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Are Gold and Silver Already Too High, or is the Rally Just Starting?

Based on the February 18th, 2011 Premium Update and following messages. Visit our archives for more gold & silver analysis.


 

In its latest Gold Demand Trends 2010 report, the World Gold Council said gold demand hit a decade high as jewelry buyers returned to the market after the previous year's near-absence and central banks became net buyers. Early indications this year suggest buying interest in main consumers India and China will stay firm. Gold is all aglitter for Chinese Investors as rising inflation and currency appreciation risks make the metal an attractive alternative, placing the country in a position to challenge India as the world's top gold consumer, according to the report.

As per the WGC forecasts, gold is set to remain strong in 2011. On the other hand, from the fundamental perspective, silver is also expected to witness highs from the current price levels as the demand stay firm. That is, precious metals exhibit an improved outlook in the foreseeable future.

The short term is a different matter, but the implications here are bullish as well. Let's have a look at the individual market moves for more details. We will start with the long-term chart for silver (charts courtesy by http://stockcharts.com.)

Silver

The very long-term chart for silver last week showed that the white metal has moved above previous highs and above previous target level. Thursday's closing price of $31.74 was more than 6% higher than where it opened the week.

This is very bullish price action but when compared to previous rallies, the implication is that even higher prices are likely to be seen. When we originally posted the above chart on our website, we believed that a higher target level is possible once this breakout is confirmed - and based on this week's price action it seems that it was in fact confirmed. There may be a slight pause seen soon as silver may have gotten a bit ahead of itself, but further rally towards the higher target levels will likely follow such a pause.

Several days of sideways price action may be seen due to the recent breakout. These should not be viewed as bearish for it is more likely to result in a stronger foundation for the rally to come.

Let's take a look at the SLV ETF for more details.

iShares Silver Trust

In last week's short-term SLV ETF chart, we clearly see the recent breakout above the level of the previous high. Silver moved even higher since then, so the outlook is even more optimistic. More than half of that move up took place after mid-week and volume levels have been relatively high. The volume level is a confirmation of the breakout indicating that the breakout will likely be validated. Volume levels this week so far provided us with a confirmation.

Higher price levels are probable in the short term although a period of sideways movement may be in the next several days.

Let's have an outlook on the corresponding situations in gold market.

Gold

The very long-term chart week continues to support a target level of $1,600 or even higher during this rally. This is a bit speculative on our part at this time and will move to be more probable once we see the 2010 highs taken out and the move verified.

SPDR Gold Trust Shares

In the short-term GLD ETF chart, we did not see any true bearish signals on Friday (when the above chart was originally posted), and we see very few of them today. There has been a decisive move above the rising resistance - namely, we've seen a short-term breakout. Volume levels have been somewhat average at the beginning of the really and have increased along with the price - also after the above-mentioned breakout - clearly a bullish situation.

From here a sizable rally could take place although it may be preceded by a short period of sideways movement. Another possibility is that a slight move below the resistance level could then be followed by several days of consolidation before prices again move higher. Both scenarios are bullish for the short term.

Overall, the outlook for gold is bullish for the short term. Quoting from the message which we sent out on 17th February, It seems that exiting these [long] positions today might still not be the best way to approach the market. Please note that besides mentioning target levels, we also wrote about waiting for a confirmation that the top is in before exiting the speculative long positions.

Overall, both gold and silver market technicals render bullish developments, ahead. To check the relative strength in market moves, let's have a look into the Silver:Gold ratio analysis.

SLV:GLD

We see a spiked high volume in this ratio as SLV ETF's volume was high compared to that of GLD ETF. This normally means that lower silver prices would be seen soon. The question in the mind of Investors following our analysis is whether the current rise in silver's price on high volume is actually a bearish sign - due to ratio's spike high volume.

The answer seems to be no because precisely of the aforementioned breakout.

Breakouts are generally a widely watched phenomenon. Many investors participate. Some who bought at previous tops sell without a loss while momentum players move to buy as soon as the price exceeds previous highs. This often results in high volume levels.

The bullish development for silver past week did not see gold quickly follow last week, but that was clearly the case this week so far. The breakout is the key factor here and in previous silver to gold ratio spikes, breakouts were not an issue. Simply put, this period is not comparable to those seen prior and therefore a bearish sentiment does not appear to be valid.

Summing up, the outlook for gold and silver remains bullish. We will soon (most likely on Friday or Saturday) provide a follow-up analysis of gold & silver markets, so it might be a good idea for you to immediately sign up for our gold & silver mailing list. It's free and you'll also get 7-day access to the Premium Sections on our website, including valuable tools and charts dedicated to serious Precious Metals Investors and Speculators. Again, it's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

 

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