Precious Metals Review: Follow The Yellow Brick Road?

on Dec 10, 2014

The end of the year is full of surprises, literally.

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   We saw a huge reversal in gold and silver on December 1st. There are plenty of signs that at least an intermediate term bottom is in. Metals prices are ridiculously low. Yes they can go lower, but the downside is limited. Especially silver, which has fallen 70% from its peak, has seen strong physical demand as evidenced by record silver coin sales and inflows of silver in the large SLV ETF (while the GLD ETF has seen an outflow). These are all signs that now is the time to buy gold and especially silver, not to sell.

   Consider the fact that Gold has failed to break down below the $1,200/oz properly on the back of very negative news after the Swiss referendum resulted in a No vote to gold backing. Many great investors, such as Marc Faber, have pointed out that when an asset, any asset, fails to break lower on extremely negative news, it is a sign that a major reversal in trend could be on the cards.

   We saw a huge reversal in gold and silver on December 1st. Gold soared 3.05% on the day on heavy volume. Although that is certainly good news, the most exceptional characteristic was the huge jump from its intraday low. The yellow metal touched $1,140 after a big decline which started in overnight trading (Asian opening) before making a big reversal, straight up to $1,220 in a matter of hours. That represented a 5.9% intraday swing!


   Silver made an even more extreme move, although with a similar chart pattern. The grey metal literally sold off and spiked for some minutes as low as $14.20, after which a huge reversal took place to $16,80. Silver closed the trading session at $16,46 with a gain of 5.81%, but the intraday swing was almost 18%Zerohedge notes that this is the biggest positive swing since our data began. All the previous major swings have been downshifts, most recently in September 2011 (-22% and -18% over 2 days).”


   As I write, gold is now trading at $1,230/oz and silver at $17.00/oz following another surge higher, breaking out of their 5 month long downtrends. According to this recent price action, the so called ‘easiest trades in the world’, which was shorting gold as it broke below the eighteen month long $1,185/oz support level and shorting silver below $16/oz, has now totally reversed on the bears. As a young man, my experience is very limited, but usually when the market fails to hold a break in one direction, it tends to trap a large group of traders, before swinging powerfully the other way.  There are plenty of signs that at least an intermediate term bottom is in. Metals prices are ridiculously low. The question is will gold and silver continue to break out to the upside? Many will say no, despite the recent price action and seeing strong physical demand as evidenced by record silver coin demand and inflows of silver into the large SLV ETF.


   These strong signs of demand don’t normally correlate with an asset in a bear market. Do you know of any bear market, in any asset, that’s seen this kind of demand? Neither do I. There’s only one explanation: all these parties see the bear soon yielding to the bull. These are all signs that now is the time to buy silver, not to sell.


   But before you make your conclusion, I want to make a final observation.


   Policy makers and market participants seem obsessed with deflation fears whilst the US dollar has gone through the roof. A basket of major currencies including the Euro, Yen, Aussie, Russian Rouble, and Chinese Yuan has been crushed. Furthermore, commodities such as Crude oil have collapsed by nearly 50% in 6 months. The strong dollar rally is still putting pressure on everything; everything apart from Gold and Silver. Despite all these deflationary forces, Gold is still trading above $1,200 like nothing happened.


   As of this week, the US national debt officially stands at $18 trillion, and yesterday the Senate agreed to raise its debt ceiling by another $1.1 trillion until September 2015 to avoid default. In other words, their IOU just had a bit more added to it.


   If fundamentals are so good for the world’s creaking economies, and so awful for precious metals, ask yourself why aren’t they dropping? Maybe because, when it’s obvious to the public…it’s obviously wrong.


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Commodity Precious Metals