Squeezing the Precious Metals’ Juice (GLD,SLV)

We open today with a word on the precious metals and whether the latest burst higher for gold and her friends is for keeps, or merely an overreaction to financial stirrings at home and abroad.

 

We’ll open with a look at the chart of the SPDR Gold ETF (NYSE:GLD), everyone’s favourite proxy for the metal. But before we do, a quick word on the dollar, a key factor in understanding movements in gold, and a laggard of an investment of late.

 

The dollar is down some four percent in the last ten weeks, the majority of the decline hitting over a seven day period at the beginning of February. It was precisely during that time frame that the price of gold skyrocketed – by over 20% – in a move that many people are hailing as the end of the bear market in the precious metals.

 

So is it?

 

Well, while it’s true that the precious metals complex generally moves inversely to the dollar, the size of gold’s reaction to the dollar’s recent dump was both surprising and, in our view, exaggerated. But that’s not uncommon in the gold pits.

 

What we do know is that much of the hype from the goldphiles is based on the premise that the dollar will be eventually replaced as the world’s currency of last resort, or that all currencies will eventually deteriorate into uselessness, thus spurring gold into the stratosphere – to levels that exceed $10,000 worth of that aforementioned useless paper (hard to figure why anyone would want to value gold in terms of useless paper, but we won’t dig too deep at the moment).

 

So the question becomes – is this the beginning of the end for the buck, and the start of gold’s return to stardom?

 

The envelope please … PIC fampous starlets at the oscars

 

To begin, crises are not built on four percent drops in the dollar. Our apologies to the buttered gold lover crowd, but we’ll need a lot more than this to convince us that the rally is on.

 

As to the actual move in GLD, here it is below. And as you’ll see, the surge of the last two months – and the last two weeks in particular – was stupendous. The stock put on 22% over that period with the majority garnered in just ten trading sessions.

GLD Technical

What should worry the gold bulls about the spike is not just the speed at which the move transpired, but also the underlying technical condition of the stock. That includes –

 

  • the overbought RSI indication of the last few days (red circle),
  • the massive volume spike that accompanied last Thursday’s 7% leap (in blue),
  • the overall parabolic shape of the climb (black line), and
  • the gaps created from the $106 level onward (in green).

 

Taken together, they tell a story of an all but certain stall at present and a subsequent retracement to at least the long term moving average at $113 (yellow line), and more likely to the lower end of the gap at $112.

 

That’s our best estimate for the near term price of gold, and certainly even the most bullish gold bugs would admit to the inevitability of a pullback at this point.

 

The question we’d love an answer to, is whether GLD will bounce once it strikes the long term MA, or whether that line will succumb to the weight of the selling at that hour. Only time will tell.

 

Evidence from Other Corners

 

But perhaps silver and the miners, both of whose charts show little of the froth found on GLD, have something to say on the matter.

 

Let’s look first at the Market Vectors Gold Miners ETF (NYSE:GDX), whose rise was even more substantial than GLD’s and took far less time to transpire.

GDX Technical

What’s most telling here is that despite a rise of 50% (!) over the course of seventeen trading sessions, the soiled miners still couldn’t manage to conquer the technical mountain that GLD did. Indeed, the sector is still struggling to overcome its long term moving average.

 

Will they manage it? Not unless gold and silver continue their climb, but that seems all but impossible, given the action to date and the need for a respite and some digestion of the most recent gains. In all likelihood, we’ll get a retracement to the $15.00/15.50 level, where a gap from the first week of the month needs filling (green circles).

 

We note, too, that RSI (in blue) did not break above the important overbought ‘80’ level, as GLD’s did, but got a near sight close enough to put it in danger, in our eyes.

 

How about silver?

 

The chart of the iShares Silver Trust ETF (NYSE:SLV) is perhaps the least impressed of all with the dollar’s decline. As you’ll see, SLV rose a tad more than 15% in a two month span, and barely managed to scrape above its 274 day moving average (in orange).

 

Have a look –

SLV Technical

Nor did it manage to ascend above its last retracement high at $15.60 (red line), a technical detail that indicates silver is still in a downtrend (lower lows and lower highs), and will remain so until a punch above that mark is accomplished. Add to that a near-overbought read on the RSI (in blue), and you have signs of pop-o-matic trouble for the near term.

 

Look for SLV to cover its open gaps and back off to at least $14.25 in the near term.

 

PIC of trouble the game.

 

Sum it up, Huey!

 

In short, GDX and SLV support our view that sister goldenhair delight’s recent sashay is over and will likely lead to a steep pullback for the metal as we move into spring.

 

And that’s what we’re trading today.

 

We’re betting that the gap between silver and gold collapses altogether in the coming weeks, and we’re offering the following trade for all who think like us.

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Wall Street Elite recommends you purchase the GLD June 118 PUT for $5.75 and sell the SLV June 15 PUT for $0.98 for a total debit of $4.77.

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With kind regards,

 

Hugh L. O’Haynew

 

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