A Critical Look at Gold and Silver

For this past week, gold rose by about $25.00 an ounce, closing on Friday at $999.50 after making a brief foray into quadruple digits. Silver, on the hand, failed to reach a new high, but was still up 42 cents for the week.

Let's get right into the charts by looking at a really long term view of the yellow metal. The following chart is a monthly chart of gold, and goes back to about 1990:


My goal in the above chart is to contrast this recent action against the last time gold went parabolic, which was during the spring of 2006. If you don't recall, gold went ballistic during February, March and April of 2006, and then came crashing down in May and June. In my opinion, gold appears equally over-extended now relative to then. To view a monthly chart of silver, please refer to the bottom of this article.

Gold is not the only story making the news right now. There are also some exciting developments in the foreign exchange markets. One such development is that 1 US Dollar buys less than 100 Yen presently, and that the Swiss Franc is practically at par with the US Dollar.

The next chart shows that the Swiss Franc and Gold are related. What the weekly chart below does is that it takes the RSI of the Swiss Franc and contrasts it to the price action of gold bullion:

In other words, the above chart is showing that whenever the Swiss Franc is overbought, it represents a dangerous time to hold gold.

And on the topic of currencies, let's have a look at a weekly chart of the US Dollar. The US Dollar Index, which is an index that measures the US Dollar against a basket of six other major currencies, hit another all time low again this week.

In my opinion, the US Dollar is now, at long last, finally starting to look oversold to me. On a fundamental note, I have a feeling that European Central Banks and the Bank of Japan will not just sit idly and watch their currencies rise week after week. Although a falling currency is bad for an economy, a rapidly rising currency also has economic ramifications, especially to an export oriented economy such as Japan.


Another angle to look at the precious metals market is through the silver gold ratio. Silver and gold are certainly correlated, but they do not always move together on a one to one ratio. By dividing the two metals, one can determine which is outperforming:


In the above weekly chart, we have the RSI of the Gold/Silver ratio, and a chart of the HUI Gold Bugs Index. My rationale behind this chart is that when precious metals start to take off, silver usually begins to outperform gold. Silver is a more speculative market, with large swings, and so when the precious metals market heats up, money piles into silver. This speculative buying into silver eventually climaxes, and then comes crashing down, bringing gold stocks down with it.

Another point I wanted to touch on is the significance of gold being right under $1,000. This could possibly be a formidable resistance area. It took oil 4 attempts to break through the psychologically important $100 area. It took the Dow Jones Industrial Average 20 years to get past the 1,000 area.

Although my analysis shows that gold could be in short term trouble, keep in mind that I do not recommend shorting gold or gold stocks. There are a lot of variables that I do not know the outcome to. For example, will the Fed's cut next week throw the US Dollar near the point of collapse? What if another major US Bank melts down? These are very uncertain times, and I think a capital preservation mentality is warranted at this time.

The fundamentals for gold, silver, gold stocks, and oil are very strong right now. The best bet is to try to accumulate a long term position in these areas, and dollar cost average when there are dips.



This weekend, I enjoyed the posts from:

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