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Precious Points: Consolidation in Gold and Silver

December 08, 2007

"This update has been writing for weeks that it would be relative weakness in Europe that would cause exchange rates to tip in the other direction. With the Fed closer to the end of its accommodations than the stubborn hold outs in London and at the ECB, holders of those currencies have wisely begun to suspect the ride up, for now at least, is ending. In all likelihood, the Fed will probably look to keep the cut light and favor further open market activities including a possible change in the discount rate while Treasury and other government entities come to the aid of the ailing housing market that's the real source of the problem. In the meantime, it's possible gold and silver will continue to face headwinds and lose their panic premium as investors put money back to work in financials and other stocks." ~ Precious Points: Fairweather Friends, November 25, 2007

Members at TTC will know I've been following a fourth wave triangle consolidation pattern in gold that, as the daily chart below reveals, is still valid. Taking out the 50-day moving average, currently about $784 in the futures, would be a warning sign and indicate a deeper correction to the $759-775 area.

Silver also held up well this week, as conversation shifted from whether the Fed will cut 25 bps or 50. Remember this update never flinched from its rate cut expectations and suggested last week that a cut in the discount rate was more likely than a steep cut in the overnight target, a view that became consensus this week. The chart below continues to unfold in a consolidation though, with the 200-day sma looking like strong support, an intermediate bullish outlook in silver is looking increasingly favorable even as a selloff to $13.50 continues to appear likely.

The problem, of course, is the rally in the dollar, particularly against the euro and the British pound. Just as this update suggested, it was not strong domestic economic news that triggered the turn, but weakness abroad. Of course, the BoE cutting its benchmark rate only increases the amount of paper currency in circulation and does not make an ounce of gold any less valuable. But, because of the hot money hedging in gold, the current consolidation is unavoidable and may deepen as described above.

The ultimate deciding factor could be the extent to which the U.S. economy weakens from here and when the financial crisis dissipates. In this, the Fed and other governmental authorities have the advantage in that they calculate the figure that would determine whether or not a 'recession' had officially begun. The "r" word having become a terrible political liability in an election year, and with an administration making enormous expenditures on war and defense, expect every political exigency to avoid admission of a recession at least in the next twelve months - the president's rate-freezing plan being case in point and a tactic that reinforces the outlook that the Fed will err on the side of caution on Tuesday, likely with a 25 bps cut and a further reduction of the discount rate. The impetus for explosive new rallies in metals over the short term, Tuesday's rate cut notwithstanding, seems to be lacking unless crisis returns to the financial markets. This is certainly not entirely unlikely between now and next summer, so at least until then one new high in precious metals is likely.

Of course, as many of you know, one sure way to put aside the stresses of tracking the metals markets day to day is putting aside some of the physical metal as a long term investment. Now, whether you already own metals or are now just looking to get involved, there's a new piece of silver bullion on the market, a custom round designed in partnership between Trading the Charts and the Northwest Territorial Mint.

The design pictured above is available directly from the Mint on impressive five-ounce .999 fine silver round in minimum lots of 50, but, they've also provided rounds to serve as prizes for TTC's annual "Pick the Tick" contest. If you're not currently a member, click here to participate for free in this unique opportunity to win a beautiful piece of silver bullion with no obligations. Also, if you're thinking about increasing your allocation to physical metals, or considering commissioning a custom piece of your own, visit the mint's online store for a treasure of other valuable metal collectibles and bullion.


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