Precious Metals Investing: Will Gold And Silver Continue Their Run Up?

George Maniere: I had at least six emails today asking if the run in gold and silver were over. The answer is most definitely – Maybe!!!! My regular readers know that I have been predicting silver at $50.00 an ounce by year’s end. I believe that the drivers of gold and silver remain intact. The fact is that there is a sense that gold and silver has moved too far – too fast and as a result, people are not inclined to chase the trade.

For the sake of this article I will use the SPDR Gold ETF (NYSE:GLD) to represent the move in gold and I will use the iShares Silver ETF (NYSE:SLV) to represent the move in silver.

Let’s not forget that silver had its own parabolic move from January until the last week of April and the people who bought in the last week of April will not soon forgive or forget. To add to this Gold experienced a parabolic move of its own from July through September when it ran from $1200.00 an ounce to $1925.00. The average investors see the correlation between the two moves and are not inclined to chase either trade. The fact is that in September gold was extremely overbought and it needed a pullback to consolidate before the next leg up.

The media was squawking that gold was in a bubble but this is complete nonsense. When we speak of a bubble let’s look at gold in the context of other markets. An example of a bubble in gold would be a look at it from 1972 to when it rallied up until 1979. That was close to a 1000% rise. Gold, since 2001, when it traded for $250.00 an ounce ran up to $1925.00 which is a rise of about nine times. So we have a tangible item that represents a global currency for the last 5000 years that has on an inflation adjusted basis not even reached $2200.00.

While there are many things still favoring this secular gold move there is no doubt we are still in a very cyclical bear market now.

Please see the chart of gold below.

As you can see, when the chart is pulled out over just three years, every six months or so gold comes back to the trend line, consolidates and then continues its run up. This chart shows me exactly what I expect to see. What I expect to see is the spot price of gold at about $2500.00 by year’s end.

Silver, on the other hand, has just finished its second major correction this year. The second one that took place at the end of September was as parabolic as the one that took place in the 1st week of May. This second decline caused silver to lose nearly half its value. This decline has pushed the silver indicator to the second most oversold value in a decade.

Given the sharp selloff over the last few months it is not at all surprising to see silver in oversold territory. This begs the question – how oversold is it in relation to other corrections? According to the silver VIX, silver is at its most oversold reading in the past decade with 2008 the only exception. Talk about volatility as the silver VIX showed the most overbought condition in April, with silver exceeding 2004, 2006 and 2008 peaks, and then see the most oversold reading six months later. Given the deeply oversold condition silver finds itself in, is now a good time to take advantage of the recent price decline? The answer is yes and no.

Please take a look at the chart below.

A look at this chart will show that silver has begun to consolidate and move sideways through the middle of October. Stocks usually put in this pattern before they break out and I expect my prediction of $50.00 an ounce by year’s end to bear out.

Now that I’ve put that out there I must say that I could be wrong about silver. If silver’s breakout fails to continue the correction it has made in the last month, beginning next week we could see a down leg that could take us to the $20.00 level heading into November. What makes watching silver over the next week so incredibly important is that for the last year the market has seemed to use the S&P 500 as a proxy and all assets may get bid into yearend as it works off its oversold condition.

In conclusion, if the U.S. dollar continues to advance after it cools off a bit, we are likely to see both gold and silver sell off or trade flat at best. Please see the chart below.

Right now the USD Index is above the 200 day moving average (DMA) as well as its 50 DMA which are converging near $76.00 and would represent strong support on a short term correction in the USD Index. For the all clear to be signaled by silver, we would likely need to see the USD Index break below $76.00. As long as the USD remains above the 200 DMA, I think playing defense for precious metals is the proper strategy.