Gold and silver decisively break multi-year support

16 April 2013

In a previous blog post last month, I ascribed a greater than 50% chance that gold and silver will break down below long term support. This prediction has come to pass.

Take a look at the short and intermediate term charts of gold and silver respectively.

One year (daily) and Three year (weekly) charts of Gold

golddaily16april2013

goldweekly16april2013

One year (daily) and Three year (weekly) charts of Silver

silverdaily16april2013

silverweekly16april2013

As can be seen from the charts, both gold and silver have decisively broken multi-year support.

Usually, such a strong move downwards will lead to a quick bounce in the near term. However, I expect such a bounce to be short-lived. I am still holding on to the opinion that support will remain broken over the coming months, even if a short-term rally occurs.

Outlook for gold and silver over the next several months

In my blog post describing the behaviour of gold and silver over the past 10 years, I said that the metals tend to trade in cycles, with a 6-9 month upswing followed by a 15-18 month consolidation phase.

In the secular bull market is still intact — something which is highly questionable — I expect this trend should continue. We could see an extended 20-24 month consolidation phase for both metals (to shake out the numerous precious metal bulls who have been drawn in during the past few years), followed by another rally. That would mean the current cyclical bear market in both metals may have another few months to go at least.

If the secular bull market is over, however, then prices should slowly drift downwards and reach an eventual target of gold in the $700-$1000 range, and silver in the $10-$15 range.

This scenario will cause massive, widespread bankruptcies in the gold and silver mining sector because currently, the average cost of extracting one ounce of gold from the ground is around $1100-$1200, while the average cost of extracting one ounce of silver from the ground is near to $20.

These costs are expected to rise even further in the years ahead because of rising input costs and factor costs of production, as well as heightened government regulation or intervention in the mining industry. The outlook therefore for mining stocks is bleak indeed.

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About E-Jay Ng