My Gold and Silver markets perspective, October 2008

The fundamental for \$1000+ Gold is certainly in place, like the free money handout that's been going on in many countries and the global financial panic. Conventional wisdom says in times of trouble, hoard as much gold as you can. I still believe Gold and Silver will break their previous highs from earlier this year.

Yet, I don't have a Swiss bank account to hoard physical gold nor have I got the financial means to even purchase mint-backed gold certificates. I am merely a small time trader on the market. One rule of the tradebook I learned by experience is that it's good to live by an independent perspective on the market, but don't die by it.

Looking at the gold and silver charts though, it is blatantly obvious that we're in a severe downtrend lately, for whatever reasons. The small rally this week may be tempting for some perma-bull or the fundamentalists. But I wouldn't enter the commodities market at this point without some price-volume confirmation.

Indeed, if we look at the gold chart. We see that the current rally is probably a retracement. It has tested its resistance at 780 and backed down already.

[caption id="attachment_537" align="aligncenter" width="500" caption="Gold"][Gold][][/caption]

Surprisingly, the silver camp is looking better. We are seeing a positive divergence in both the RSI and MACD in the latest down leg. This is caused by the more severe fall of silver since its high earlier. The silver down leg hasn't had a chance to catch a breath like gold has. In fact, I would watch for an upside break in Silver regardless of the move in Gold. I don't know would this be possible and sustainable, silver going up while gold going down.

[caption id="attachment_538" align="aligncenter" width="500" caption="Silver"][Silver][][/caption]

Sometimes it's easy to forget that gold and silver are two commodities with two different prices. That is because gold and silver price correlation is very high and have generally moved together for many fundamental reasons. However, there are periods of time when the Gold/Silver ratio make drastic changes.

The G/S ratio has been around 55 - 65 in the past 5 years. G/S ratio runs higher in times of trouble when people purchase gold as a safety shelter to store value. In the tech bubble, G/S went above 80 around 2003. The highest in the past 40 year occured after the 1987 crash, in 1990 when G/S got to 100.

[caption id="attachment_539" align="aligncenter" width="500" caption="Historical Gold/Silver Ratio (snatched from www.gold-eagle.com)"][Historical Gold/Silver Ratio][][/caption]

While the absolute price of Gold and Silver has been counter-intuitive, the G/S ratio picture still fits well with the norm. Notice the spike starting in August 2008? When the financial troubles we're in now is written all over the wall? (Actually, the writing on the wall appeared late last year already, but that's another story.) The faster fall of Silver lately could be explained with this. If that's the case, then both Gold and Silver could continue its downtrend.

[caption id="attachment_536" align="aligncenter" width="500" caption="Gold/Silver price ratio"][Gold/Silver price
ratio][][/caption]

So what's my point in this post? I don't really have one. I am just saying what's in my mind about Gold and Silver in this recent counter-intuitive trend. In terms of the prices, I am still bullish on gold and silver in the looong term. And definitely bearish in the short term. When will they move up? I don't know, just observe the market. But I see silver to have more upside if it were to go up. It could easily creep up to \$12 from here.

[Gold]: http://traderpau.files.wordpress.com/2008/10/2008-10-30-gold.jpg [Silver]: http://traderpau.files.wordpress.com/2008/10/2008-10-30-silver.jpg [Historical Gold/Silver Ratio]: http://traderpau.files.wordpress.com/2008/10/gsr-gm.gif [Gold/Silver price ratio]: http://traderpau.files.wordpress.com/2008/10/gold-silver.png