Thursday, December 15, 2011

Gold, Silver Tumble, Near Important Support

LAS VEGAS – It didn’t take long for gold to free fall down into a zone at what should be at least interim support (shown in yellow on the chart below).  In just three days the USD price of gold has plummeted more than $80 with about $55 of that plunge coming today while we were traveling west at 40,000 feet. 

The captain of the airplane reminded us that at that altitude the ambient temperature is about minus 69 degrees F, and said that he would be grateful if no one opened a window on the way.  A few folks chuckled.  The only thing we can think of that is colder than that is the precious metals market.    


Who knows what shall happen just ahead.  The plunge over the past few days has been brutally harsh and way too quick for comfort.  Having said that it has always been our contention that the most violent down-jags for the gold market occur in bull markets, not in 'bears.'   We would not be at all surprised to see gold fetching up either here, at implied support, or perhaps if the momentum is too strong, at the next level lower, suggested by the green bar. 

One of the reasons precious metals have broken so hard is the one-two punch of a surging U.S. dollar and growing fear of European banks.  There is quite a flight of capital out of the euro at present, so this is not your usual commodity selloff.  With the big, … no make that huge banks in Europe scrambling to raise capital and with scared capital trying to get anywhere but where it is, there is a rush to liquidity.  Commodity trader/broker/merchants are creatures of credit, and a lot of that credit is tightening or disappearing – suddenly- so part of what we are seeing is forced liquidation on a pretty big scale. 

We are pressed for time, so to get to the crux of the issue, what is unfolding is longer term very bullish for precious metals.  But that does not count for much in a rush to liquidity.  Our bet is that this current down spike in gold will end up being a precursor of a follow-on rush out of fiat currencies again and back into precious metals.  But how much damage will be done before the liquidation is over, we can only watch and patiently wait to know for sure.

Like gold, silver also plunged as traders headed for the exits en masse for the third time since silver’s peak near $50 in April. 


Vultures (Got Gold Report Subscribers) already know where we have chosen to look for support to form.  That’s because we have noted the areas on special linked charts on our member pages.  Silver is actually testing an implied support level now (shown in green in the chart above). 

For the first time in nearly a year we are becoming motivated to get ready to add to our own physical metal holdings of silver.  We have decided to do so this time via the COMEX.  Our intention is to watch the trading as carefully as we can while on vacation, looking for signs of strong support forming and then to attempt a long trade once we are reasonably convinced that silver has found overwhelming support. 

When the market is in virtual free fall, it almost never seems to respect the obvious zones of support, so we cannot just target a specific price and ignore what the rest of the market is telling us.  Instead, what we will be attempting to do is to watch the action carefully, looking at 1 minute and 1 hour tick charts, watching for when silver seems to be getting ready for a counter-move.  If that counter move is well supported with heavy bidding on both the futures and in ETFs, and if silver manages to print a series of very short term higher highs and lows (in a period measured in hours), then so long as silver is within the zones we have already disclosed to Vultures, we shall pounce, and immediately put in the thinnest (tightest) of new trade trading stops.

We either want to be right from the get-go, or out pronto.  And we don’t mind attempting that trade more than once in order to get one that sticks.

We are energized and excited as we have not been since at least the flag pullback for silver in January-February.  (Unfortunately we were unable to get a trade put on in that pullback, missing the great run up from $26 and change to $49.82.)  Perhaps now we are being given a second bite at the $24 - $26 apple we wanted back then.  We’ll see how it goes. 

The only thing we know for sure is that we want to own more physical silver, certainly not less.  If it takes us several attempts to get the trade put on that will result in our obtaining that silver … well, we think it’s worth the trouble.

As Vultures also know, we are keeping one eye on the gold/silver ratio.  Should it reach the targets we have already shared, we shall not hesitate to trade some gold for silver, to take advantage of this anomalous event.  We are convinced that over time the gold silver ratio is heading back to its historic relationship of something between 15 and 20 ounces of silver to one ounce of gold.  So if we can trade some gold now for 55 or 60, or perhaps even 65 ounces of silver for each ounce of gold, that seems to us to be a reasonably good trade, thinking longer term.

The idea is that at some point we will reverse the trade, trading something like 15 or 20 ounces of silver for an ounce of gold.  We really like that idea, how about you?  

That is all for now, but there is more to come.  


The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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