Wednesday, March 26, 2014

Gold and Silver Testing Technical Support

By Jason Hamlin

Gold and silver are testing key technical support levels this week. Some analysts have already flipped their outlook to bearish over the past few days, but I believe the uptrend remain intact as long as current support levels are not breached.

Goldman Sachs has predicted new lows in 2014, but physical buying remains strong and precious metals represent not only a good safe haven during increasing political tensions worldwide, but also one of the only asset classes that remain undervalued at the current levels.

During January, gold broke through resistance at the downward sloping trend line that had been in place for over year. This key breakout is circled in the chart below. A new uptrend support line was established starting in December and gold is now testing this support line at $1,300 for the second time.

gold chart

A bounce off this support would be very bullish for gold as it would represent a higher low and verify the new uptrend has staying power. A drop below this support level would suggest that gold will continue dropping to test the prior low of $1,195. Such a move would be very bearish as the gold price would drop back below the long-term resistance line and mark a reversal into the downtrend channel once more.

So, all eyes are on $1,300 gold as a critical price level for determining the future trend. This level is key not only as trend line support, but it is also the 200-day moving average for gold. Investors might consider reducing exposure, hedging positions or going short gold on any move below this support.

Silver has underperformed gold in 2014 by a wide margin. Some analysts view this as a bearish indicator, as silver usually leads the gold price higher. However, much of the underperformance can be explained by slowing economic growth in 2014. Gold outperforms silver in touch an environment, as only 10% of gold’s demand is industrial versus roughly 50% for silver.

The silver chart shows greater volatility, but a more gradual uptrend line with support around $19. Silver broke out from its long-term downtrend a bit later than gold, with a sharp move higher in early February. It made this move higher on increasing volume, which is typically a bullish sign.

silver chart

Silver has given back most of its 2014 gains in the past week, as it fell below $20. The uptrend remains intact as long as the silver price holds above $19, which is a key level as it is precisely where the two trend lines converge to form a descending triangle pattern. $19 is also key as it was strong resistance on numerous occasions in the past and resistance often turns into key support.

I will be watching for silver to find support above $19.16, which was the previous low. This would mark a ‘higher low’ for silver, which would be bullish and suggest a continuation of the 2014 uptrend.

In summary, I don’t think it is time to panic out of precious metals quite yet. The fundamentals have grown increasingly bullish in the past months and and technicals remain bullish as long as the support levels mentioned above hold. So far, they appear to be holding, although sentiment is turning bearish and speculators/bots are quit to exit positions on any failure of key technical support.

Even if technical support fails and precious metals drop towards previous lows, I do not believe they will remain there for long. While deep-pocketed players can utilize paper derivatives and extreme leverage to manipulate prices however they wish in the short term, commodity prices rarely drop below their cost of production and never stay at those levels for long.

If producers of oil, food or any other commodity are not able to sell their product at a profit, they are forced to shut down operations. This causes supplies to drop and prices to rise again, assuming reasonably stable demand.

So, we should see a floor for gold and silver prices near the all-in sustaining costs. The industry average for gold is around $1,200 and for silver it is around $20. Therefore, I believe the downside risk with precious metals is relatively small at this juncture. In the short-term we would see prices fall another 10 or 20% at most.

However, the upside potential is limitless. A move bak to previous highs would represent gains of roughly 50% for gold and nearly 150% for silver. The more money that central banks around the globe continue to print, the higher the potential price of precious metals. There really is no ceiling as there is no limit to how much money can be printed and how much debt can be monetized.

Of course, a 10X move to $13,000 gold does equate to a 10X increase in purchasing power for gold investors. But we can expect the nominal price increase to far outpace inflation, resulting in a significant increase in purchasing power over time.

With exploding sovereign debt levels, the ballooning FED balance sheet, increasing consolidation of the banking industry, the ticking time bomb of the massive level of toxic derivatives still in existence, growing distrust of governments, growing geopolitical tensions, increasing chances of Russia and China dumping U.S. debt/dollar (economic warfare), end of the petrodollar world reserve in sight and rise of alternative monetary systems, it is difficult to imagine gold and silver prices remaining this low much longer.

In fact, this may be the last great buying opportunity for this seeking to protect, preserve and growth their wealth through the coming chaos. It is the most difficult time to buy when everyone around you is bearish and fearful. But these are exactly the opportunities that the most successful investors are able to seize, running head first into the herd that is unaware of the cliff straight ahead.

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