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XMFSinchiruna (27.97)

The Near-Term Outlook for Gold and Silver

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33

May 18, 2010 – Comments (23) | RELATED TICKERS: AZK , GDXJ , SIL

When investor confidence in the state of sovereign debt throughout old guard economies remains this tenuous and volatile, and for as long as the JP Morgan's of the world are able to keep their ponzified hold on the bullion market limping along on whistleblown crutches, forecasting the near-term movements in gold and silver will remain extremely difficult to do with any degree of certainty. Sometimes, the technical picture is so clear as to overcome these challenges and permit a fairly reliable call in one direction or the other, but even then the success of those forecasts relies upon the absence of trajectory-altering events that are truly impossible to telegraph. In short, forecasting near-term movements remains a crap shoot, and not one that I consider worthy of betting any significant amount of real capital on. For that reason, I continue to remain long and strong with more than 80% of my precious metals allocation at any given time, and engage in opportunistic profit-taking and (hopefully) subsequent repurchasing at slightly reduced costs. Any and all investors who do not feel as though they have their finger on the pulse of the precious metals market are encouraged to solely partake in the buy-and-hold strategy, but since not all investors are yet fully invested to their desired allocations, I continue to provide my outlook at key junctures alongside qualifying statements like these regarding the inherent uncertainty therein. My aim in doing this continues to be trying to help Fools seeking additional exposure to find their best entry points.

After selling 10% of my pm exposure above $1,220 in December 2009, I began buying positions back just over $1,100 and accelerated that effort near the $1,070 level ... which ended up being extremely close to the last near-term bottom. This time around, I was far less concerned about the prospects for any meaningful correction than I had been in December, but the RSI was a little too inflated for its own good so early in the breakout. Ever the cautious Fool, I sold small portions of a few positions into strength above $1,240. So, where to begin nibbling once more?

Yesterday and today's weakness in USD gold is a minor setback, meaning that technically some work must be done in order to rescusitate the recent break-out. I agree with JSMineset's "Trader Dan" Norcini that $1,215 is key first support that could lead to an uninterrupted move higher if sustained. The next few days will be key. If $1,215 fails to hold, then this Fool will begin slowly re-entering positions near the $1,190 mark, and then turn more aggressive with that buying if we were to revert back to the $1,160 area. I think $1,150 will not be broken in this very minor down-move, but as always I concede the possibility for worst-case scenario type dips at any given point in time.

At present, the absolute worst case scenario for gold prices remains the $1,000 mark, which was never properly re-tested following our last break-out above the level last Fall. However, and this is important, I think the likelihood that prices could dip that low has been reduced down to about a 2% chance ... it is truly the basement floor now of a worst case scenario for gold prices. I would give $1,050 about a 5% chance of coming into play, and $1,100 about a 15% chance (still highly, highly unlikely!)

At any point throughout the waiting process, I am prepared to buy back in at less than an ideal spread should the charts (or the headlines) turn notably more positive in a hurry. The most likely outcome of the game I am playing with a small sliver of my capital is that at some point I'll be left behind with a cash position that I would have preferred to have allocated to pms. I am ready to live with that outcome for the very small proportion of my allocation that I perform these games with. I advise any and all gold and silver investors to likewise limit their moving in and out of positions to precisely that portion of one's desired pm allocation that one can easily accept missing the rocket when one day it takes off unexpectedly. In a strong multi-year bull market trend like this one, and especially with a manipulated market still yet to unravel into a violent repricing event, we must accept that as a likely outcome. In the meantime, I find the guessing game quite fun. 

I hope these musings in near-term price moves are either entertaining, informative, or both ... and I hope that Foos will heed my caution by significantly limiting the proportion of one's pm allocation subject to such whimsical attempts to telegraph gold's near-term price movements.

My own personal confidence in my long-term targets of $2,000 gold and $50 silver has, meanwhile, grown from about 110% to 150%. :) With one more major, desperate spending spree by an old guard economy, I may be prepared to officially raise those targets. 

