A breakout in gold and silver?

[Royal Canin Feline 32]

For a while gold looked like it was breaking out, but several of the important conditions for a successful upside breakout that were explained in the last update 2 weeks ago were not met and on Friday gold turned sharply lower. Although Friday's drop is thought to mark the start of a reactive phase, it is considered likely that it will prove short-lived as the overall picture for gold remains positive.

On its 6-month chart we can see that after a 2-week rally gold stalled out near the upper boundary of the zone of resistance capping the trading range of recent months, and it can be argued that after two weeks of good gains it is entitled to a reaction, which - provided it doesn't carry too far - will put it in better technical condition for a successful breakout and sustained advance. It looks like it is starting to advance away from a Head-and-Shoulders bottom and moving averages are in bullish alignment, so the time is right for a major uptrend to begin, once the current reaction is done.



If we run through the conditions that require to be met for a successful gold breakout, that were set out in the last update, we find that none of them - so far - has been conclusively. Silver needed to break above its downsloping line of peaks of recent months. It has failed to do so and broke lower again on Friday and has further short-term weakness in prospect.



The dollar has broken down from its uptrend, but the break thus far remains marginal. Action in the dollar suggests that it may be forming a top area following its substantial rally from early December through mid-late February. If true this augers well for gold which generally has the wind at its back due to global money supply expansion.



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[Royal Canin Feline 32]

Silver did make a little further progress following the last update, but the going was heavy as it battled resistance approaching its December and January highs, and the gains were incremental. With the Goldman Sachs bombshell on Friday, buyers vanished and the price plunged to initiate a probable reactive phase.

Silver had shown recent strength relative to gold, but is burdened with heavy overhanging supply approaching its highs, which gold of course isn't, so when things start looking rough players quickly head for the exits. This situation will only end when silver succeeds in breaking above its 2008 highs at about $21.


On its 6-month chart we can see that although silver did succeed in breaking above the red downtrend line shown, it was still unable to break the run of lower highs by rising above its January highs, before caving in again, this time courtesy of the illustrious Goldman Sachs. This of course marks the start of a probable reactive phase, and although this chart certainly looks like a lot less inspiring than the one for gold, it is thought that silver is unlikely to react as far as many may expect, partly due to the fact that it is likely to be "rescued" by gold as it turns up again. A likely downside target therefore is the $16.50 - $16.75 area near to its bullishly aligned moving averages and a support level. The short-term reaction scenarios for both gold and silver should synchronize with the fallout reaction anticipated in the broad market as a result of the impact of the Goldman Sachs scandal, as set out in the article on the site on this subject.



The 3-year chart is interesting as it shows the origin of the resistance that has dogged silver for the past 6-months and prevented it from making any serious headway. This resistance arises from the trapped buyers in the $16 - $21 area in the first half of 2008, who are trying to get out even. Once silver succeeds in absorbing all of this selling, it will then be free to break out to new highs and advance with much more vigor, as it will be unimpeded.



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