Precious Metals Correction Still A Technical One

I called a bottom in Great Western Minerals (GWMGF) on the 18th and forecasted that it would immediately make a run on the resistance level of $.70. I didn’t think that it would demolish that resistance, but it did just that and today it closed up another 10% at $.83. Still stock still has a lot of catching up to do and there is still plenty of time to get in.

The lower trendline is right in line with the 20 Day MA. Any pullback should find support there moving forward. There are several overbought indicators here but the volume overwhelmingly supports the move.

Silver is still getting hammered as it lost another $.51 today on average volume. The daily chart for SLV tells me that this afternoon one traders offloaded 75K worth of shares in the ETF which caused a second wave of selling late in the day.

We have support here and the oscillators are indicating that a bounce off of the current lows is in order. I think that this may only be a short term bounce but I am convinced it will happen nonetheless. This support is not invincible and if it breaks, I don’t expect $25 to fail, if anything the bottom will be there.

Same story with gold, very oversold in the short term and we should see a bounce here.

I stand by what I said last week, $1325 is the bottom based on the long term trends that date back to the 2008 crash. If this support level fails then you could say that gold’s long term structure has changed. Unless the market is ignorant to this statistic, in which case $1260 is support and an epic buying opportunity.

The underlying issue here however is that this correction is a technical move, not a fundamental move. There are plenty of explanations – “weak hands being scared away” is something I’ve been hearing. I agree with that because when you see the mining companies get hit considerably harder than the spot prices, it shows us that speculative money is leaving the market, or in other words, those who are not committed to the long term trade. Another thing I’ve heard from the likes of Peter Schiff and Bob Chapman, is that the trend as of late has been long gold/short euro, and since the euro has gained strength, people have begun to cover short euro positions and close long gold contracts. Another explanation is simply that the market needs to take profit to realize gains. Either way, what concerns me is not the reason behind the correction, but the large amount of bullish news that has been coming out despite the slowdown in prices.

Examples include: The Chinese cutting silver exports, the amount of short covering in the COT reports, Russia claiming that they will buy 100 tonnes of gold a year, or the US mint having a nearly record setting sales month for Silver Eagle Coins.

It is my opinion that the above articles that should provide bullish momentum are currently contradicting price activity in the metals markets. I believe that this means that the more that the metals consolidate with this type of news going around, the harder and sharper the buying pressure will come back. This may go down as one of the best dips that we’ll have a chance to buy gold and silver when it’s all said and done.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

5 Responses to Precious Metals Correction Still A Technical One

  1. Anuj Joshi says:

    Hi,
    Crude oil and gold futures are trading with a short bias for a few days now while if we see EURO/USD trend, it’s in strong uptrend since 12 January.
    Generally we see them trading in same direction,if we consider historical inter market trends.
    Any idea which one will show a reversal first?
    Thank you

    • aaronbasile says:

      My gut says that gold will show strength here. FXE is close to resistance and gold is close to long term support trends. FXE has traded higher for 11 consecutive days and in that time, had 6 trading gaps to open the sessions. It’s also overbought on just about every oscillator (near 100 on the stoch). Likewise, gold is the opposite, totally oversold in every aspect and testing the 20-26 Day MA on the weekly chart.

      This reminds me of what was going on earlier in 2010 where gold did well on Greece default concerns even though the dollar was strong. Well I think we’re seeing gold and otehr commodities decouple from the dollar given the amount of QE that’s going on. I think that investors are beginning to see that even if the US exports inflation, it’s still bad for the dollar because in doing so we keep our spending economy going. Plus most US companies already have a large portion of their business overseas, which means that rising costs will lead to rising prices in the US.

      I’m not sure which trend will reverse first, but I do think that these gold/dollar/euro relationships aren’t going to follow historical trends in the future so long as the Fed continues with QE.

  2. Rene from Cape Cod says:

    I believe though that more people are putting their faith in the stock market as it is doing very well. When that happens they will put less faith in the metals or at least buy less. I don’t believe the market uptrend will continue, but then I didn’t think so when the DOW was @ 11,000. That’s when I put quite a bit of cash into some Ultra Shorts. The following day, the market went up…and continued up, needless to say, my utra-shorts are down…..way down.

  3. Rene from Cape Cod says:

    Also, we look at gold and silver all the time, when there are some other materials we seldom hear.
    One of which is Uranium and Lithium.
    More and more clean air nuclear power plants are coming on line around the world, more overseas such as France then in the US, but the need for the stuff is immense.
    Lithium, also, especially now where we depend on solar panels and battery operated cars.
    What is your take on this Aaron?

    • aaronbasile says:

      I think that uranium will definitely make a run in the next few years. The US is continuing to subsidize alternative energy and I think that there are plenty of opportunities in that field.

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