Monday I posted an article with the provocative title Silver is in a Bear Flag in response to some bullish headlines and well… silver’s Bear Flag, which remains intact and viable on the daily chart.
A favorable bigger picture risk vs. reward situation was also highlighted for gold and silver in that post. Among the reasons for this:
- Technical upside potential appears greater than downside.
- The inflation-dampening Operation Twist is now put in the rear view mirror in favor of good old fashioned T bond and MBS Monetization.
- The Commitments of Traders structures are improving.
- Sentiment – especially among gold newsletter writers tracked by Mark Hulbert – is in the dumps and contrarian bullish.
Importantly, there is also gold's value proposition, which has not changed throughout the long and bullish consolidation these last 1.5 years. According to the graph below, courtesy of the St. Louis Fed, it has not changed since the beginning of the secular bull market either.
Here we have the gold price adjusted by the Monetary Base, which is the key money supply measure to be watching (as opposed to M2, MZM or their velocity measures) for signs of inflation.
So gold has barely gotten going in its secular bull market as measured in Adjusted Monetary Base which, when viewed nominally has been flatlining for the duration of nominal gold’s correction.
The weekly chart of gold below shows a touch of the top of the big support zone, which would roughly be defined as a ‘higher low’ to last summer’s lows. MACD is green and trending up, but triggered down on the current correction. RSI is below the important resistance level at 50 and the Aroon is weekly trend up.
Gold could prove it is not in a Bear Flag by breaking above the weekly EMAs 20 and 35, which was the area that loaded the target in the low 1600s when it failed as support. Gold has however, already satisfied our target of low 1600s and a 62% Fib retrace. Keep an eye on it.
The weekly chart of silver dials out to a bigger picture of the poor man’s gold as well.
Silver has also Fib’d 62%, is weekly trend up and oversold enough to qualify for an end to the correction. But the Bear Flag will not be disqualified unless it climbs above 31 and then breaks the weekly EMAs 20 and 40.
Bottom Line
Gold needs to take out 1700 to end its correction and then a break of 1800 to target new highs. From that point, the sky could be the limit when considering the value that has been pent up in the monetary metal.
Silver is a would-be leader to bullish activity in the metals, although it could be argued that it is the mining stocks that are actually setting up as leaders to the entire precious metals complex, given the ongoing bullish divergence in the HUI-Gold ratio’s bottoming process. Back on silver, it must get above 31 to begin signaling an all clear.
The precious metals correction has been a challenge for 1.5-plus years now. When it ends, the pent up energy is going to be something to behold. I intend to hold quality equities – those with measurable and favorable metrics as opposed to stories about holes in the ground – and the metals in an environment that might be less about the intensive risk management of the last 1.5 years and more about bull market continuation.