Are Precious Metals About to Collapse?

[theo]

An interesting read. . .

http://www.kitco.com/ind/Summers/nov292010.html

By Graham Summers
Nov 29 2010 1:57PM

www.gainspainscapital.com



From mid-August to early November the markets have operated based on the “Bernanke put”: the idea that our esteemed Fed Chairman will do everything in his power to keep stock levels up.

Indeed, with QE lite going in full force and QE2 on the horizon, the markets became dominated by the “inflation trade” in which the US Dollar fell and every other asset (specifically stocks and commodities) rallied on a near tick-for-tick basis.



However, once the Fed finally DID announced QE 2 in early November stocks began to sell off. Part of this was “selling the fact,” but most of it had to do with a seismic shift occurring in the geo-political/ financial arena.

With several major countries now raising interest rates (Australia and China) or planning to halt their own QE/ Bailout efforts in the near future (the UK and EU), the Fed’s QE 2 program signaled that going forward, the Fed would be on its own regarding its re-flation efforts.

This, combined with increasing political pressure hitting the Fed at home and abroad (China has made it clear it will not tolerate US Dollar debasement), has resulted in a seismic shift taking place in the markets. It’s almost as though investors finally figured out that the Fed’s “free lunch” liquidity schemes will eventually come at a cost, whether it be a US Dollar collapse, trade wars with China, or more.

As a result of this, stocks began a sell off almost to the day that QE 2 was announced. They’ve since begun to trade in a wide range between 1,200 and 1,180 on the S&P 500.



As I write this, the market hasn’t been able to break below support at 1,180 convincingly, largely due to the fact that the Fed is juicing the market almost every day via QE lite and QE 2. On top of this, the majority of traders remain convinced that the Fed can prop this thing up no matter what.

By the same token, stocks can’t seem to break above 1,200 on the S&P 500 because the whole world knows that QE 2 is the equivalent of a “Hail Mary” pass and that the odds are high it will be end very badly (inflation, trade war with China, US Dollar collapse, etc). Consequently, traders are not able to rally enough enthusiasm to push the market higher even during the extremely light volume of Thanksgiving week.

One thing that COULD potentially override the “Bernanke Put” would be a major US Dollar rally. On that note I want to alert you to the fact the US Dollar looks to have broken out of its 6-month downward trading channel.



This move is of HUGE import as it could very easily kick the “inflation trade” off a cliff. As I’ve noted in previously essays, the US Dollar has been the carry trade of choice for many traders since the June ’10 top. And with US Dollar bearishness at record highs, ANY upward momentum in the greenback could accelerate rapidly as the shorts are forced to cover.

Can a US Dollar rally overcome the Bernanke put? We’ll find out this week. We have a total of six POMOs this week (two today and one every other day). So the Fed will literally be juicing the market by $6-9 billion EVERY day this week. If stocks can’t remain afloat in the environment and the US Dollar strength continues, then the markets are heading into some VERY DARK times in the near future.

The BIG question for those of us forecasting inflation in the near future is: how will this move affect the precious metals sector?

To be clear, I am extremely bullish on precious metals in the long-term. However, in the short-term, both Silver and Gold have been on an absolute tear in the last three months, rallying 48% and 13% respectively.

Now, no investment ever goes straight up or straight down. With that in mind I want to point out that Silver looks to have just put in a potential double top:



As you can see, the precious metal has met up against major resistance at $27.50 twice in the last month. Silver needs to make a quick turn around and break above this level soon, otherwise a correction to $25.50 is highly probable.

However, far more worrisome for the Silver bulls is the fact that it’s coming up against its multi-month trend-line.



As you can see, Silver has obeyed this line for most of this recent leg up. A break below this line here would signal a sizable correction, most likely to the $24-25 area.

But what about Gold?



Gold looks to be forming a clear Head and Shoulders pattern. In order for this pattern to be confirmed, we need to see the precious metal break below its neckline at $1325 per ounce. A breakdown there would forecast a correction to $1250 per ounce. This would fit in well with Gold’s current bull market as $1250 represents its most recent peak prior to this latest rally.



Does any of this indicate that the bull markets in Silver or Gold are over? Absolutely not. However, both precious metals have been on a tear and need to cool/ consolidate. No investment goes straight up or straight down. And right now, both Gold and Silver are primed for a pull-back.

If you enjoyed this article, swing by http://www.gainspainscapital.com/ for more of my insights and commentary.

Good Investing!

Graham Summers

[Pennysaved]

The thing is gold and silver have been going up even with the stronger dollar; it is more safe haven buying now.

Can you imagine what the prices will be when the focus is taken off of Europe and back onto the U.S. and the dollar begins to weaken?

[jasmatk]

Can you imagine what the prices will be when the focus is taken off of Europe and back onto the U.S. and the dollar begins to weaken?

I think that says it all

[Lemon Thrower]

if you go back to 2008, the stock and commodity markets tanked. there was a credit crucnch and funds were liquidating. they sold the baby with the bathwater. will that happen again? in retrospect, most look back and say that was a mistake. i think the dips in pms will be bought. sure, the market - all markets - could crash again. but i know what my pms are worth and ain't selling just because everyone else dont' know what they are worth.

in investing, you have to think through what might happen and what you will do if it does. if the market goes down to 2008 levels i'm not selling. if it goes down and it surprises you, the surprise may cause you to sell.

