Gold and Silver: Where Do We Go From Here?

By: Carter Thompson | Mon, Nov 2, 2009
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Asset markets, whether it is stocks, commodities or precious metals have been dominated recently by their inverse relationship with the US dollar. A recent rally by the dollar has allowed these asset classes to take a breather and find their respective support levels. Gold has the historically perfect inverse relationship with the US dollar, and thus we focus on the prospects for this precious metal, along with Silver.

Are we in store for new highs shortly or is more consolidation needed for these precious metals, before a resumption of the upward trend? On the other hand, have they completely topped out?

Looking at the chart of Gold, it shows the perfect picture of a healthy correction. MACD continues to show new highs (now divergences), while the 32-day moving average along with the 38.2% Fibonacci Retracement level have held, and a potential rebound is now in play. A correction this shallow is usually a good indication that momentum is intact. The only problem with the chart is that the MACD is a far distance from the zero line, or what we usually call "equilibrium".

You can see in the chart that the price of Gold (thus the MACD) was able to rebound the previous instances (red circle) without reaching "equilibrium". This is not an uncommon occurrence. However, the same thing happening twice in a row has a very low probability, and false breakouts are common unless we see a MACD correction to "equilibrium" first. A MACD correction to equilibrium can occur even with prices in a sideways trading range. So for now, we expect a trading range from $1,025 to $1,070 per ounce, but expect a breakout from this trading range eventually as momentum is still intact.

Looking at Silver, the chart is significantly weaker as it has breached the 32-day moving average and the 61.8% Fibonacci Retracement level as well. The MACD is also showing a bearish divergence.

It would be critical for Silver to hold the support at about $16 (65-day moving average) for it to be considered a healthy correction, or else too much momentum will be lost. This level has to be tested sufficiently, and for now we reserve judgment on Silver. But clearly, Gold is the precious metal of choice of the two based on its shallower correction.

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Carter Thompson

Author: Carter Thompson

Carter Thompson

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