-- Posted Thursday, 7 August 2008 | Digg This Article
| Source: GoldSeek.com
By: Timothy Silvers
Gold and silver appear to be in the process of bottoming and some mining stocks are now screaming buys. It has been a while since my last post as my wife and I were traveling in third world countries and at times it was difficult to stay current on economic news. Now we are settled back in the US with fast internet and a new appreciation of how blessed we are in this nation, regardless of the economic woes seen daily in the news. In the future, I plan write articles more frequently as we approach turning points in the precious metals markets.
The current correction in gold and silver was not unexpected for a few reasons. First, everyone seemed to be bearish on the US Dollar so it was due for a rebound. Second, some commodities, especially oil, were pushed up into speculative overbought territory without solid short term fundamentals supporting the move up. The USD has defied all bad news about the continuing credit contraction and Fannie Mae Freddie Mac fiasco to reach an intermediate high point, but is due for a cooling off and will probably find resistance around its 200 DMA. It is hard to imagine that the world will keep bidding up the dollar as the US government puts another $5 trillion in liabilities on its balance sheet to cover Fannie and Freddie’s deteriorating equity. The dollar may find temporary safe haven status but until the leaders in Washington make some politically suicidal tough choices to curb the increasing debt burden, the dollar’s trend will remain down. Oil has broken down hard and the precious metals have fallen in sympathy. Oil will probably continue to trend down to its 200 DMA of $109 or 300 DMA of $98 and may pull down the metals some more, but I see the metals appear to be more US Dollar correlated than oil correlated.
Examining the candlestick charts, both gold and silver had a powerful move up in April and March to overbought levels, then took a much needed correction to lows in May and finally had a short but strong move up from the end of June to mid July. We have recently breached the 200 DMA for both metals, which has not happened since August 2007. Looking at the chart above, gold has corrected below to an RSI of 35 and the silver chart below is almost identical to gold since mid July. There hasn’t been a time in the last few years where you would have been hurt on a long term investment when buying gold and silver at RSI in the low 30s.
Dropping below the 200 DMA has also always been a pretty low risk buy indicator for gold and silver but there are a couple of factors that may contribute to further downside. First, both metals had a bearish hammer candle today where they opened low, traded high for a time and ended low near the open. This can indicate a lack of bullish conviction and often comes before more downward days. Second, oil could continue to correct down and drag the metals with it. To the extent that funds were invested in oil and having to sell as it corrects, they are likely liquidating metals positions as well.
As much as we would like to have cheap gas, oil isn’t going back to $60 a barrel. I can witness from traveling in the developing world that there are billions of people that are striving to attain the material conveniences of the western world and the earth flat out doesn’t have enough resources at current prices for everyone to get their piece of the pie. Conservation, alternative energy, and changing habits will play a small part to mitigate this increased demand, but the only cure to the raw material supply demand imbalance is higher prices. We are getting another, perhaps the last, good opportunity to buy real assets at low prices. Years from now August 2008 will be seen as the good old days of cheap metals, oil, foodstuffs, etc.
Finally, the COMEX Commitments of Traders (COTs) shows commercial short positions higher than I would like to see. In August 2007, the last great buying opportunity, the commercials were net short 91,994 gold contracts and 24,833 silver contracts. As of July 29, they are net short 219,671 gold contracts and 59,857 silver contracts. The downward action since then will result in many more short contracts getting closed out, but we won’t know the numbers until Friday afternoon. Still, there will be many more open shorts than a year ago, and this overhead could drag bullion down sharply if the funds are forced to liquidate their long positions. A worsening of the credit crunch or any number of triggers could cause this to happen, so expect some volatility. If you are trading on margin, be careful not to leverage too much and use close stops to minimize losses if the metals take a quick dive.
The chart below I first created in 2003 to get an idea of the trend of the commercial traders’ silver short position. When the Sum of $ Short indicator is bottoming it is always associated with a short term low and a buying opportunity. August 2007 was obviously an amazing time to buy. I would expect the Sum of $ Short to bottom between $0 and -$500million when silver hits its bottom soon. There is no guarantee that we have to drop that low but this has been a very reliable indicator in the past. We are nearing a low risk buy point now. We may be there or it could come in the next couple of weeks.
Gold and silver mining stocks, on the other hand, may not get much cheaper. Many are trading near the levels of August 2007 even though gold costs $230 more and silver is $5.50 higher than at that at time. The indexes HUI and XAU have fallen off a cliff since mid July and are way oversold. I don’t give specific stock recommendations, but you won’t have to search far to find solid junior producers and senior mining companies that are great values. They could, of course, get pulled down with bullion, but I don’t expect much more downside. Now is the time to load up on the mining shares that you have been waiting to buy.
Summary
The precious metals usually make a nice bottom at the end of summer between August and October and this year looks like it will be no exception. There should be a strong precious metals rally into the Fall and Winter 2009. Quality mining companies are great buys at current levels and gold and silver should be near a bottom. The lowest levels I expect would be $825 for gold and $15.50 for silver. Closes much below this might indicate that we are moving into a more bearish intermediate forecast for gold and silver. For cash purchases, dollar cost average over the next few weeks and you will be quite satisfied 6 to 9 months from now. Again, if you are trading on margin, expect volatility and the possibility of funds liquidation causing a sharp drop in gold and silver. Be careful not to leverage too much and use close stops to minimize losses if the metals drop quickly.
Best wishes on your investing and future and God Bless,
Timothy Silvers
Disclaimer: This article represents the opinions and personal views of Timothy Silvers and is not intended to be investment advice. If you choose to use this analysis for your personal trading, Timothy Silvers assumes no liability for the direct or indirect losses you may incur due to using this article to make your investment decisions. You are totally and completely responsible for your own investments. At any given time, Timothy Silvers or his friends and relatives may have positions in silver related investments that may or may not follow the recommendations contained in this article. The information in this article may not be completely correct and accurate. Even though Timothy Silvers has done his best to review the content and accuracy of this article, he is in no way liable or responsible for any mistakes or omissions.
-- Posted Thursday, 7 August 2008 | Digg This Article | Source: GoldSeek.com
