Tuesday, April 7, 2009

Gold and Silver under Pressure

In late January I took a look at the prospects for Gold and Silver. I had mentioned how resistance for GLD at $92 marked a convergence of declining and horizontal supply levels and had the potential to be a tough egg to crack. In the end, GLD found it relatively easy to break through without the need to consolidate, reaching an eventual high of $98.99.

However, since the high it has run into a little trouble.

The rising support marked from January was breached in early March. Gold further laboured to hold horizontal support around $88. Yesterday it cracked and broke the latter price and now looks destined to test $78.85. Gold Bugs will continue to advocate for a break of $1,000/oz ($100 for GLD) but with the depressed nature of commodity prices, not to mention the struggles in other precious metals, it's hard to see this break happening anytime soon. Add to the mix a bottom in commodity prices occurs after bottom in stock prices - and we are still waiting for the latter - it doesn't look good for gold in the near term.

Having said that, a protracted sideways range for GLD with support around $66 ($660/oz) doesn't seem unreasonable. However, I have made a call for a push to $78.85 with a stop on a return above $88.

Where I felt there was room for maneuver was in Silver prices (SLV). Silver handily reached August / September reaction highs following its January breakout. But has since run into the dual problem of a failed breakout (of August highs) and a break below its 50-day MA. It's very close to the former resistance line which marked the January breakout but is perhaps more likely to reach the double bottom neckline around $10.67.

Silver looks to have more long term support to work with than Gold. The $8.45-$10.65 range should be well defended but we may yet not have seen the bottom for the metal.

When the speculative fervor declines (for Gold in particular) then might be the time to start buying some upcoming inflation protection. For now it's sit and wait for the stock and commodity bottoms to complete.

Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, market alerts, and stock charts website