-- Posted Monday, 18 August 2008 | Digg This Article
| Source: GoldSeek.com
By: Timothy Silvers
It looks likely that gold and silver have bottomed. Although I thought a sharp August sell off was probable, the severity of this week’s drop was a bit more than I anticipated. I started buying heavily once silver hit its 300 DMA and bought more around $14.50. I also finished purchasing a lot of quality mining companies in the past week and a half. I know it has been painful to watch, but if you are buying with cash and using minimal leverage, you will be rewarded for your courage to buy while others are panicking.
In this article I will try to address some questions I received from readers while analyzing a few of the things I wrote on August 6. I was right that the metals are more USD correlated than oil correlated, but I was wrong that the USD would find resistance at its 200 DMA of 74.25. It blew through that, and the 200 DMA will now become the area of support for the next few months. If you look at the three year charts below, you will see that gold and silver have reached the most oversold levels yet, and not coincidentally, the USD has reached a previously unseen insanely overbought level.
I have read the same headlines as you about Euro land slowdown, lower inflation expectations, possibility of global recession, and slowing Asian demand.. However, nothing I’ve read has changed my mind about the fundamentals that have been driving the US Dollar lower for the past several years. I cannot find any real fundamentals that have driven the dollar rally this past month and it looks overdone. It seems obvious to me that the media interprets bad news as good news and mainstream investors jump on any piece of data that reaffirms their belief that they can stick their money in an index fund and not worry about it for the next ten years. Those days are gone and won’t come back for a while. New trends are now in place and investing will not be as easy in the future as throwing a dart against a page of mutual fund listings. The growing worldwide demand for commodities and the rush of all nations to devalue their paper backed currencies will continue to drive the cost of real assets higher. Believe it or not, metals are cheap now and we have been handed a great buying opportunity.
I mentioned in my last article that the large number of open COMEX commercial short positions was higher than I would like to see, and that this overhead could drag bullion down sharply if the funds are forced to liquidate their long positions. This is exactly what happened in the past week and a half. To recap, 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 were net short 219,671 gold contracts and 59,857 silver contracts. On August 12, they were net short 155,813 gold contracts and 55,461 silver contracts. If you look at the gold chart below, you will see that we haven’t reached the lows of 2007, but are now well off the highs earlier this year. This reduction in short contracts confirms the low risk buying opportunity now. With the sharp drop we saw on Thursday night, I believe that these short contracts will be further reduced when the new numbers are posted this Friday.
Some readers asked about my commercial traders’ silver Sum of $ Short graph, so I updated it below. I expected that the bottom of silver correction would correspond with a Sum of $ Short bottom between $0 and -$500million. This indicator is at +$174 million on August 12 and I do expect it will drop negative with the numbers posted this Friday. This is another measure that makes me feel very good about buying at current prices.
Again I will say that gold and silver mining stocks will likely not get much cheaper. Many are trading near or even below the levels of August 2007 even though gold and silver were cheaper then. I am now fully invested in the mining shares I planned to buy and if you are a mining stock investor you will want to add to your portfolio now.
Summary
The precious metals have followed through with a spike low bottom in August, which is a typical seasonal phenomenon, even though this year’s drop was more severe than usual. We took out my low target levels of $825 for gold and $15.50 for silver, so that could drag on investor sentiment for the next couple of months. I’ll have to see how we close August to have a better idea of whether the next rally will come quickly or draw out over 6 to 9 months. If the metals don’t rally back strongly, then we will probably trade sideways with a slight up trend until November.
I do not believe that we are in a bear market fundamentally. Yes, we have dropped over 20% from the top, but there is more to a bear market than numbers. This is a correction, but not a trend reversal. It is a setup for the next strong precious metals rally starting this fall and continuing into the first quarter of next year. I expect that gold and silver will make new highs by April 2009. Percentage wise, silver will outperform gold so I am primarily invested in silver. Quality mining companies are great buys at current levels and gold and silver bullion look like they have bottomed. I am fully invested now and it is a very low risk time to buy. I think the sharp drop is past but I will again give my usual warning about using a lot of leverage. The markets are very unpredictable in the short term and can be subject to huge swings up and down, especially for silver.
Now is not the time to panic. Whatever you do, don’t be scared into selling! Invest whatever you can in gold and silver now. Sometimes I feel like a broken record when I issue buy recommendations and say that this is the lowest price you will ever again be able to buy silver, but I think it is true. Silver has been making higher lows since 2003 and every missed buying opportunity means that you will end up buying at a higher price down the road.
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 Monday, 18 August 2008 | Digg This Article | Source: GoldSeek.com
