GLD, SLV - October 17, 2009

Let’s re-visit the reasons why gold might rise. Historically, gold has risen due to a

- A perceived political crisis

- A perceived financial crisis

- A perceived currency crisis

- A perceived inflationary future

We can sum up the above and say that, historically, gold has done well when there has been a lack of confidence in the future of the status quo. I would like to further condense it and say that, historically, gold has risen due to a lack of confidence in paper and/or paper pushers.

Think about it:

Political crisis comes from politicians, and politicians print papers either as money or as debt (promise of money)

Financial crisis comes from financial houses and financial houses issue papers of all sorts

Currency crisis comes from paper

Inflation is a product of money supply (paper) and credit supply (promise and/or guarantee of paper)

In the simplest form, simple enough so that I can understand it, Gold is a bet (hedge) against perceived future problems with paper and/or paper pushers.

So, do we have a paper problem? Or, better to ask: does the world think that we will have a paper problem?

I don’t really know. What I know is that when it comes to a market, any market, it is better to pay attention to what it does and not what its participants say. Or, to say it as bluntly as possible, it is better to follow the money and not the words.

Let’s see what the gold market has been doing. But, before doing that, I should emphasize that it is all about the perception of the future (near or far), it is the collective psyche of the market that establishes trends. Perceptions may change without advance notice. That is the risk that we, as market participants, take.

This is a weekly chart of gold that we have seen before

On September 4, I pointed to the price flirting with the 1000 level and asked: Now What?

In a post on September 6, I said

I think the big picture is very clear at this point. Gold either stays above 850, and finally gets above the 1000 level, or crashes below 850 and melts away. Anything in between is a just chop shop full of expert advice and nothing else.

We are now past the 1000 mark.

In the same post I said

If you like a laid back approach to trading, I suggest taking a look at P&F charts

I showed this chart in that post


This is a P&F chart now


So far so good for those who have got in earlier.

Referring back to the weekly chart above, since gold has made a new high, I am leaning towards the bullish count that regards the low of 2008 as Primary Wave 4. I will still keep the alternates on my chart(s) as a reminder of other possibilities.

This is a daily chart


If the count is correct, then we may be very near (if not at) Intermediate wave 3 and about to see some correction. If so, any correction should ideally stay above the top of Intermediate wave 1 around 96.5.

Staying with the bullish count, it is also possible that we are seeing an extended minor wave 3 like this


I am not sure which is the one, I just have to wait and see.

There is support from the MAs and a seemingly strong shelf around 100.

This is a 60-min chart of GLD


This is a 15-min chart of the December contracts


It looks like we are very close to a complete wave set if not at it. A break below what I have marked as Minute wave 4 will likely confirm that.

Silver has been doing well.

Despite outperforming gold, silver has not made a new high. This divergence between the two metals is a bit of a worry to me.

This is a daily


I expected Silver to hit the top line of the channel that started in December 2008. It may still do so, but there is some nasty looking divergence on the daily chart, and the price action of the last few days looked a bit tired.

In the same post of September 6, I presented this P&F chart as a lazy way to play SLV


It worked well, this is a P&F chart now


This is a 60-min chart of SLV


It’s not quite clear to me whether Minor wave 5 has ended or not. Same thing from the silver contracts of December


As long as price stays above the top of minute wave 1, it has a shot at another high. It is up to the individual trader to determine if another high justifies the risk of cutting below support

Same argument that I presented for gold with a super bullish chart, applies to silver as well


It may be about to show us a wave 3 of a 3 of a 3. I don’t think that is the case, but it doesn’t really matter what I think. What price does matters.

A silver-related company that I follow, SLW, has been on fire

That’s one reason I thought SLV would hit the top line of its channel. Now, I am not as certain, and as I wrote on October 14, and 15, I have reduced across the sector. I have also hedged some.

There are very well defined support levels for gold and silver. It should not be difficult to plan exit points from here.

Both metals seem at, or near a complete 5-wave set. They both seem overbought on daily frames. I thought it was time for me to take some defensive action .

For SLV, I have a target around 18.5. There is support around 16.30, 15.50, and 14.50

For GLD, I have a target around 108. There is support around 100, and the 96.5.

All the above targets are theoretical.

So, watch how Gold and silver behave, especially when, and if the market corrects, and remember the historical reasons I sited for precious metals doing well.

I have said before, and I will never tire of saying it: When it comes to precious metals, the world has an abundance of experts. I shall ignore every single one of them.