Several Factors Suggest That The Bottom in Gold and Silver Is Near

By: Przemyslaw Radomski | Mon, Jun 15, 2009
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This essay is based on the Premium Update posted on June 14th, 2009

In my previous essay (and in my previous Premium Update, which you will be able read, as it is now posted on my website as a sample version) I wrote the following:

(...) once you consider details, the outlook becomes rather bearish in the short term. The point here is that volume has been declining while gold has been rising and it rose along with declining gold price. Volume usually confirms the direction in which the market is headed, and this time it points to lower prices in coming days. Naturally, a day or two of pause are possible (and also quite likely), as gold is currently just at its support level, but still - it is likely that gold will move lower in the short term.

This is exactly what took place during the rest of the week - we had slightly higher prices of gold, silver and mining stocks in the middle of the week, but they closed lower on Friday. Of course the key question here are: "Is the bottom already in?" and "Is it safe to get back on the long side of the market?" In short, it seems that we are going a little lower before we will reach a local bottom.

Gold

Moving on to the current situation, let's begin with a gold chart. Charts are courtesy of stockcharts.com.

At the first glance, the situation on the gold market looks quite bullish. Gold has advanced substantially from April to June, and has been correcting since the beginning of this month. Corrections are to be expected on any market, and gold is no exception here, so until we see evidence that this correction is anything more than just that, we remain bullish in the long run. Right now the price of gold (and also the value of the GLD ETF) has closed at its long term support level (solid blue line), which generally indicates that a rebound is likely.

Generally doesn't mean always, and it is usually useful (and profitable) to put "general rules" into proper context before making any investment decisions. As mentioned above, the price of gold stopped at the rising support line. However, did gold rebound in the past when the situation was similar? I have marked two situations with dashed lines on the above chart.

Please note that each time price got to the analogical support line it has briefly broken it before rising again, so this may be the case also now.

Additionally, previous bottoms were accompanied by particular signals from the stochastic indicator (as seen on the bottom of the gold chart). Several weeks ago I wrote about the RSI indicator as particularly useful in timing top on the precious metals market. Naturally - there is no perfect tool. RSI is not that useful in determining bottoms on the PM market, as it is the case with tops. Still, there are many more indicators than just the Relative Strength Index, and one of them proved to be particularly useful in estimating bottoms in the recent past. During the past several days most meaningful bottoms took place when stochastic indicator was below the 20 level and it started to rise (thus crossing its moving average) - I have marked these situations with red ellipses.

Currently, the stochastic indicator has moved lower, but it is not yet below the 20 level. Therefore, there is another significant confirmation of the previous conclusion - the bottom is near, but it is yet to materialize. How low can it go temporarily? We will leave this part of our analysis to the Members of our Premium Service.

Silver

The first thing that comes into mind after taking a glimpse at the above chart is that silver has held very well during the current decline. The strength in the silver market should not surprise you, if you've been following my analysis for some time now - I've written about the particularly favorable situation on the silver market on 20th of April.

As far as the target for this decline is concerned, the situation is similar to the one in the gold market. The area in which the bottom is likely to take place is marked with a red ellipse and it contains levels corresponding to two important Fibonacci retracement levels: 38.2% and 50%. Prices of many assets often correct these parts of their previous move before resuming their main trend (for example the 38.2% level stopped the decline at the beginning of March 2009). Another important level that this ellipse contains is the lower border of the short term trend channel - if we get the C decline of the ABC (zigzag) correction it may go exactly to this support level. I currently view such a decline as likely.

Summary

After having rallied in May, the whole precious metals sector entered a corrective phase, which began two weeks ago. Currently many factors suggest that the end of this correction is near. The coming bottom is likely to provide a favorable buying opportunity for long-term investors with the "buy more on the dips" approach. Short-term traders are advised to consider preparing themselves for opening long positions and closing remaining short ones in the coming days.

To make sure that you get immediate access to my thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM investors and speculators. It's free and you may unsubscribe at any time.

 


 

Przemyslaw Radomski

Author: Przemyslaw Radomski

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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