Fool on!

23 Comments – Post Your Own

#1) On May 18, 2010 at 10:15 AM, brickcityman (< 20) wrote:

Don't you get it man!?!?!?

 

Its all over...  I know that denial is part of the stages of grief but you need to join with me in the grieving process before you do any more harm to yourself!

 

;-)

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#2) On May 18, 2010 at 10:42 AM, XMFSinchiruna (27.97) wrote:

To Cramer's rarely deserved credit, he has been touting gold stocks for the past couple of years. :)

I found it even more bizarre to hear Kudlow last week calling gold the de facto reserve currency of the world.

I thought I was in an alternate financial universe for a second. :P

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#3) On May 18, 2010 at 6:26 PM, jesusfreakinco (29.12) wrote:

Sinchy,

Long and strong.  Ain't no one prying my PM shares from my hands...

Scary days ahead.  I'll add some advice to fools - stock some food, necessities, and ammo...  It could get ugly real quick.

Several good articles on www.zerohedge.com discussing today's move by Germany and significant drop in the Euro.  We could see a full on Euro rout which may very well drag the USD with it.

JFC

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#4) On May 19, 2010 at 1:18 AM, RonChapmanJr (97.20) wrote:

You didn't really talk about the near term for silver.  I've heard $16 is as low as it can go.

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#5) On May 19, 2010 at 1:50 AM, uclayoda87 (29.51) wrote:

TMFSinchiruna

Do you know if JPM still has its large short position on silver?  The video that reviewed this is about a year old and I haven't seen any update.

JP Morgan fails to manipulate Silver price last month... sorry - better luck next time

The recently released Meltup video has already had a high viewer count, which I suspect may further increase the interest in PM and would likely buffer any sell off periods.  Going forward, those scared away from the equity markets will have to decide on cash (short-term safe, long term certain failure), bonds (short-term safe, long term worse than cash), commodities (long term winner if you can get in after a substantial sell off) or PM/miners (short-term fluctuations but the general trend higher).  I suspect that most TV pundits will be talking up the US bonds as they sell these to move quietly into PM.

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#6) On May 19, 2010 at 2:15 AM, ralphmachio (23.67) wrote:

2%? I don't know for sure, but I'd say we'll see 600-800$ gold in less than a year. Just my guess. The dollar may be the popularly perceived flight to safety first. (People are dumb) 

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#7) On May 19, 2010 at 9:40 AM, XMFSinchiruna (27.97) wrote:

RonChapmanJr

You're right, I didn't offer price outlooks for silver. I'm so used to constructing those correlative silver prices for gold price scenarios in my head that I forgot to write it. :)

As a rough rule of thumb, silver usually experiences about 1.5X to 2X the percentage drop of gold on during any pullback event. If a pullback event is very short-lived, that rule of thumb is less appropriate. This is the slingshot effect in action. The slingshot stretched between gold and silver never changes, it's always there ... and you will often hear me speak about gold and silver but frame the discussion in terms of the leader of the currency pack: gold.

Incidentally, that's why the long-term silver chart looks so strange compared to that of gold ... because silver prices answer to the slingshot effect with gold before they respond even to their own technical indicators, support levels, etc. That's not to say that support levels on the silver chart are meaningless during a pullback ... they are not. It's just that the array of factors affecting gold trump them all at will.

To get your corresponding silver price expectations for the gold price scenarios discussed above, calculate both 1.5X and 2X the percentage decline from the nominal high implied by each gold price scenario, and that will yield an expected price range for silver. Again, that works best over time, so if the pullback only lasts a few days or weeks, that it could easily not adhere to those expectations (i.e. drop less than 1.5X the % decline for gold and then turn relatively stronger, lowering the gold:silver ratio immediately prior to the next breakout).

