Just under 2 weeks ago we wrote in our weekly newsletter:
The prices of gold and silver are almost boring at the moment with both trading in very narrow ranges particularly in NZ dollars…. However, we think this boring price action bodes well for the metals. The fact the metals are just drifting sideways is potentially a good thing. They are building a base of support for further movements….
You can see in the charts below for both metals that they are trending down in an ever narrower wedge for gold and a giant “pennant” formation for silver. At some point they will have to break out of these ranges. Ben Davies in an article we reference below, also referred to this and said he favours the odds of a movement to the upside.
It appears those breakouts have now occurred, well especially in NZD silver. Cast your eye over the charts for each metal below.
Silver does indeed appear to have poked it’s head above the downtrend line and this generally means it’s heading higher. Of course there is always the chance of a “head fake”.
There’s a couple of points to note from the chart. We are now well above the 50 day moving average (blue line) for the first time since March, which is a positive. We’re also just touching the 200 day moving average, which potentially is why we might see the price turn down from here in the short term.
The RSI indicator (top of the chart) is showing a reading well above 70 which is generally regarded as an indicator of being overbought. This “overboughtness”, to create a word, can be negated by the price falling or by trading sideways for a period.
Now looking at the Moving Average Convergence Divergence (MACD) – see the bottom of the chart. It is an indicator of which way the market is trending. We can see it is now positive (above 0), indicating the trend is possibly heading up and the bottom may be in.
In the short term, if we were forced to guess we’d say the NZD silver price could return to test the 50 day MA (blue line) at around $35. This also happens to be the top of the range that NZD silver has been trading in for close on 2 months. Often previous “resistance” becomes “support” so $35 would be a nice round number, as well as the price, that until last week, silver was having trouble breaching.
In the medium term, we will need to see a breakout above the 200 day moving average and even to get above about $39 (green horizontal line on the chart) to really be off to the races.
An important point is that the duration of a trading range from where a price breakout occurs will provide an indication of the strength of the breakout. Or put another way, the longer the trading range the more significant the break. And silver had been in a narrow trading range for 2 months until just over a week ago.
To be honest we prefer to buy when the price is bouncing along the support levels lower than where we are currently. We’ve been pointing out these out over the past couple of months, but we know human nature makes it hard to buy here for many people.
But in terms of the current price, as always it depends on whether you have a position or not. If not, maybe grab a slice but keep some cash reserves in case of a dip back down.
On this very point we made reference to an article last Friday to our daily alert readers, which highlighted a strategy for silver given the rapid move in price that had occurred over a few days.
We think it bears repeating, in particular the part we’ve emphasised ourselves…(do realise they are talking about US prices here not NZ prices though so we’ve added what we think are some relevant NZ prices for you in brackets).
“It’s normal for charts to come back down and re-test their breakout levels. In that case, patient traders can look to buy silver on a move back down near $28.30 [say $35.50NZ] or so. But strong breakouts like this – the kind that kick off important intermediate-term uptrends – usually don’t make it easy for late-coming traders to get in.
Instead of pulling back, charts with strong breakouts simply waffle back and forth around the new resistance level for a couple days. Then they explode higher again… leaving patient traders in the dust.
It makes sense to nibble on a little silver on even just a small pullback over the next few days. There’s more than $3 per ounce [or about $4NZ] in upside potential. And there’s about half of that in downside risk if silver comes back to retest its breakout level. So the risk versus reward setup is still favorable. And buying a little silver here – even after such a fast run higher – can still pay off well.
But hold back some ammunition just in case silver does retest the $28.30 [say $35.50NZ] price level. If that happens, consider it a gift from the market gods… and use it to take a full position in the metal. It may turn out to be your last chance to buy silver below $29 [below $35NZ] for a long, long time.”
For the past few days we have seen exactly what was referred to above. Prices waffling around these higher resistance levels. As always psychology is key, it’s easy to be left behind waiting for the perfect time to buy, so we think the advice set out in the above mentioned article makes sense.
As we mentioned silver has been really flying but gold hasn’t exactly been asleep. Up from NZ$2020 to NZ$2080 per oz over the past week. Technically it’s chart is not so advanced as silver’s. Perhaps not surprising given silver topped out in April of last year and gold not until November.
The RSI is approaching overbought levels but not quite there yet.
Unlike NZD silver, NZD gold has yet to break out above the downtrend line, although it’s getting close. The nice round number of $2100 seems to be an important marker on the chart as cross this line and the price will have broken above the downtrend in place since November 2011.
There’s probably not too much to add to what we wrote above for silver really. We should get a dip down in the short term but will that occur from here or maybe rather from close to the $2100 level instead?
Like silver the NZD gold price currently is still much down on previous highs and in the long run likely to make a decent entry point.
Same strategy applies perhaps? Get some but keep some monopoly money in reserve.
Who knows why both gold and silver have rallied so hard over the past week. With Bernanke’s speech coming on Friday many would argue the precious metals are pointing to some sort of announcement that more printing is on its way. But we don’t really care.
As we pointed out to our daily alert subscribers on Friday, Jim Sinclair made some interesting comments on the news in the Wall Street Journal overnight Thursday that Mitt Romney has said he would not reappoint Bernanke if he wins the US election race…
“The current pressure on gold shares by hedgies is because Romney says, if elected, he will fire Bernanke and will not want to see QE 3.
Now what impact does that have to have on Bernanke? I would say he now really wants to see Obama elected. That speaks very well for huge stimulus fast and an end of the standoff between the Federal Reserve and the US legislative.”
This makes sense, however we think trying to time your buying by second guessing what Bernanke and his statist central planning cronies around the world say and do is not the best method to use. Rather ignore the media noise, focus on the “price action” (i.e. look at the charts) and simply buy the dips.
Our guess is the US dollar gold and silver price will have the greater impact in the medium term on the price for both metals here in New Zealand, than the USD/NZD foreign exchange cross rate.
By this we mean the kiwi dollar could remain strong but gold and silver will likely keep rising in the long run and we NZers will continue to feel most, or at least some, of the benefit of any USD price gains.
As always these are just our own musings, think and decide for yourself. Then leave a comment below as to what you think is in store for the local gold and silver prices.