Fundamentals, Technicals & Silver - Be Cautious

As it was the case in our previous essay (Will Gold Price Decline Soon or Is This Summer Really Different), let's begin also today's article by answering one of the questions that we've received from one of our Subscribers. Here is the question.

• With the volatility in the stock market, the fears about the effect of the Greece debt crisis, "fukushima" in Japan, our various problems with housing, jobs and stunning national debt here in the U.S., I have to wonder if investors are increasingly looking to precious metals as a safe haven……in a way that might defy usually reliable quantitative measures?
• Also, is it possible the recent detailed study and report by Standard Chartered, citing the limited supply of gold in the next few years and projecting a $5,000 per oz top, tend to drive investors into gold in a way that could defy past technicals?

Here is what we wrote in the past about the usefulness of technical analysis, and it still holds true today. Here's a summary:

September 3rd, 2010 Premium Update:

Well, the most important fundamental that does not change over time is human psychology and emotionality of individual investors. This is something by far more stable that one, two, or even three quantitative easings are not able to change. Will China's growth cause people to stop being greedy when they see higher prices and fearful when they see them decline? Will Europe's problems cause people to act by means of cold logic only? Definitely not. Moreover, even if TA will someday cease to be useful it is highly improbable that it will happen quickly. Certainly, it is not a matter of weeks, months or years because TA's foundations are based on real mechanisms, which are inherent part of each human being.

September 16th, 2010 Premium Update:

Technical analysis techniques as historical charts only give support to probability theory. Even the best tools and signals miss their targets between 20% and 30% of the time. This is important to remember whenever any type of analysis in undertaken to forecast future movement or trends - this is why limiting one's exposure is absolutely critical.

October 29th, 2010 Premium Update:

Any analysis (fundamental, technical, cyclical, fractal, econometric model, etc.) can be suddenly overruled - but that is no reason to ignore them. At any time someone could trigger a massive rally or major selloff in any given market, provided that they have enough cash. Does that mean that we should not invest in anything as there are absolutely no sure bets?

In our view this approach is wrong because it confuses what's possible with what's probable. Instead we suggest taking what's probable (most of the time each of the systems of analyses mentioned above will be useful, and by combining them we'll get more information than we could by just using one of them) and position yourself accordingly.

Fundamentals are favorable for gold, silver and mining stocks. Dedicate a part of your capital to long-term investments. Market inevitably corrects from time to time - use charts and other tools to gain on most of them. Don't expect catching each move, as it's impossible to accomplish. Financial markets could be destroyed overnight if China dumps its dollar holdings or derivative holders worldwide default or the COMEX defaults, etc. There are plenty worst case scenarios. Be sure to own physical precious metals as well.

As far as the second question is concerned, discussion of supply and demand is appropriate when estimating the main trend - which (we definitely agree) is up. Positive fundamental situation has virtually nothing to do with a few-month corrective decline that would take gold and silver prices lower. This certainly could happen, be followed by a turnaround and a rally that could eventually make gold reach $5000.

What we would like to emphasize is that fundamental factors are not something driving markets in the short term. Generally (there might be a few exceptions), if you check fundamental reports (from newsletter writers) from 2007, 2008, 2009, 2010 and 2011 they will most likely agree that the fundamental situation was favorable for gold and silver throughout these years (and we agree). However, did the price move up without any corrections? Didn't silver plunge from above $20 to below $10? It surely did - even despite positive supply-demand situation. These are long-term factors, not the short-term ones.

The most important factors driving prices in the short term are fear and greed (emotions). Cold logic (fundamental factors)"works" in the long run.

With this in mind, let's see what the technicals suggest about the precious metals' price direction in the short-term. In this essay we will begin cover the situation in silver (charts courtesy by http://stockcharts.com.)

In the medium-term chart for silver, we have seen yet another move back down to within the trend channel. The recent big rally appears to be over and based on this breakdown alone, declines are likely to be seen from here.

The breakdown seen several weeks ago was not confirmed. It was invalidated by a quick move up at that time but it appears that this breakdown may indeed be verified. If such is the case, further declines are very likely.

The short-term SLV ETF chart allows us to compare the recent moves of silver directly with that of gold. Note that rally for the white metal in the past few days is barely visible here and is better described as a pause within the decline. Therefore, gold's bullish move is definitely not confirmed by its sister metal.

Silver's cyclical turning point is coming up soon. This could mean that we may see a significant decline or possibly (and it seems a little more likely than not at this point) a slight move higher for a few days and then a decline. The latter would indicate the turning point close-at-hand is in fact a local top.

Summing up, a downtrend is anticipated for silver in the medium term, however we might see a few days of higher silver prices before that. Two breakdowns have been seen recently in silver - below the rising support lines for both medium-term and short-term timeframes. Silver does not confirm the bullish move of gold and the picture here remains quite bearish for the white metal.

Naturally, this does not invalidate the positive fundamental situation for the white metal - we expect it to resume its major upward trend after the coming decline.

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