For the $1,150 gold price scenario discussed above, that would imply a silver price range between $16.70 and $17.40. But here's the thing, silver's relative technical weakness on the charts relative to gold always presents the possibility of even more pronounced decline relative to gold, and we have witnessed the market's ability to rationalize extreme dislocations in the gold:silver ratio that hold no place in rational asset pricing. Both markets are manipulated, but silver more easily so, and that fact is never lost on this Fool. Moreover, we have $16 on the silver chart corresponding with near-$1,050 gold as recently as early February 2010. For all of those reasons, I do believe that $16 silver represents a reasonable expectation for a low to this pullback if my $1,150 scenario plays out. It's not a guaranteed low, as for that we would have to go to a corresponding silver price for $1,000 gold as discussed in the original post, but it is a low that I think hold's a strong likelihood of holding the line during this unusual, right-after-the-breakout pullback that we're presently experiencing.

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#8) On May 19, 2010 at 9:40 AM, XMFSinchiruna (27.97) wrote:

ralphmachio

I would place a wager against that call any day. :)

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#9) On May 19, 2010 at 11:49 AM, kstarich (30.62) wrote:

Sinch

Metals starting May 27 then June 6-13 will be an amazing jump up through price resistance...you will be so happy...jumping up and down....walking on clouds type of happy!!!!

Regards,

Kstar

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#10) On May 19, 2010 at 12:15 PM, silverminer (31.38) wrote:

BTW, Today's sell-off in pm mining equities is completely out of whack with the price moves in bullion. Today is a buying opportunity, albeit a cautious one under the circumstances.

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#11) On May 19, 2010 at 1:22 PM, mhy729 (34.10) wrote:

Took a small bite in SIL and GDXJ today.  Been looking for an opportunity to establish a position, and today looked to be a pretty good one.  I am quite confident in the long-term upward trajectories for these.  Indeed if they go lower still I will add some more to my stake.

Thanks for the wonderful posts Sinch!  I greatly appreciate your generous sharing of knowledge with us.

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#12) On May 19, 2010 at 2:50 PM, silverminer (31.38) wrote:

I did some buying today as well. The mining shares were just too severely punished to ignore. :)

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#13) On May 20, 2010 at 11:22 AM, kadosas (< 20) wrote:

Silverminer:

And what were those, if I might ask? I´m pretty keen on SLW, but don´t you think it can/will go lower?

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#14) On May 20, 2010 at 11:51 AM, silverminer (31.38) wrote:

kadosas

For the record: silverminer = TMFSinchiruna for those who may not know. :)

I am not permitted to discuss specific trades that I make within a required grace period. Sorry. I can say that I don't care one iota about nailing the absolute bottom ... I have a process in place. I set my target price to begin buying activity, and another target below that where I will accelerate buying activity. Because mining equities so ridiculously outpaced the drop in bullion prices over the past few days, I began nibbling on the hardest hit juniors even just slightly before hitting my target price. I continue to proceed in gradual nibbling mode.

I have small transaction fees, so I am not averse to making multiple small buys as opposed to single larger buys.

Everything I bought today had a market cap of less than $1B, with one exception.

Some coal stocks are also beginning to look attractive, as are the equipment manufacturers.

Fool on.

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#15) On May 20, 2010 at 12:07 PM, 100ozRound (29.70) wrote:

I'm thinking about getting in on BUCY.  It's starting to look like an incredible bargain!

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#16) On May 21, 2010 at 12:50 AM, mhy729 (34.10) wrote:

Wow...crazy day.  Interesting to see that at market close we have:

GLD down 0.68%

CEF down 1.71%

PHYS up 2.60%

Can anybody explain why PHYS has actually gone up when CEF and GLD are down?

Miners, of course, were hit down considerably, with GDX down 4.86%.  Gold seems to have found support at 1170.  If this is just the beginning in stocks going further down, can we expect the miners to go down with them even if gold is able to hold?

