-- Posted Monday, 14 September 2009 | | Source: GoldSeek.com
By: Timothy Silvers
In an email update I sent on Friday 9/4, I wrote the following:
We've had a strong rally in gold and silver since the most recent bottom on August 19th. Silver is up more than $2 in two weeks and gold around $60. Many analysts are calling this the breakout that we've been waiting for, but I don't trust the current rally. Metals have been trading very much in step with the general equity markets most of the year. Then, just a few days ago, they disconnected and went up sharply when stocks went down. Are investors really recognizing gold and silver as safe havens from uncertainty or are they just getting caught up in a speculative rally? I suspect the later. I am still bullish on gold and silver in the intermediate and long term, but a good pullback, down to the 200 day moving average around $910 for gold and $13 for silver would be very healthy.
I have been sitting mostly on cash since the end of July and consequently, I have not been trading the current rally. We are overdue for the typical seasonal precious metals correction and it appears most risky to buy gold and silver at these levels. If I were long now, I would have trailing stop sell orders on my trading positions to protect gains accumulated in the last two weeks. If you are sitting on large gains you may want to take profits on some of your trades. $1010 is the key resistance level for gold, and would also set the tone for silver. If gold manages to break out over $1010, then we would likely see gains of $100 to $200 an ounce within the next few months. However, I think it probable that we will first see a correction, shallow or deep still to be determined, before the real breakout that we have been waiting for.
Since I wrote that, gold has tried to pierce $1010 and has failed so far. The candlestick chart below shows that gold is again reaching very overbought levels in the short term and has not had a significant correction since April.
Furthermore, the Commitments of Traders report released on Friday shows a very interesting development. The Commercial Traders’ short position increased by a near record 54,089 contracts in one week, resulting in a four year record net short position of 270,797 contracts. I understand that these positions may be offsetting long positions in other less transparent markets, but the Commercial’s short position is often a very good indicator near market tops and bottoms. When they are very short, there is a good chance a large correction is coming soon. If the offsetting long traders are forced to liquidate, it could precipitate another sharp drop in gold. Check out the chart below to see how extreme the short position has become. It may be a little hard to see the near vertical spike last week in the blue, red and green lines:
Looking at silver, it also shows extremely overbought conditions, in bad need of a correction back to the 200 day moving average:
For silver, the commercial short levels are not near historical highs, but the Commercials have increased their short position by about 14,000 contracts in just the last two weeks. The Sum of $ Short indicator that I track does a great job of identifying low risk buying opportunities but it is a harder to use it to pinpoint a short term top. The indicator shot up by $687 Million to $943 Million in the last week, which is a very large jump. We are currently nowhere near the low risk buy points like September 2007, October and November 2008, and April 2009. The correlation between the Commercials’ short position and the spot price of silver is at 84% for all of 2009, which gives me more confidence that we are near a top.
Summary
It is possible that gold will stage another attempt to take out $1010, but more likely that the current rally is over. I have lightened up on all my bullion and mining stocks (while keeping my core positions), and I am holding cash to buy back after the correction which I expect soon. For any trading positions you decide to keep open, I highly recommend using trailing stops to protect gains because the correction will be swift when it comes. I am looking for a pullback down to the 200 day moving average around $910 for gold and $13 for silver. That would probably present a great place to buy in anticipation of the bigger rally later this year into 2010.
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Best wishes on your investing and future and God Bless,
Timothy Silvers
www.silverbrothers.com
www.numisnetwork.com/silverbrothers
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, 14 September 2009 | Digg This Article
| Source: GoldSeek.com
