Outlook for gold and silver

A few readers and BNN callers have asked me about gold and silver lately, and I’m happy to address the outlook for these metals with a few of my technical observations. Before doing so, I’d like to ask readers to post your questions and requests for sector analysis on this blog. I dont like to comment on individual stocks very often – unless they are very widely followed (such as AAPL, BCE, RIM, etc). Instead, I like to focus on sectors – this allows me to address a wider audience.

Gold and silver have had a pretty substantial correction over the past few months. I’ve traded gold twice over the past 7 months – once successfully from $1560 in the summer to $1800 then out, followed by another entry at $1700 in the late fall. The second trade is under-water with gold sitting at $1570. I have not traded silver recently.

Gold

Gold still has the same support level as it did in the summer when I did my first trade – which is somewhere around $1550. Gold briefly hit around $1555 yesterday – close enough. it closed higher on the day, which is encouraging. Having said that, I would not advise considering a purchase until these metals confirm support. Use my 3-day rule to confirm a bounce from support (a SmartBounce!).

Silver

Silver has support at around $26. Its not quite there yet.

If gold or silver break their respective support levels, it could get ugly. In such a case, I will sell my gold, but only after I verify the legitimacy of a break in support by waiting 3 days. If price remains below support for 3 days, I will sell. This does imply potentially greater downside by waiting 3 days to sell after support is cracked. However, I have found through 24 years of trading experience that it is better to wait for confirmation of a true break in support in order to avoid being whipsawed by one or two day spikes.

Daily charts

A few quick observations on the neartermed charts. On the daily charts, both gold and silver are oversold and looking to rally in the short term, according to their stochastics and RSI signals. Longer term, gold has just hit the point of forming a “death cross” – where the 50 day MA falls through the 200 day MA. This can often be a bearish sign for more intermediate termed downside. But not always, so I don’t waste too much time fretting over this type of occurrence.

Silver has not yet staged the dreaded “death cross” – but its lack of visable support at current levels may see it continue on down to $26 support.

I will remain long my gold position, and will exit upon a break of $1550 by more than 3 days. If support holds on both of these metals, near termed upside target will be $1650 for gold, and $30 for silver. Thereafter a mental or physical stop loss might not be a bad idea.