. Gold is still up about 14% YTD.

The plunge brought the "Gold Bubble" crowd out of the woodwork and with much joy, glee and self-satisfaction they proclaimed that they were right all along and the gold "bubble" is over.

They have said this every time that precious metals has corrected.

There is no doubt that like everything else, the bull run in gold will eventually come to an end, but we're still a long way off. We see the sharp decline as an opportunity rather than a warning. It is a good time, for those who wished all along that they had bought gold, to do it on dips. Nothing that has taken place over the past weeks lessens our long-term optimism about gold. The same fundamentals are still in place. The situation in Europe continues to deteriorate daily. Greece is on the cusp of default and larger EU members look sure to follow. Meanwhile, political gridlock is the situation in Washington and QE3 is coming, and with it, further decline in the purchasing power of the dollar (not necessarily right away, of course). The Swiss National Bank just instituted a peg with the euro to slow down inflows of global investors seeking a safe haven – costing franc holders 25% of their position in the course of a week. Central banks are still buyers and not sellers of gold.

So to see what kind of a roller coaster ride we can anticipate in the near future, we will now take you to this week's technical part. We will start with analysis of the long-term Euro Index chart (charts courtesy of

In this week's long-term Euro Index chart, we clearly see that drastic declines have taken place in the past few weeks following a failed breakout attempt. Now the Index has paused and the breakdown below several support levels is likely to be verified. These levels will then provide resistance.
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