Gold and Silver — At critical support

01 March 2013

Gold and silver are at critical multi-month support. Attached below are the 3-Year Weekly charts for both the gold and silver spot price. As can be seen from the charts, gold is near the critical support band of 1540-1560 per ounce, whilst silver is near the critical support band of 27-28 per ounce.



If this important multi-month supports for gold and silver are broken, and price trades below it for more than a couple of weeks, I will expect more downside, more volatility, and a much broader trading range. I will also expect gold to eventually test the 1000-1300 range within a year in such a scenario.

Price action near the support level has been weak and unreadable. In the past 11 years since the secular bull market began in early 2002, I have not seen critical support being tested so many times (this is the fourth time since 2011) and the rebound so moribund. Currently, I am prescribing at least a 50% chance that this crucial support will break, and stay broken.

In light of the dismal price action near such an important support level, let us revisit the secular bull market. Attached are the 12-Year Monthly charts for spot gold and silver.

The secular bull began in 2002. Since then, I have identified a repeating sequence of 6-9 month bull phases, followed by 15-18 month consolidation phases.



This pattern was interrupted in 2008 when the gold and silver market plunged along with the stock market and broke support so decisively that it looked as if the secular bull was over.

However, gold and silver rebounded sharply even before stocks did. The precious metals subsequently overcame the old highs established in early 2008 and proceeded on a tremendous upswing that saw the price of gold reach slightly over $1900 an ounce, and silver very near $50 an ounce.

The incredible cyclical bull phase from 2009 to the 3rd Quarter of 2011 drew in many bulls from both the institutional as well as retail side. These bulls are now bailing out in frustration.

However, the consolidation phase since 3rd Quarter of 2011 is thus far still consistent with my previous observed pattern of gold and silver enduring up to 18 months of consolidation before embarking on a renewed uptrend.

Despite this, the dismal price action near such crucial support level makes me doubt whether support can hold. Patterns are ultimately meant to be broken. Maybe this time, the old pattern will break.

Attached are 3-Year Weekly charts of the GDX, GDXJ and SIL — the standard ETFs for gold miners, junior gold miners, and silver miners respectively.




The miners have significantly underperformed the metals since the consolidation phase began in 2011.

This is due to ETF cannibalization as well as deteriorating fundamentals of many mining companies. The inflationary pressures which should in theory lead to a rising price of gold are instead showing up more aggressively in the cost of production. The cost of extracting gold from the ground has shot up in recent years and margins of mining companies have been significantly eroded.

Many mining companies also have to content with bureaucratic red tape and operate in politically hostile environments where government policy repeatedly sabotages mining projects.

As such, I expect the underperformance of mining stocks to continue, and for the underperformance to be exacerbated should the broader stock market correct significantly from the current lofty levels.