Friday, August 08, 2008

How Low Might the Silver and Gold Price Drop?

Gold Price Close Today : 857.80
Gold Price Close August 1st : 909.00
Change: -51.20 or -5.6%

Silver Price Close Today : 15.303
Silver Price Close August 1st : 17.481
Change: -217.80 cents or -12.5%

US Dollar Index Today: 75.850
US Dollar Index August 1st: 73.390
Change: 2.460 or 3.4%

Rough week for metals! What? The dollar's up? Are the Heads right,is this the end of Commodity Demand and return of the Dollar (think "Freddy Kruger")? I'm just a natural born fool, an ignorant ridge-runner, but the way I figure it, they're right 50% of the time, and I can do that well without breaking a sweat.

So here's my try: Big news this week is the US DOLLAR INDEX breaking out to its highest price since March this year. Freddy -- whoops, make that "the dollar index" -- climbed over its June high (74.31) & scattered the shorts. As they fled, the dollar jumped to 75.85, up nearly 250 basis points for the week.

But put this in perspective -- back in 2001 the Dollar Index stood at 120, and even in 2006 its low was only 82. All this has the smell of a job by the Nice Government Men, not only because it has no basis in fundamental economics, but also because the technicals don't support it. MACD is at the top of the range, and the RSI is way over bought. Of course, markets can always wax more overbought, but this one can't last long.

Hey -- wait a minute! I think we've been snookered. If the high dollar is crushing silver and gold so badly, then how come back in March when the dollar was trading at this same price Gold was over $1,000 and silver banging on $21? I hate to break the news to y'all, but markets, and the big, tough cigar-smoking men who trade them, think like 12 year old teeny-bopper girls. They flop from one fashion to the other with no reason much at all. Hence the "reason of the day" for silver ad gold and oil sinking is either "end of commodity demand" or "rising dollar." How about the rational explanation, that commodity markets, led by oil, just swung their pendulum too hard and now must swing backwards in correction?

STOCKS rose today, but anyone who bothers to look at a chart reaching back more than 4 weeks won't be too impressed. An enormous head and shoulders top hangs above the market (5/07 - 12/07), and the big rally today took it nearer its 200 DMA at -- 12,510.95. This rally will be over by end-August.

DOW IN GOLD DOLLARS hints that this stock rally might carry the DiG$ to G$415 (20.076 oz).

The GOLD/SILVER RATIO reached 56 today, but on the chart that's no big deal. It merely revisited its 200 Day Moving Average, but remains in the megaphone pattern that foretells a breakdown. A spike in the ratio always coincides with silver and gold lows within days, if not on the very day.

The SILVER PRICE has hit and pierced its 300 DMA (now 1551). This has happened only twice since September 2005, the other time in August 2007. It was followed by an enormous price rise. August has seen significant silver lows in 2002, 2003, 2004, 2005, and 2007, with a late July low in 2006. No news there, it merely offers a favourable time to buy. In other words, August lows help confirm bottoms.

How low might the silver price drop? Remember when I talk about targets they are possibilities, not certainties. If silver were to drop to the longest term uptrend line, it might drop as low as 1400. However, $14.80 - $15 offers powerful support, as does $15.50. The spike upward in the GOLD/SILVER RATIO supports the view that we are now seeing a bottom. [Swap gold for silver now.]

GOLD'S future is cloudy, too. It's not at all clear whether $850 will be broken before the climb resumes. The one thing you must be clear on is that the bull market has not ended. The market proverb holds that the bull likes to shake off all riders. Now wouldn't a close down below US$850 just do that? Every croaker in the swamp would crawl out to RIVET to the night sky that silver & gold are dead & the day of doom deflation has begun.

So IF [remember, "IF"] gold were to drop below $850, where might it stop? Well, in November 2007 a triangle formed with an apex of $803. Markets often return to the apex of triangles from which they broke out. Gold has a nest of support from $832.50 to $775.50, so anywhere in there might prove a backstop. Gold has already broken its 200 DMA (now $887.74) but the 300 DMA is now at $820.70.

All things considered, if gold doesn't hold at $846, then it might fall to $820. However, remember that y'all are watching a paroxysm, a spasm, & paroxysms are fast events quickly ended. The low for silver and gold can't be further away than next Wednesday, if we didn't see them today. Another finger pointing at a bottom is non-confirmation from platinum & palladium today, which did not go for new lows.

Y'all can panic if you want, but me, I'm still buying silver and gold, and more still. One sign that forces me to buy is the rising premiums on physical silver and gold. Physical demand is HUGE and we never see these premiums & volumes unless metals are near bottoms.

Thank you all for your many cards, e-mails, & prayers on behalf of my wife, Susan. The supplements she is taking are really helping her symptoms, and, we hope, strengthening her heart for surgery on 26 August. Thank you for your generous kindness, and please keep on praying for her!

Buy! Buy! And again I say, BUY!

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 $3,130.00; silver's primary is up targeting 16:1 gold/silver ratio or $195.66; stocks' primary trend is down, targeting Dow under 2,900 and worth only one ounce of gold; US$ or US$-denominated assets, primary trend down; real estate in a bubble, primary trend way down.