The 18th century author Oliver Wendell Holmes suggested not to put your trust
in money, but your money in trust. What about gold and silver? Can you trust
them to be the safe haven again theyre supposed to be? 2011 was a turbulent year
for precious metals, gold and silver in particular. Silver spiked to a new
nominal all-time high on April 25. Gold outlasted silver and recorded a new
nominal all-time high on Sept. 6. Time has a way to obliterate unpleasant
memories, but lets take a moment to revisit the frenzy that was so prevalent at
silver and golds all-time high. Silver Frenzy For two days in late April, the
iShares Silver Trust (NYSE: SLV ) was the most heavily traded ETF in the world.
Investors were even willing to pay a premium to own SLV over physical silver. On
April 25, the day silver topped, The Wall Street Journal wrote in a front-page
article titled Silver rush spreads to stock market that Investors have turned to
precious metals amid worries about inflation and the weakness in the U.S dollar.
The metals are increasingly considered attractive as a permanent store of value
that doesnt diminish like paper currencies. Since then, the permanent store of
value, silver, is down 43%, while diminishing paper currency (the U.S. dollar)
is up 9%. Contrary to the silver rush, the ETF Profit Strategy Newsletter warned
on April 10: Silver seems to be in blow off mode just as oil was in the summer
of 2008. Chances are that similar to oil, prices will collapse once up side
momentum is exhausted. Picking a top is treacherous but silver is definitely
overbought and may collapse at any moment. Gold Frenzy Gold in September
followed the same template as the silver top. The SPDR Gold Shares (NYSE: GLD )
became the largest ETF in late August with $78 billion in assets, and the gold
rush was on. At the time, gold was viewed as the ultimate safe haven against
inflation, deflation, European defaults and whatever other problem you can think
of. The Aug. 24 ETF Profit Strategy Newsletter, however, looked at gold prices
from a different angle and warned: Even though gold is the logical fear trade,
price action is also dictated by liquidity. At some point investors will have to
sell holdings to pay off debt or answer margin calls. Commonly the most
profitable asset is sold first. Gold has been the best performing asset for a
decade and a liquidity crunch could produce sellers en masse. Gold prices are
down 18% since their September high. Silver Outlook The chart below shows silver
prices for 2011 along with some simple but effective trend lines. Its funny that
a digital crayon can prove more powerful than the combined power of Wall Streets
analysts. Based on a simple resistance line, the Oct. 30 ETF Profit Strategy
Newsletter said, Silver is getting close to resistance at 36 36.4. The outlook
for silver is bearish as long as prices stay below 36 36.4. Since then silver
has broken through a number of support levels. If current support fails, silver
will drop into a technical vacuum with no real support levels for quite a while.
Gold Outlook Hope for gold was high at the beginning of December. Here are some
headlines from Dec. 2: Investopedia: 5 best bets for buying gold Motley Fool:
$7000 gold is closer than you might think Reuters: Gold bull run to extend to
2012 on resilient demand The same day, the ETF Profit Strategy Newsletter
identified this short opportunity: Gold prices are butting up against a trend
line that originates from the September high. This is a low-risk opportunity
simply because the risk is well defined by the trend line. Traders may go short
gold with a stop-loss at 1,760 for gold futures or 171.1 for GLD. The chart
below shows various gold trend lines, including the upper yellow trend line that
acted like resistance of a bearish triangle. Of importance to gold is also the
150-day SMA, which has provided support for gold about a dozen times since
January 2009. The Aug. 31 ETF Profit Strategy update suggested that a test of
the 150-day SMA (a $250/oz. drop) is next. CNBC aptly summarized goldbugs
frustration this way: In just three months, gold has gone from the trade that
works in every kind of market to the trade that doesnt work in any market. Gold
has found support at the final support line. It is possible that gold will come
back to kiss one of those trend lines goodbye, but regardless, the trend is
pointing to lower prices . A Remarkable, Yet Ominous, Trend If you look at gold,
silver and the euro, and compare them with U.S. stocks, youll find that U.S.
stocks are the best performer. Considering the backdrop of bad news, this is
remarkable and ominous at the same time. In fact, it raises a number of red
flags. 1) U.S. stocks are strongly correlated to the euro. The euro (NYSE: FXE )
dropped from 1.49 to 1.28 while the U.S. dollar (NYSE: UUP ) rallied. January
tends to be a seasonally weak period for the euro. A weak euro is bad for
commodities (like gold and silver) and U.S. stocks. 2) The U.S. stock indexes
are fragmented. On Dec. 28,the Dow rallied to new recovery highs (highest since
July 21). The S&P 500 and Russell 2000 did not get past their Oct. 27 high, and
the Nasdaq didnt even make it past its Dec. 5 high. 3) 50.5% of investment
advisers and newsletter writers polled by Investors Intelligence are bullish
again. This is the highest reading since July. Event though this doesnt mean
stocks cant go any higher, it suggests that stocks are in a countertrend rally.
In short, the metals and the euro have already turned, while U.S. stocks are
holding on by a thin thread. The question is not if but when U.S. stocks will
join the rest of the bunch. An interesting side point is that the S&P is stuck
in a similar triangle formation as gold was just a few weeks ago. The ETF Profit
Strategy Newsletter outlines the price target for gold and silver and the
triangle support/resistance lines for the S&P along with short, mid and
long-term forecasts for stocks.
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