And in the news:

Global economy in much better shape than before: Geithner

http://www.moneycontrol.com/news/economy/global-economymuch-better-shape-than-before-geithner_459358.html

US, Britain and Germany to discuss debt crisis

http://www.google.com/hostednews/ap/article/ALeqM5i00EWgNgboeImdZZicC4iRtZuCigD9FQUMPG0

What is it...better shape or debt crisis?  Maybe it's both and "deficits don't matter"?

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#17) On May 23, 2010 at 8:47 AM, silvermind (< 20) wrote:

Hey Christopher,

Do you see anything even close to the November 2008 SLW bargain?  I bought a bit of it at around $5.

 Bill   

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#18) On May 24, 2010 at 7:05 AM, XMFSinchiruna (27.97) wrote:

100ozRound

Yep ... I highlighted BUCY as a compelling value on Thursday when the stock struck as low as $46. We'll see how that call performs over time, as I also added the pick to both of my CAPS portfolios.

mhy729

CEF and PHYS are both closed-end funds. They will create shares to add more bullion periodically to keep up with demand, but they do not do so on a constant basis the way an ETF like GLD does. As such, you can develop a hefty spread between net asset value and shares prices within a high-demand environment.

CEF just recently performed a (non-dilutive) share offering at about $14.80 to purchase more bullion, which knocked out a chunk of CEF's premium.  The underwriters could well be selling their shares, which can cause a near-term relative drag, but as I've mentioned before every past share sale that CEF has ever conducted has been a buying opportunity. The company knows the bullion market well, and times its bullion purchases to coincide with indications of looming breakouts.

PHYS is new and is just all the rage right now, so it will likely continue to carry a large premium.

verymildbill

I can virtually guarantee that we'll never see bargains like that again in the best known names in gold and silver through the remainder of this multi-year bull market. Although volatility will only increase as the bull marches on, another episode of unimagineable weakness like 2008 is no longer in the cards ... as the cat has since leapt out of the bag with respect to the structural state of fiat currencies and the resulting specter of sovereign debt crises.

However, we do even today, right now, have plenty of bargains out there that represent very similar opportunities to SLW below $5. They are simply in smaller companies with names that may not yet be as recognizeable. 100% of my buying during the present sell-off has been in micro-cap juniors. They offer less liquidity, and certainly more volatility, and each one must be fully vetted to see whether they fit within one's own risk tolerance formula, but there are truly some unbelieveable bargains remaining among the juniors. 

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#19) On May 24, 2010 at 11:57 AM, kstarich (30.62) wrote:

Sinch, silverminer, Goldbug, and all other monikers

Bucy an incredible buy!

Same with Joyg.

Are you ready???  I will make you some tungston filled bars (for weights) to tie to your feet....by mid June you'll be so happy I'm afraid you might not come back down to earth!

Regards,

Kstar

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#20) On May 24, 2010 at 7:24 PM, silvermind (< 20) wrote:

Silverminer,

 Thanks for the reply.  I have looked at your TMF portfolio (CAPS) and don't see any stocks for less than $2 per share.  Can you help me identify those microcaps?

 Bill  

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#21) On May 24, 2010 at 7:32 PM, silvermind (< 20) wrote:

kstarich,

what factors do you see making bucy an incredible buy? 

Bill  

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#22) On May 26, 2010 at 7:02 AM, XMFSinchiruna (27.97) wrote:

verymildbill

Sure ... look to the list of holdings of the SIL ETF. That is a seriously prospective cast of characters. If you can't decide, or prefer to spread your risk, try the ETF.

BUCY is tops in its business, and demand for mining equipment is not going to wane anytime soon ... even with a deceleration of China's growth curve.

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#23) On May 28, 2010 at 2:10 AM, silvermind (< 20) wrote:

silverminer,

 I added some SIL today.  I was thinking about some gprlf tomorrow morning.  I need some serious growth.  

 Bill   

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