Silver and gold have been on fire, but how do we know if this is the real deal?
Since the beginning of August, silver is up over 23% and gold (GLD) over 7% and both metals have received heavy buying interest.
Declining Prices Hurt the Miners
Silver's (SIL) YTD decline of 35% through June and gold's similar decline of 25% resulted in gold miners (DUST) writing off over $15B from their books. This however hasn't prevented hedge funds from continuing with their busted long trades.
In fact, many hedge funds have taken the stubborn "buy at any cost" approach. Paulson & Co. has reiterated its commitment to investing in bullion and gold producers to "hedge against currency debasement".
However, as we have pointed out numerous times over the past year, "ignoring the gold experts" has proven the much better strategy, and again we think that is the appropriate route. In fact, ignoring the experts would have allowed you to participate in an over 500% gain that our time stamped June GDX(GDX) put options provided subscribers.
Gold's Bear Market
The metals' (XME) recent bounce has been admirable and may be starting to make these hedge funds look smart, but taking a look at the bigger picture through charts may provide some clues as to the reality of the situation.
First we must know how we got here.
Gold's most recent top occurred in late September 2012 near $1800. Prices then gradually fell the next six months to the very important $1530 level on gold ($151 on GLD) and $26.50 on silver before crashing through that extremely important support in April.
This is something we were ready for as that level was identified many times in our ETF Technical Forecast as a key "support shelf" and shown in the silver chart below as far back as July 2012.
Click here to view larger image of the chart.
Ever since gold and silver broke down from their key lines in the sand, their bounces have been more about relief rallies than new trend kickoffs.
In April, gold and silver got a bounce, but only to fill the technically open gaps and test resistance levels, before their downtrends resumed.
This all warned that the underlying trend in the metals was down and was shown by the next chart provided to subscribers in our ETF Technical Forecast.
The below chart helped us get ahead of another gold short at its technical "kiss of death" that occurred near $1450.
Gold and Silver Now
The metals (AGQ) bottomed in late June as gold fell below 1200 (a 17%+ fall from the kiss of death).
Since then gold has rallied to fill its final open gaps from June, but this time has been different. This time the metals (IAU) didn't just stop at filling their gaps. They have continued higher and are back near price levels associated with their large declines in April.
This tells us that the rally is now part of a larger trend.
The chart below shows GLD's decline and subsequent rally as well as the expectations for the bounce.
It also shows that although this bounce seems large, in reality it is likely just a normal counter-trend bounce relieving the oversold condition created by such a swift decline in the metals.
In reality, the rally, although impressive, so far hasn't even reached the normal retracement levels/mean reversions associated with relief bounces!
That level starts near $137 and suggests GLD may have a little further to go on the upside. In this price range, traders will also find the May $144 resistance (the former "kiss of death"), a level that may have traders who were caught holding the bag looking to breakeven and get out while they can. As price rises to meet that level, more and more longs will likely be looking to liquidate and attempt to get back to even.
SLV's (SLV) chart is similar and points to a rally that may continue slightly higher to $23, but that metal has traveled very far very fast and is much closer to its resistance zone.
Since silver's price is reaching previous resistance levels on overbought momentum this is a warning sign that silver and the precious metals are likely close to ending their technical bounces. If so then the time is likely near to again short the metals. A good way to do this will be by buying the the ProShares UltraShort Silver (ZSL) or the VelocityShares 3x Inverse Silver ETN (DSLV).
The ETF Profit Strategy Newsletter and Technical Forecast ignores the supposed experts and focuses on the things that matter in the markets; fundamentals, sentiment, and technicals. And when we apply common sense, it increases our odds of success.
Follow us on Twitter @ ETFguide