Gold Update

Gold was able to reverse last week's downward momentum, and closed up about $16.00 for the week. Silver also retraced some of last week's severe pull back, gaining more than 6%. So, is the correction over, with new highs on the way, or is this round one of the correction?

Let's have a look at a weekly silver chart:


In the above chart, I am attempting to contrast the correction of May 2006, to the present. In May 2006, Silver was severely overbought, and we had one week of sharply lower prices. The following week, we had a bit of a recovery. Then, starting in the third week, the bears reemerged, and hit silver hard.

In the present, we had silver overbought, and had one week of sharply lower prices. This past week we saw a bit of a recovery. If this correction unfolds like the May 2006 correction, then we should see the bears reemerge in the coming weeks.

In my experience, gold and silver correct in three waves. One wave down, a counter-trend rally, and once final move down to clear out the weak hands.

Naturally, we'll have to keep an eye on the US Dollar to see what will be in store for precious metals. In last week's post, I mentioned that I thought that the US dollar was due for an oversold bounce. This turned out to be incorrect, as the bounce so far has been exceptionally feeble:


Nonetheless, the USD, at this point, has not put in a lower low. If the currency does put in a lower low, then gold and silver may not correct in three waves. My COT and intermarket analysis are giving mixed signals at this point, so I'm not really sure what's going to happen.

One lesson that I learned this week was that one should always have a glance at a chart of Crude Oil before making a bet on the direction of the Euro or USD. The following chart shows what I mean:


In the above chart, we have a candle chart of Crude Oil, and, on the bottom panel, we have a chart of the Euro. As you can observe, the two charts are highly correlated. What I find interesting is that Crude Oil bounced off support this week. Additionally, the Euro also experienced a bounce, but this bounce was not off any visible support. Interestingly, my view is that the Euro was bouncing off phantom support, which can only be seen by observing oil.

Bottom line is that I am expecting a three wave correction in gold and silver, but again, with the Euro looking strong, it's difficult to say what will happen. I think that I will remain hedged for this coming week until I feel more confident of a gold and silver bottom.