Another Step Closer to the Breakout

Gold closed in New York yesterday afternoon at $553.10, while silver finished the day at $10.287. It is the highest closing price for silver since October 14, 1983.

Here's an amazing fact. There have been 5,626 trading days since October 14, 1983. Do you know how many days silver has closed at or above $10 during that period? 30% of the time? 10%? Or perhaps just 5%?

The answer is 10 days, or just 0.18% of the time. And 6 of those 10 days have taken place so far this month! Clearly, the market is giving us an important message, and it looks to me like a very bullish one. The $10 level is evolving from being a barrier to a floor, i.e., from overhead resistance to underlying support. The same thing has already happened to gold.

On April 9, 1981 gold closed below $500 and barely traded above that level again, until recently. In the 6,261 trading days since April 9, 1981, gold has closed in New York at or above $500 only 69 times, every one of which has occurred since gold broke above $500 on December 1, 2005!

I've been saying since December that I do not believe gold will go back below $500 - ever. It may seem like an outrageous statement, unless you lived through and remember the 1970's. Once gold went through $50 in May 1972, it never looked back. Adjusting for inflation, other types of debasement to the dollar since then, and given the precarious financial condition prevailing in the US today as the world's largest debtor nation compared to its status back then as the world's largest creditor nation, gold today is cheaper and better value at $500 than when it climbed above $50 for the first time. So all I'm really saying is that history is about to repeat - only the nominal price levels we attach to an ounce of gold are different.

Will $10 soon be seen as a solid support level for silver just as $500 has become a floor that provides support for gold?

I'm not quite ready to say that silver will never trade again below $10, given that it is notoriously volatile. However, silver is fundamentally cheap and undervalued just like gold. So for now all that I can say is that I will not be surprised if silver never goes back below $10.

As a word of warning, no one - not me, not your broker, nor your next door neighbor - knows the future. So of course only time will tell whether history repeats with gold, and whether silver continues to climb higher into double-digits. But regardless of what may come, there are two important realities that everyone should be considering.

• On an inflation-adjusted basis, gold and silver still look pretty cheap. It takes $1,122 today to match the purchasing power of $500 when gold traded at that level in April 1981. It takes $19.84 today to match the purchasing power of $10 when silver traded at that level in October 1983.
• The problems with the US dollar in particular and the international monetary scene in general are getting worse, not better.

Consequently, diversifying some of your liquidity by holding gold and/or silver is looking increasingly prudent. This message is becoming better understood around the world, which explains why gold - so far at least - is holding above $500. And it may in time prove to be the reason that silver holds above $10, as people exchange their inflating currencies for sound money, i.e., gold and silver.

Right now gold and silver are on the verge of an important break-out. Look at the following chart of the gold/silver ratio.

The ratio closed in New York yesterday afternoon at 53.8, the fourth day in a row it has closed below 55, the level highlighted in these alerts to be a critical support point. As we can see on the above chart, the ratio is breaking down from the uptrend channel. That means silver is leading as expected, but where's gold?

So far it's lagging. It has not yet confirmed silver's new high by breaking into new high ground above $572.50.

Will gold confirm? Will it break above $572.50 and join silver in new high ground? Or will both metals swoon from here and prove me wrong? Well, as I am so fond of saying, only time will tell.

Published by GoldMoney
Copyright © 2006. All rights reserved.
Edited by James Turk, alert@goldmoney.com

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