Friday, March 02, 2007

Keep a Sharp Eye Next Week, and Buy Silver at 1250 or 1230 and Gold at 638 or 634

On last Friday I wrote that the Dow had made the first part of a key reversal -- a break into new higher territory with a lower close for the week -- and so could be expected to drop. I wasn't looking for what happened. The Dow had its worst day since September 2001, after the 9/11 "attacks". The S&P500 sank below the psychologically important 1,400 level. Demoralisation is everywhere, and the stench of death. Were I the Nice Government Men (which I clearly am not, neither am I kin to them) of the Plunge Protection Team I would be working next week like an electric slave to get that Dow up. Ergo, look for a rally next week, anaemic though it be. A rally of some sort is likely, even as high as the previous high, but this is the shuddering of a corpse, not the breathing in of new life. Sell stocks for silver & gold.

And if stocks suffered this week with a 533 point drop, what about silver, dropping 12%? Or gold, down $41.60 or 6.1%? I warned y'all last week that a correction was coming, although I didn't expect one this big. What caused it to snowball so?

First off, it's a large correction but doesn't fall outside usual boundaries, it just fell faster than normal. In four days silver fell from the top of its trading channel to the bottom. Klunk. Today. If gold had done the same it would be trading around 612 today. But my point is that markets travel from top to bottom & bottom to top of trading channels. No news there. So what hit silver & gold?

In a word, the yen carry trade is unwinding. The geniuses of the Japanese central bank, the Bank of Japan, have been keeping the yen artificially low with interest rates at or near zero for a long time. Back up the truck and get a free load of money! The BoJ didn't have to offer that twice to hedge funds who have both the morality & ruthlessness of a great white shark. Borrow yen and get free money, take proceeds and buy stocks or gold or silver or commodities and ride the wave to Richville. What one event could sour this beautiful picture? The yen rising against the dollar.And today the yen hit its highest mark in 11 weeks against the dollar, on top of the panic that began in Shanghai on Wednesday. So terrified yen-carry-trade players, caught between a rising yen (which they owe) and falling gold (which they own) sell silver & gold & buy yen as fast as they can.

At these levels SILVER and GOLD should begin tempting buyers. Below the bottom of silver's trading channel lies its 200 day moving average at 1229, which should stop any further falls, IF silver wants to fall further still. Gold might fall as low as 634, another 10 bucks, but could just as well stop here. This correction could last as long as six weeks, but hark! The lows usually come early in the correction, so if we haven't seen them already, they ought to come on Monday or Tuesday next week.

The Gold/Silver Ratio rose. The 200 DMA stands above it at 51.13, the top channel line about 54.6. If the ratio reaches either of those points, I would swap more gold for silver. However, that 200 DMA is as high as I think it's likely to move.

Now before y'all chew your fingernails up to your elbows, think! Volatility is normal in silver; if you can't stand the heat, stay out of the kitchen. Also, stand back and look at the primary trend, the multi decade trend: for silver and gold that trend is up, up, up.

A rational person expects corrections, and uses them as opportunities to add to long positions. Look for metals to settle next week and begin to rise. If this correction follows the pattern of the other big ones in this bull market, the worst damage is done in the first week or so. That makes it the best time to buy. Keep a sharp eye next week, and buy silver at 1250 or 1230 and gold at 638 or 634.

Argentum et aurum comparenda sunt --
-- Gold and silver must be bought.

- Franklin Sanders, The Moneychanger

"Buy Silver and Gold Coins at the Best Prices"

To avoid confusion, please remember that the comments above have a very short time horizon. Always invest with the primary trend. Gold's primary trend is up, targeting at least $1,250.00; silver's primary is up targeting 16:1 gold/silver ratio or $78.13; stocks' primary trend is down, targeting Dow under 2,900 and worth only one ounce of gold; US$ or US$-denominated assets, primary trend down; real estate in a bubble, primary trend way down.