Bending But Not Breaking

Today's bounce in gold and silver was a welcome relief. It suggests that support in the $570s for gold and under $11 for silver is formidable.

Testing support under the market — just like probing resistance above it — is to be expected in any market from time to time. They are a normal part of markets, and there is no predicting how long they can last.

The key point to watch is whether a test of support can turn into a trend reversal. I have therefore been watching the following charts closely. They're giving a noticeably different picture.

Clearly gold has been the weaker of the two metals of late. Gold has broken its medium-term uptrend line. But the key point to make is that gold has not yet broken support, given that it held the low reached in mid-June and then today bounced back sharply from that level.

In other words, support is bending, but not yet breaking. This conclusion is given added reinforcement by looking at silver, which has barely broken its medium-term uptrend line.

More importantly, silver has held the low point it reached just a few weeks ago. Silver is still far above the correction low it reached in mid-June, clearly demonstrating that silver is the much stronger performer of the two precious metals.

This divergence between silver and gold since mid-June is also noteworthy for another reason. It is in effect a non-confirmation. Gold broke much lower than silver, so silver has not confirmed the weakness in gold.

Non-confirmations like this one are important. They usually signal that a correction is over, or nearly so.

Thus, the relative strength of silver and the non-confirmation between the metals may be an indication that the correction is ending, which highlights the importance of the following quote from Bill Murphy.

"It's like there is an orchestra conductor out there waving his baton, making the markets move just the right way for the November US elections." Bill Murphy, September 12, 2006
www.lemetropolecafe.com

Just think about all the things that have happened a few short weeks before an important mid-term US election. The Dow Jones Industrials made a record high, spreading the wealth effect in investor portfolios. Gasoline prices have dropped, putting more spending money in consumers' pockets. Bond yields have dropped, making adjustable rate mortgages substantially less burdensome than they were a few weeks ago. And gold and silver have dropped, on the pretense that inflation is no longer a problem. How convenient.

These developments make it appear as if there is nothing to worry about. So should we forget about the trade deficit, the federal government budget deficit, the collapse in housing, whether the latest hedge fund blow-up is going to cause a derivative implosion, not to mention all the other things there are to worry about? I don't think so.

I think we have to look across the valley, which I define as the four weeks left until the election. Thereafter, reality strikes, if it hasn't already struck by then. Gold and silver are still the place to be.

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

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