Sunday, September 8, 2013

Gold & Silver Prospects...9.8.13

Here's an update of Friday's closing signals on the ALPHA model, which has recently been dominated by the gold and silver ETFS...GLD and SLV.
The model has clearly been hit by the expected reversal in momentum following a dramatic parabolic (and profitable) rise.  The good news would appear to be that the metals are beginning to look oversold...with the P6 on the 3 month chart now below the RSQ equity line and the TrendX P6 signals approaching the zero line.  However, the word "beginning" must be emphasized.  Based on the behavior of these technical signals in the past we should expect continued weakness before a true buying opportunity presents itself in these 2 ETFs.
To confound these expectations Jim Rogers, arguable one of the greatest commodity traders of all time, recently voiced the opinion that gold is in for a more substantial retreat than most traders may expect and he forecast a possible low at the $1000/ounce level (currently around $1300).  As if to reinforce that forecast here's a recent article from FUTURES magazine that makes a similar look forward based on a supply and demand perspective.

Below is a composite chart that looks at the SPY (shaded area) versus SLV, XLU and GLD over a 2 year lookback.  Despite the recent rally that has produced nice returns for the ALPHA model the chart clearly shows that holding gold and silver over the past 2 years has not been a happy situation as they have both been in a steady decline with gold having lost 25% and silver having lost 45% of its value over that time frame.  The foremost conclusion to be drawn from this chart is that tight risk management is absolutely crucial in order to protect your equity in this model as we are really bucking the curve by making GLD and SLV our investment choices and the positions must be considered short term holds...not long term investments.