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Wednesday, 7 July 2010

Precious Metals Still in Strong Uptrend

I was planning this as a post this weekend, but as it is possible that the targets I'm looking at may be hit before then, I've decided to bring it forward.

I was reading John Murphy's post last week talking about serious technical damage done to the GDX uptrend, and then assorted suggestions of imminent distaster in precious metals in various places, but notably yesterday in Clusterstock Chart of the Day.

For me the essential driver in the long precious metals rally is the loss of confidence in fiat money due to the easy money policies of the last decade, and the wild printing of new money to support economic growth in the last two years. There is little sign of this ending in the US particularly, and every chance that it may accelerate if we see the weakness in equities this summer that I am expecting, so I had a careful look at GDX, silver and gold to see whether I could see any sign of a significant reversal.

On gold we have a two year old rising channel and while we are falling towards the lower trendline of that rising channel, until it breaks we are just looking at a potential opportunity to buy at support in the 1153 - 1160 area. Here it is on the Gold Futures (Aug) daily chart:


On silver I see the same two year rising channel with a potential opportunity to buy at support in the 16.60 area, here it is on the Silver Futures (Aug) daily chart:


On GDX, I see an eighteen month old support trendline that will give strong support in the 46 area, but I also see what may well be a rectangle, with a recent partial decline. These rectangle 'tops' break upwards 68% of the time, and a partial decline predicts an upward breakout 89% of the time. If rising trendline support at 46 breaks, then rectangle support should be found in the 40 - 41 area.

On an upward break of this rectangle the upside target would be almost 70, though I would add that the rectangle needs more crosses within it to be a stronger pattern, and that rectangles that take more than six months to form tend to be less likely to reach target.

Here it is on the GDX weekly chart:

All in all I'm not seeing any sign of weakness yet in gold, silver or GDX. I am seeing a rare opportunity coming to buy at longer term support.

Only if these channels and patterns break would we be seeing a real reversal.

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