Breakouts: Long-Term Technical Outlook for Gold and Silver
Over the next 12 months we could see gold back to $1,900 and a final consolidation. Silver's bubble could burst with a powerful move past $50.
Gold (XAUUSD=X) has consistently made impulsive advances that were digested by multi-quarter corrections and eventually followed by a breakout and new impulsive advance. Following the last major breakout in late 2009, gold enjoyed an extended impulsive advance that lasted two years. Previous impulsive advances lasted less than a year. Gold, having bottomed, remains well entrenched in another consolidation that is 12 months old. As we can see from the chart, previous consolidations lasted 16 to 20 months.
It is important to note that previously gold, within a year, was able to rally back near the recent impulsive high. In other words, gold is currently in a much weaker state relative to past consolidations. Gold will need to rally back to $1,800 or $1,900 and that would be followed by a multi-month consolidation that would lead to a breakout. Conservatively speaking, over the next 12 months we could see a rally back to $1,900 and a final consolidation.
Meanwhile, silver (XAG=X) continues to consolidate and digest the 2.5-year advance from $8 to $49. Predictions of $60 or $70 silver are absurd and fail to account for the lengthy consolidation that is needed to reduce supply and position the market for not only a retest of $50 but an actual breakout. Silver is a commodity with real-world supply and demand dynamics. It will be a while before producers won't sell for $35-$36 and before buyers consider $35 a bargain. That being said, the near and medium term outlook is quite compelling. Longer term, the market is in a giant cup and handle pattern (dating back to the high in 1980) and this correction and consolidation is the handle. A powerful breakout past $50 in, say 2014, could push silver toward its bubble phase.
The fact that gold and silver are unlikely to break to new highs anytime soon hardly deters me in my bullish enthusiasm for select gold and silver stocks, the key word being select. I'm not bullish on every mining company, but I digress. In the chart below I use a 66-day moving average to plot an average quarterly gold and silver price. I also circle the moving average at the end of quarters.
Note that the quarterly high prices for gold and silver are roughly $1,750 and $39 and far off from the 2011 highs. The quarterly averages are starting to turn up. Well-run companies with production increases could very well move to new highs when gold returns to $1,750 and silver moves past $35. We do think most of the gold and silver shares can break out to new highs ahead of the metals. In other words, the mining shares at large will ultimately challenge for a breakout ahead of gold and silver reaching new all-time highs.
Editor's Note: See more from Jordan Roy-Byrne at The Daily Gold.
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