[sdmarasso]

If it goes down count it a blessing that you can buy more silver for cheap. If you're holding physical you shouldn't be in it for short gains anyway unless your a dealer or something of that nature.

[Ardent Listener]

My main concern is that the economy appears to be just stalling again after a weak "recovery" over the past year. I was reading the Cleveland Business Journal and many local companies are reporting the same. I wouldn't be surprised to see even more weakness after the Christmas shopping season. Then too, the sun spot prediction guy was on CNBC predicting much more deflation, the collapse of the DOW down to 5,000 and a major war in 2012. I would laugh him off, but then he was right about the housing collapse and the the start of this recession.

Yes, cheap PMs are always a buying opportunity. But if unemployment or under employment hits you too they won't do you any good.

[beauanderos]

Pessimism! Bah, humbug. This is why it's called "climbing the wall of worry."

[Heartkill]

If it goes down count it a blessing that you can buy more silver for cheap. If you're holding physical you shouldn't be in it for short gains anyway unless your a dealer or something of that nature.

Echoes my thoughts exactly. All I see is a buying opportunity.

[Tourney64]

Prices are going up in a stagnant world economy due to no faith in paper currency of any country. Silver and gold will once again become the world's currency.

[Lemon Thrower]

My main concern is that the economy appears to be just stalling again after a weak "recovery" over the past year.

consider that it could be stalling before another leg down, and this is as good as it gets.

the sun spot prediction guy was on CNBC predicting much more deflation, the collapse of the DOW down to 5,000 and a major war in 2012.

those are not remote possibilities imho. i'm not predicting them, just saying they are within the realm of possibility.

i think the economy will get worse, the equivalent of 208 or worse. that's akin to dow 5000 even if they don't let the dow drop.

deflation - yeah, there will be more debt that goes bad, but it will be masked by inflation. necessities will more than double in price so you will have inflation at the same time.

the core ideas that give me confidence are:
- govt will print money to avoid the tough choices
- real assets can be conjured out of thin air like money
- humans have used pms as money for millenia and nothing in current events is likely to make the things that make pms valuable to humans no longer valuabe.

[AGCoinHunter]

LT, where does copper fit into your PM/BM thoughts?

[neilgin1]

a punch above 30 on the board, suck in the technicians, it's a bull trap, and then trade down to support at 25.

if "they" have enough steam, they blow thru 25, which makes the market "look" bearish, and we test the next support level of 20-21, which will hold. i personally think 25 will hold, because there is too much strong money cascading into silver, PM's etc.

and its not only PM's strong money's cascading into, grains, meats, softs, the whole list.

as for me, i hold what i have, and buy more physical as my meager purse will allow. the real trade is to buy good land and woodlot, and hold. just my two mites.

[Lemon Thrower]

anything used in industry like copper is more volatile because from time to time you have fluctuations in industrial demand affecting its value. for example, there are rumors that some guy is trying to corner the london physical copper market, and questions about a supply shortage next year, although all of this presumes china keeps buying as much as they have recently - i don't know the answeres to those questions just know that they are different questions than what affect the value of pms. so i have a lot more confidence in gold at 1400 and silver at 29 holding their value than copper at 4. but i do have more confidence in copper than paper FRNs. copper will always have some value but more utilitarian than monetary.

none of this means copper wont go up - it very well could go up faster - just that it will go up mostly for different reasons.

[Ardent Listener]

Well here we go again. Lol. As long as I can my pay my bills I will wait this one out too and hold onto the metals I already got.

[Ardent Listener]

Well here we go again. Lol. As long as I can my pay my bills I will wait this one out too and hold onto the metals I already got.

Just to be clear, IMHO now is the time to start dollar cost averaging buying if you aren't already. The bottom is unknown but we can be relatively sure that this is not the new top. If you are not buying then try to hold long term to what you already got. We are in the "despair" phase on the long term chart which is only the start of the new up cycle. Remember when we go back into the euphoric stage to start to temper your buys and consider sales if you want to take some profits. Things are seldom as bad or as good as they may appear.

[Sheikh_yer_Bu'Tay]

a punch above 30 on the board, suck in the technicians, it's a bull trap, and then trade down to support at 25.

if "they" have enough steam, they blow thru 25, which makes the market "look" bearish, and we test the next support level of 20-21, which will hold. i personally think 25 will hold, because there is too much strong money cascading into silver, PM's etc.

and its not only PM's strong money's cascading into, grains, meats, softs, the whole list.

as for me, i hold what i have, and buy more physical as my meager purse will allow. the real trade is to buy good land and woodlot, and hold. just my two mites.

Ding, ding, ding!!! We have a winner!

Well said, Neil.

[Rodebaugh]

Neils post is over a year old and still rings true.......and the game goes on.

[beauanderos]

Jamie, long time no see... good to see you posting again!