The two precious metals – gold and silver – have entered a corrective mode after a stupendous rally since July and August. The uptrend on both metals is still intact.
A look at the charts shows that silver had a greater correction than gold, as the white metal rallied much more strongly.
Silver began its rally in August to move from $18 to $29, a whopping 63 per cent rise in price. Gold, on the other hand rallied from $1,180 to $1,425, an increase of 20 per cent. It is hence logical that silver should have a great correction given the rally it had.
The immediate reason for the sell-off in metals is due to the fact that dollar rallied strongly over the past two weeks, from a support area. Despite the quantitative easing injection plan of $600 billion by the US Federal Reserve, the greenback rallied. Immediately after the announcement of the quantitative easing plan, the Dollar index fell into a support area of 75.50. The index measures the dollar against a basket of six major currencies.
The rally in the Dollar led to a selloff in the precious metals as they are inversely related in the medium term. However, note that gold has been relatively stronger than the dollar for several years. Since 2005 the dollar index has been range bound between 70 and 90. However, gold continued to make new highs.
Silver on the other hand was range bound like to dollar, but broke out to new highs in early October 2010. With the Dollar range bound and the metals making new highs, we are still bullish on gold and silver.
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Silver rallied last week after hitting the $25 area, which was previous resistance. Previous resistance often turns to support. Gold too rallied a bit last week, but not as strongly as silver. The rally in both metals last week was due to small correction in the Dollar after a strong rally.
Gold for now looks weaker than silver as it’s last week was anaemic. However, the bullish trends for both metals are intact. Given the strong sell offs in both metals watch out for resistance at $29.50 for silver and $1,425 for gold. If these resistance areas are cleared we could see the rally in the metals continue.
The first projected target for gold once resistance is broken is in the $1,500 area and the price action of the precious metal as it reaches that level will give a clue if it can rally further. For silver the first, second and third targets if resistance is broken are $31.80, $34.38 and $35.90, respectively.
The author is based in Chicago and is the editor of www.capturetrends.com