Breakouts in Gold and Silver Prices

By: Przemyslaw Radomski | Fri, Apr 8, 2011
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Based on the April 8th, 2011 Premium Update. Visit our archives for more gold & silver analysis.


 

The story of gold is as rich, lustrous and complex as the metal itself. It is as ancient as the Egyptian Pharos and modern as the mirrors coated with gold which astronomers use to capture images of the universe. The metal's mounting value is connected directly to its economic role as a stable alternative to paper currencies, and its rise should speak volume about the health of the global monetary system.

John Maynard Keynes, the economic guru of many of today's economists, called gold a "barbaric relic." Lenin went even further. He suggested an ingenious way to demonetize gold. Under Communism gold would be used to plate the inner surfaces of public urinals. Lenin of course, had the means of preventing the people for making off with the urinals. He had the secret police. But neither Keynes nor Lenin has proven to be right. In fact, the way it's going, it looks like it is paper money that is going to the toilet.

The philosophical thought associated with valuation of gold is always a talk of interest. Now, let's move on to something very particular to gold. Here are few interesting numbers with respect to gold.

To see if gold might reach some new highs soon, let's turn to the technical portion with analysis of market moves. We will start with the short-term GLD chart (charts courtesy by http://stockcharts.com.)

GLD Chart

We begin with the short-term chart for the yellow metal since much attention has been focused here these days. Although there has been a confirmation in the form of high volume, we didn't felt enough proof has been seen. Therefore we have decided to wait a few more days to see if these price levels will manage to hold and give us more peace of mind (lowering the risk parameter in the risk/reward ratio). Thursday was the third consecutive day above a critical resistance/support line and the recent breakout has been verified by high volume levels. The trend is clearly bullish.

Another bit of bullish news comes from the completion of a reverse head-and-shoulders pattern formation. A further rally (even a $100+ one) from here appears quite possible. Although the RSI levels are nearly overbought and this is somewhat negative, the bullish developments seem strong enough to override this factor. RSI levels alone simply do not seem capable of keeping this rally in check.

$Gold:$XJY Index

Looking at the chart for gold in terms of the Japanese yen this week, the most important point we wish to make is in regards to waiting for confirmations of breakouts and breakdowns.

Recently, this index showed a breakdown below the lower border of the trading channel. Investors who sold without waiting on a confirmation of this move would have lost out since a quick rally was seen prior to a confirmation of the breakdown. In this case, patience was indeed a virtue for those who waited. In fact in one of our previous gold investment articles, we wrote that in case of the above chart the "breakdown" should not be viewed as a true bearish sign for gold.

Overall,based on the general bullish sentiment from nearly all of our gold charts this week, it seems that the time is right for opening speculative long positions in the yellow metal.

Let's have a quick glance at the silver market too.

$Silver Index

In the very-long-term chart for silver, we see a breakout above the rising long-term resistance line and this is a positive factor. The situation at this point, however, remains tense for several reasons.

The recent rally can be compared only to the rally of 2005-2006. At that time, the percentage rise was actually a bit higher which leaves open the possibility that this 2011 rally may continue a bit more. In fact, if a bigger rally is seen, then the 2010-2011 silver upswing would actually outperform the rally from 5 years ago. Consequently, it will set a new record in terms of percentage gains for a single rally.

The RSI levels and the size of the current rally suggest that a correction may be seen fairly soon. Furthermore, this correction is likely to be quite sharp. Investors should continue to monitor this situation closely and be prepared to exit the market once it turns unfavorable.

This is also in line with the True Seasonal tendencies of the white metal, a topic we discussed in our Premium Update March 31st 2011. "...an upward trend might occur in the first days of April after which we should be particularly cautious and look for signals of a possible slump. In the second half of the month prices of silver might drift sideways."

Before summarizing, let's turn towards the silver:gold ratio.

$Silver:$Gold Index

In the silver:gold ratio chart, we continue to see silver's superior performance. While silver continues to outperform gold, the silver:gold ratio did not move to its resistance level (upper border of the rising trend channel) yet, so this trend may not reverse for some time.

Once silver:gold ratio gets to this particular level, it will be likely that a local top will be seen in the whole sector. Naturally, this does not mean that there will be no additional tops along the way.

Summing up, based on gold, silver and mining stocks alone, a rally from here appears to be in the cards.

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Thank you for reading. Have a great and profitable week!

 


 

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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