Are Precious Metals About to Collapse?


Are Precious Metals About to Collapse?

Nov 29 2010 1:57PM

From mid-August to early November the markets have operated based on the “Bernanke put”: the idea that our esteemed Fed Chairman will do everything in his power to keep stock levels up.

Indeed, with QE lite going in full force and QE2 on the horizon, the markets became dominated by the “inflation trade” in which the US Dollar fell and every other asset (specifically stocks and commodities) rallied on a near tick-for-tick basis.

However, once the Fed finally DID announced QE 2 in early November stocks began to sell off. Part of this was “selling the fact,” but most of it had to do with a seismic shift occurring in the geo-political/ financial arena.

With several major countries now raising interest rates (Australia and China) or planning to halt their own QE/ Bailout efforts in the near future (the UK and EU), the Fed’s QE 2 program signaled that going forward, the Fed would be on its own regarding its re-flation efforts.

This, combined with increasing political pressure hitting the Fed at home and abroad (China has made it clear it will not tolerate US Dollar debasement), has resulted in a seismic shift taking place in the markets. It’s almost as though investors finally figured out that the Fed’s “free lunch” liquidity schemes will eventually come at a cost, whether it be a US Dollar collapse, trade wars with China, or more.

As a result of this, stocks began a sell off almost to the day that QE 2 was announced. They’ve since begun to trade in a wide range between 1,200 and 1,180 on the S&P 500.


As I write this, the market hasn’t been able to break below support at 1,180 convincingly, largely due to the fact that the Fed is juicing the market almost every day via QE lite and QE 2. On top of this, the majority of traders remain convinced that the Fed can prop this thing up no matter what.

By the same token, stocks can’t seem to break above 1,200 on the S&P 500 because the whole world knows that QE 2 is the equivalent of a “Hail Mary” pass and that the odds are high it will be end very badly (inflation, trade war with China, US Dollar collapse, etc). Consequently, traders are not able to rally enough enthusiasm to push the market higher even during the extremely light volume of Thanksgiving week.

One thing that COULD potentially override the “Bernanke Put” would be a major US Dollar rally. On that note I want to alert you to the fact the US Dollar looks to have broken out of its 6-month downward trading channel.

This move is of HUGE import as it could very easily kick the “inflation trade” off a cliff. As I’ve noted in previously essays, the US Dollar has been the carry trade of choice for many traders since the June ’10 top. And with US Dollar bearishness at record highs, ANY upward momentum in the greenback could accelerate rapidly as the shorts are forced to cover.

Can a US Dollar rally overcome the Bernanke put? We’ll find out this week. We have a total of six POMOs this week (two today and one every other day). So the Fed will literally be juicing the market by $6-9 billion EVERY day this week. If stocks can’t remain afloat in the environment and the US Dollar strength continues, then the markets are heading into some VERY DARK times in the near future.

The BIG question for those of us forecasting inflation in the near future is: how will this move affect the precious metals sector?

To be clear, I am extremely bullish on precious metals in the long-term. However, in the short-term, both Silver and Gold have been on an absolute tear in the last three months, rallying 48% and 13% respectively.

Now, no investment ever goes straight up or straight down. With that in mind I want to point out that Silver looks to have just put in a potential double top:

As you can see, the precious metal has met up against major resistance at $27.50 twice in the last month. Silver needs to make a quick turn around and break above this level soon, otherwise a correction to $25.50 is highly probable.

However, far more worrisome for the Silver bulls is the fact that it’s coming up against its multi-month trend-line.

As you can see, Silver has obeyed this line for most of this recent leg up. A break below this line here would signal a sizable correction, most likely to the $24-25 area.

But what about Gold?

Gold looks to be forming a clear Head and Shoulders pattern. In order for this pattern to be confirmed, we need to see the precious metal break below its neckline at $1325 per ounce. A breakdown there would forecast a correction to $1250 per ounce. This would fit in well with Gold’s current bull market as $1250 represents its most recent peak prior to this latest rally.

Does any of this indicate that the bull markets in Silver or Gold are over? Absolutely not. However, both precious metals have been on a tear and need to cool/ consolidate. No investment goes straight up or straight down. And right now, both Gold and Silver are primed for a pull-back.



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