Saturday, September 24, 2011

Correction in Gold & Silver And Coming Year End Rally.

In my last post I wrote; “I am not sure if the corrections are over or we shall see renewed weakness again. …….. The weakness in the market may continue till October.”  That was after the markets rallied for a week and people were hoping for a trade-able bottom and there were talks of new Bull Run.  However Euro did not live up to the hype and came down couple of hundred pips.  I said that the big money is leaving Europe and they want to keep that flight low key and orderly and the correction in precious metal may have just started.

Right on cue, price of gold came down by over 5% in the week. Everyone is speculating why the price of gold and silver came down. The easy answer that is being talked about is that CME hiked the margin. But that is not the complete answer. Yes, margin hike deter additional position taking and sometimes forces the weak speculators to liquidate. But the more compelling reason was the position liquidation and margin call by the Mutual Funds and Hedge Funds. I think most funds were caught by surprise by the violent plunge in the stock market.  So when the sell orders came in, they held on to their loss positions and liquidated the position in precious metal which was in profit. Moreover, there were widespread disappointments with the Fed action.  Again, in the last post I said that the rally was “in anticipation of Santa Clause coming early on September 21st. There may be some disappointments and we might see some selling the news.”

I would like to show two charts. First the gold chart.

If gold falls below $1550 by next week, the next support is around $ 1050 / $ 1100. But even that kind of correction would keep gold on a long term bull run. Whether that will happen or not, is anybody’s guess. But the chances of the continued correction are high.

The 2nd chart is of Silver. 

Silver has already broken the trend line big time and the next support is around $ 25. I think even that support will be broken. By the same token, gold may also suffer. My favourite chartist Chris Kimble has this Eiffel Tower chart for gold. So make your own conclusion.

Coming back to the stock markets, I expect the weakness to continue in October, till the Europeans show some guts and political will to throw more good money after the bad. The Obama administration is pushing Germany hard and want a trillion euro rescue fund. The problem is that Madam Markel is losing the political capital and the German population is becoming sick of supporting Greece.  But the cost of not supporting Euro is very high and Germany may just want to buy more time. That Greece will default is given. The European banks, particularly the French Banks are going to suffer the most. The most important question is, is Greece going to be the only sovereign default? The Euro Zone may be able to handle Greek default but if Ireland and Portugal and Spain are added to the equation, then it is a different ball game.

I do not expect the markets to fall much below from here onward. My short term downside target is around 1125 in SPX.  If that is broken, the next support level is around 1050 in SPX. A close below that would mean big trouble. However I do not expect the bottom to fall off yet and most likely we would see a bounce of the lows.

The central bankers and the world governments are missing the woods for the trees. For them everything is a liquidity problem when in fact the problem facing the world is solvency problem. The only way they are trying to solve the crisis is by pumping in more money in the banking system. But it s a giant black hole sucking the life out of the world economy. The balance sheet contraction is on us, however much the central bankers and governments may try. Remember the QE2? After $ 600 billion, the US stock markets are now below the level of QE2. The desperate fight is on to save the system and for a while PTB (Powers That Be) will succeed. I am expecting a yearend rally to start from end of October which may well take the stock markets to a new high in 2012 before the game is over.

For now, let us see how low gold goes.