Silver has defied the weeks-long bearish chart pattern to rally strongly and aims to reach its previous high. Gold, meanwhile, has touched a new high, continuing its long-term uptrend.
Silver had been bearish for a long time. It broke to the down side from the continuation chart pattern, called the symmetrical triangle. A few months ago, after a sharp drop, silver went into the continuation pattern. Most of the time, a break from a symmetrical triangle after a drop into it results in a further move down.
Six weeks ago, silver had broken below the triangle, but last week it did not continue its downward trend and, in fact, rallied. This week, prices closed above the triangle formation, which indicates the bear has been killed for now. Based on the chart pattern, we feel silver may try to test its previous highs in the near future.
The white metal had rallied very strongly for several months and then sold off sharply. Markets stretching far away from its averages tend to snap back to it pretty quickly. That’s what happened with it. Long-term investors use the 30-week moving average as a guide to take positions. When the prices are above the average and come back to it and the average is sloping up, long-term investors tend to go long. That’s what happened to silver, and the prices bounced from the 30-week moving average. (see chart).
Additionally, silver tends to follow the price of gold. Since gold had been rallying for quite some time, silver followed suit. Based on the symmetrical triangle, we had expected the white metal would fall. The market has, however, defied the bearish pattern.
Meanwhile, as financial markets focused on a potential default by Greece, other Euro nations dragged into the debt crisis and a possible credit downgrade of the US, gold quietly peaked to a new high. The previous peak in the mini-sized gold futures contract was $1,578 and, at the time of writing of this article, gold had broken out above $1,600. It is the most trusted store of value and often punishes fiat currencies controlled by governments when fiscal and monetary discipline is thrown out of the window. Not only has the gold market devalued the US dollar, but also punished the Indian rupee.
In the US, quantitative easing by the Federal Reserve has resulted in a spike in gold and other commodity prices. In India, an exercise to stop the rupee from appreciating and deficit financing has led to a rise in gold prices. To prevent the appreciation of the rupee, the Reserve Bank of India (RBI) sells the currency to buy the dollar. This increases money supply, as does printing currency to finance the government deficit. As people slowly lose trust in the fiat currency, they move to gold.
Despite the brief pullbacks and stagnation in gold prices, the yellow metal is bullish. Aggressive buyers tend to buy as soon as prices break to a new high, like last week. However, the conservative traders wait for a pullback in prices to the previous high before buying. The previous high in the case of gold was $1,578. We feel that unless gold prices close below $1,480, the chart will stay bullish. A close below that will turn us into cautious bears.
The author is based in Chicago and is the editor of www.capturetrends.com
